Polish Finance Chief on Defensive as Retailers Take To Streets

  • Fakt newspaper reports Finance Minister Szalamacha may leave
  • Minister plans to tax retailers to help offset new spending

Polish shopkeepers are making life more difficult for Finance Minister Pawel Szalamacha. Their opposition to a planned new tax is exposing strains in the new government as it tries to find ways to finance its generous election promises.

Hundreds of protesters, accusing the government of backsliding on a plan to help them compete against big-box chains, picketed parliament on Thursday. Earlier in the day, best-selling tabloid Fakt said Szalamacha may leave the cabinet following disagreements over the plan, originally designed to impose higher taxes on mostly foreign-owned retailers.

The controversy comes as the cabinet struggles to convince investors that its budget plans are credible following last month’s surprise rating downgrade from Standard & Poor’s. For now, Law & Justice is pushing ahead with its spending measures, which are forcing Szalamacha into a tricky balancing act as he looks for ways to raise money without alienating the party’s base.

“Law & Justice has clearly underestimated the costs of all its promises, and Poles will soon realize they’re not getting what they expected,” Olgierd Annusewicz, a political scientist at Warsaw University, said on Thursday. “The government will need to seriously consider the political risks related to the potential dismissal of people like Szalamacha, if he is made into a scapegoat.”

On Monday, Prime Minister Beata Szydlo voiced support for Szalamacha, calling him one of her “most important” ministers. In November, she hand-picked the Harvard-trained lawyer, who helped draft Law & Justice’s economic program, into her cabinet after he failed to win a parliamentary seat in general elections a month earlier.

‘Too Busy’

Fakt’s report casting doubt on Szalamacha’s future is “very surprising,” the minister’s spokeswoman Alina Urban said by phone. “We don’t have any such signals from the Prime Minister’s office.” Asked later in the day why Szalamacha skipped a scheduled media event, Urban said he was “too busy.”

Poland’s Law & Justice party -- which won both presidential and parliamentary elections last year -- is on a collision course with financial markets and the domestic banking industry. On Jan 19, Polish central bank governor Marek Belka dismissed as “pure evil” a proposal by the president to convert some foreign-denominated mortgages into zloty. That came four days after S&P reduced its rating on Poland for the first time ever, cutting to the third-lowest investment level.

Szalamacha’s potential departure could unsettle markets as he’s “been cautious in keeping the deficit under 3 percent” of gross domestic product, said Jakub Rybacki, an economist at ING Groep NV in Warsaw. “If he were to go and we got someone who is less wedded to the the idea of keeping the deficit in check, bond yields could go higher.”

Poland’s zloty is emerging Europe’s worst-performing currency this year after Russia’s ruble, declining 3.4 percent against the euro. It fell 0.4 percent to 4.4298 to the euro at 4:16 p.m. in Warsaw. The yield on the benchmark 10-year local-currency bond dropped 1 basis point to 3.11 percent.

Retail Outrage

Support for Law & Justice dropped to 34 percent in February from 36 percent last month and 37.6 percent in October’s election, according to a CBOS survey of 1,000 Poles carried out on Feb. 3-10 and published on Thursday. Backing for the two biggest opposition groups together, both of which oppose the retail tax, rose one point to 33 percent.

Law & Justice has so far proved itself more focused on controversial measures consolidating its influence over public life than on economic policy. It gained control over national media, subordinated prosecutors to the justice ministry, gave police more surveillance powers and revamped the constitutional tribunal to make it harder for judges to shoot down its laws.

That said, the retail tax controversy shows how tricky it will be for the party to meet all the expectations its landslide victory raised without falling foul of the European Union. Its political reforms haves already triggered a European Commission probe into the state of democracy in Poland.

And a note from the EU’s executive “attacking” the retail tax prompted Szalamacha to redraw the proposal. The government changed its initial plan targeting mainly foreign-owned companies chains such as Jeronimo Martins SGPS SA, Tesco Plc, and Schwarz Group to include mid-sized shops. That brought several hundreds of demonstrators into the streets of Warsaw on Thursday to condemn what they said was the government’s about-face.

“They won power to support small- and medium-sized businesses, and with this bill they are just killing us,” said Andrzej Domagalski, 54, the owner of a grocery in Rzeszow, southeastern Poland. “Law & Justice was supposed to defend us.”

The retailers’ “emotions will subside” and a compromise that satisfies everyone involved will be found, Law & Justice lawmaker Maks Kraczkowski said on Thursday. “That’s what’s being expected from the finance minister. For the time being, nobody within the party is talking about replacing him.”

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