Slowing Polish Economy May Force Tusk to Ease Budget Cuts

Poland’s slowing economy is putting pressure on Prime Minister Donald Tusk to ease deficit cuts to avoid the fate of other European Union nations where austerity measures to tackle the debt crisis helped suffocate growth.

Tusk’s Cabinet approved a revised 2013 budget after the economy expanded at the slowest pace in 11 quarters in the three months through June, the government’s office said in an e-mailed statement. Growth will ease to 2.2 percent instead of a previously forecast 2.9 percent, according to the statement, which didn’t release a new deficit target.

While Poland will stick to a plan to cut the 2012 budget gap within the EU’s limit of 3 percent of output, keeping its 2.2 percent goal for 2013 would “mean we end up next year with zero growth or even a recession,” said Jakub Szulc, a member of Tusk’s Civic Platform who sits on Parliament’s Public Finances Commission.

“We can’t drop the long-term goal for a 1 percent deficit in 2015, but next year’s plan obviously needs to be adjusted,” Szulc said by phone from Warsaw today. “Foreign investors will understand this because it’s growth that matters for the international credibility of countries these days.”

Tusk, the first Polish premier to serve a second term since communism ended in 1989, must weigh EU deficit demands against concerns that further spending cuts may damp growth in the nation of 38 million people, whose GDP-per-capita is 40 percent below the 27-nation bloc’s average. While his Cabinet still enjoys broad support in polls, governments across Europe have collapsed after protests against austerity policies that helped plunge economies from Romania to Spain into recession.

‘Politically Unpopular’

“With the economy slowing, the already poor state of the labor market is likely to get worse,” William Jackson, London-based economist at Capital Economics Ltd., said in an e-mailed comment. “As such, any further fiscal austerity measures to meet budget deficit targets are likely to be politically unpopular. What’s more, they could also be counterproductive.”

Gross domestic product expanded 2.4 percent in the second quarter from a year earlier as a tighter budget policy and declining real wages curbed domestic demand. While the EU’s biggest eastern economy is still expanding at the third-fastest rate in the bloc, the slowdown is stoking concern about the future, weakening the zloty 2.6 percent against the euro since Aug. 27, making it the worst-performer among 25 emerging-market currencies tracked by Bloomberg.

New Forecast

Tusk has said he will give a parliamentary speech, probably next week, to outline measures aimed at tackling threats to the economy.

The central bank’s Monetary Policy Council also begins a two-day meeting in Warsaw today and will keep the benchmark interest rate at 4.75 percent, according to 24 of 25 analysts surveyed by Bloomberg News. “There is a room to reduce which, if necessary, I’m sure we’ll utilize,” Governor Marek Belka told Bloomberg Television in a weekend interview in Wyoming. The rate decision will be announced tomorrow.

Poland plans to reduce its deficit to 2.9 percent of GDP this year, within the EU ceiling for the first time since 2007 and down from 5.1 percent last year and 7.8 percent in 2010. Ludwik Kotecki, the chief economist at the Finance Ministry, said last month that the government will continue consolidating finances if economic growth isn’t at risk.

Next Year

The economy will slow “more or less” to 2.5 percent in 2012 from 4.3 percent last year, Finance Minister Jacek Rostowski told reporters last week in Warsaw.

Next year’s central budget deficit will total 35.6 billion zloty ($10.7 billion), 600 million zloty more than initially planned, the government said after today’s meeting. The general government shortfall, which includes all state expenses, wasn’t revised from 2.2 percent of gross domestic product.

“The central budget deficit at more or less the same level as 2012 suggests the general government deficit won’t be cut to 2.2 percent,” said Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw. “Still, amid a considerable deterioration of Europe’s economic climate, we don’t think this will diminish the assessment of Polish fiscal policy.”

Poland plans to reduce the budget gap to within the EU’s limit of 3 percent this year, the first time since 2007.

The European Commission, the EU’s executive arm, has given Poland until the end of this year to cut the deficit to 3 percent. Failing to do so may cost the country access to development grants that totaled 67 billion euros ($84 billion) and added an average of 1 percentage point per year to gross domestic product in the seven years through 2013.

The Brussels-based commission forecasts the economy will grow 2.7 percent in 2012, the most in the EU. The expansion slowing next year to less than the 1.6 percent rate posted in 2009, when Poland was the only EU member to avoid a slump, “can’t be ruled out,” Maja Goettig, a member of Tusk’s Council of Economic Advisers, said by phone on Aug. 31.

“The effects of fiscal consolidation, uncertainty over the external environment and a weakening labor market are increasingly visible in the data,” Magdalena Polan, an economist at Goldman Sachs in London, said in a note Aug. 30. “This is likely to continue in the second half, in our view, keeping growth below potential.”

Labor Market

Jobs growth slowed to zero in July from 3.3 percent a year earlier, the lowest in 25 months, while the unemployment rate has been stuck between 11.4 percent and 13.5 percent for two years, even as the economy outperformed most EU peers. It will stay at about that level through 2013, the government predicts.

Tusk, who began his second term in October, doesn’t face any immediate political threats to his coalition, which has a four-seat majority in parliament. The current legislature’s term ends in three years.

Still, 64 percent of Poles are increasingly concerned about the economy’s future, up 5 percentage points from July, according to an Aug. 14-23 poll of 1,011 people by Warsaw-based researcher CBOS. No margin of error was given.

Bond Yields

Tusk, 55, has credited policies aimed at narrowing the deficit with helping to reduce borrowing costs. The yield on the government’s five-year bond reached a record low of 4.22 percent at 2:45 p.m. Warsaw time, down from 5.05 percent on Oct. 10 after Tusk’s re-election, according to generic data compiled by Bloomberg.

The cost to insure Polish debt against non-payment for five years using credit-default swaps rose one basis point to 152, data compiled by Bloomberg show. The swaps cost 89 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, compared with an average difference of 78 basis points in the first half of 2012.

“In the light of weakening economy, we should definitely keep some public investments, which may not be possible if we continue reducing the deficit at the pace we have outlined so far,” Jacek Wisniewski, also a member of Tusk’s Council of Economic Advisers, said by phone yesterday.

Sticking to 3 percent in 2013 “won’t mean any loosening” and “will avoid a further tightening of fiscal policy, which is what’s required when an economy slows,” he said.

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