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Poland Aims to Raise Tax on Fuels Amid Social-Spending Drive

  • Ruling party to break election promise about no tax increases
  • Levy set to squeeze fuel retailers’ margins, boost inflation

Poland’s parliament started debate on legislation to raise the tax on petrol, reversing on an election promise even after producing a reported budget surplus in the first half.

The ruling party proposed the tariff to provide as much as 5 billion zloty ($1.3 billion) a year to the budget, according to parliament’s website. Law & Justice, which vowed not to hike taxes before winning power in 2015 elections, is seeking additional revenue as the costs of an unprecedented social-spending program and an early-retirement plan weigh on state finances.

The tax debate in parliament on Wednesday, part of an accelerated process that bypasses the customary public consultations, follows a government tax-collection revamp to reduce fraud. That measure boosted revenue from value-added taxes through May by 30 percent from a year earlier. The Finance Ministry boasted a five-month central-government deficit of 200 million-zloty, and after the central bank transferred its profit to the state coffers in June, that became a surplus, daily Dziennik Gazeta Prawna reported Tuesday.

“The government is obviously trying to minimize the cost of election promises,” said Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw. “Backing away from a lower retirement age would amount to a political loss, while sticking by the pledge means a tangible financial cost.”

Retailers’ Margins

The planned tax, which will increase the price of a liter of fuel by 0.25 zloty, or about 6 percent, will help finance the construction of local roads, according to the draft. The new levy “doesn’t need to mean higher fuel prices for clients of petrol stations,” Poland’s largest, government-controlled oil refiner and retailer PKN Orlen SA, said in a statement to PAP news agency late Tuesday.

Poland’s state-controlled refiners Orlen and Grupa Lotos SA may be under pressure to reduce their retail margins to curb impact of the levy proposed by the ruling party, Erste Group Bank AG analysts said on Wednesday. Orlen and Lotos shares advanced 1.4 percent at 12 p.m. in Warsaw. Warsaw’s WIG20 Index was up 1.3 percent.

The ruling party has said local road construction was largely neglected by the previous government, which focused on building highways with the help of European Union funds, and that this additional fee will seek to right that wrong.

Inflationary Impact

“All drivers are aware that the condition of local roads is far from perfect,” Law & Justice lawmaker Zbigniew Dolata told parliament on Wednesday. “Such conditions hinder economic growth and safety.”

Analysts from banks including PKO Bank Polski SA, Bank Zachodni WBK SA and Bank BGZ BNP Paribas SA said that Poland’s inflation rate would increase by 0.3 to 0.4 percentage points if the levy is approved. The nation’s consumer-price index declined to 1.5 percent last month, in year-on-year terms, compared with the central bank’s 2.5 percent price growth target.

“Governments don’t like low inflation, and this levy will help gradually increase both prices and budget revenue,” said Tomasz Kaczor, a senior economist at state bank BGK SA in Warsaw.

Pensions Boost?

Law & Justice leader Jaroslaw Kaczynski said at a party congress this month that the government should increase payouts for pensioners and seek to re-introduce some personal tax breaks, moves that could widen the deficit. The retirement-age reduction, which will come into effect in October, is set to cost as much as 55 billion zloty through 2021. The cabinet is also spending more than 24 billion zloty a year on its flagship child-benefit program, according to government calculations.

Fitch Ratings said last week that it expects Poland’s general government deficit to increase to 2.6 percent of economic output this year from 2.4 percent in 2016. The cost of increased transfers to families and the earlier retirement age will “largely be offset by a strong increase in revenue, reflecting the stronger economy and improved tax compliance,” it said.

Deputy Prime Minister and Finance Minister Mateusz Morawiecki has pledged to keep the budget gap below 3 percent of gross domestic product, a level that if breached would allow the EU to withhold some funds earmarked for the biggest economy in the bloc’s formerly communist east.

“It’s clear that the budget, which is looking good now, will start causing problems in the future,” said Katarzyna Lubnauer, the head of the parliamentary caucus of the pro-business opposition party Nowoczesna. “This new tax reveals Law & Justice’s real outlook for the budget.”

— With assistance by Adrian Krajewski

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