Poland Cleared to Exit EU Budget Monitoring Before Elections

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Poland signaled it may boost spending and cut taxes after getting a reprieve from European Union budget monitoring as the ruling party tries to overcome a setback in a first-round presidential ballot.

Wages in the public sector may rise from next year, or a year earlier than planned, Finance Minister Mateusz Szczurek said at the news conference in Warsaw on Wednesday. It was “almost certain” that value-added tax rates will be cut in 2017, Jacek Rostowski, chief political adviser to Prime Minister Ewa Kopacz, said at the same briefing.

The announcements came after the EU’s executive branch recommended ending its excessive-deficit procedure for Poland, which had forced the government to freeze public wages and raise some taxes. That has become a contentious issue now that the country is in the midst of picking its president, and incumbent Bronislaw Komorowski came in a surprise second in first-round voting after struggling to fend off criticism that many Poles have missed out on economic growth.

“It’s a new opening -- now we don’t have to focus so much on looking for savings,” Szczurek told TVN24 BiS television channel. At the same time, he said it’s “way too early” to discuss cutting VAT next year because the decision will depend on budget spending plans that aren’t ready yet.

Tight Race

The ruling Civic Platform party is running neck-and-neck with the opposition Law and Justice ahead of a parliamentary election due by early November. Law and Justice’s presidential candidate, Andrzej Duda, delivered the first-round defeat to Komorowski by putting the spotlight on economic issues. They’re set to face off in a May 24 runoff.

While the headline budget deficit figure was 3.2 percent of economic output in 2014, above the bloc’s limit of 3 percent, the European Commission decided to factor in the costs of a pension overhaul, it said in e-mailed statement.

“Once these net costs from 1999 are taken into account, the deficit is below 3 percent of GDP in 2014,” it said on Wednesday. “Thus, the Commission considers that Poland respects the deficit criterion.”

The monitoring procedure for budget offenders was imposed on Poland in 2009. The European Commission’s recommendation requires approval by EU finance ministers, expected to happen in June, for it to end, Szczurek said.

While the EU executive’s decision shows Poland’s strategy of reducing its budget shortfall is working, it isn’t a “game changer” when it comes to assessing the country’s creditworthiness, said Arnaud Louis, director at Fitch Ratings.

“We’d need to see an impact of a lower deficit on government debt before the improvement in public finances leads to positive pressure on the ratings,” Louis said in an e-mailed response to questions from Bloomberg on Wednesday.

Fitch has kept Poland’s rating at A-, the seventh highest investment grade, since January 2007.

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