Poland investors worried by budget plan

Poland may delay complying with the European Union's deficit limit, disappointing investors, according to a draft four-year financial plan reported Thursday night by the PAP newswire.

The Finance Ministry proposes to cut the public-finance deficit to 3 percent of gross domestic product in 2013, a year later than the government has pledged, PAP reported, citing the unofficial document. The central government deficit won't exceed 45 billion zloty ($14.7 billion) next year, PAP said.

"A deficit of around 40 billion zloty would basically mean no change from this year, and it would be bad news for markets," said Jaroslaw Janecki, chief economist in Warsaw at Societe Generale SA. "It won't support the declared intentions of real fiscal tightening."

The government will discuss the plan, which outlines deficit, spending, revenue and borrowing targets through 2014, later today. Prime Minister Donald Tusk's administration is struggling to close a deficit that swelled to 7.1 percent of GDP in 2009 as it prepares for local and parliamentary elections in the next year.

Hungary has roiled markets by seeking to back away from budget commitments after Greece's ballooning deficit sparked investor concern about European sovereign debt. The EU and International Monetary Fund suspended a review of Hungary's 20 billion-euro ($26.2 billion) bailout program July 17, saying the government had to make "tough decisions" on spending.

Poland plans to freeze wages for government workers through 2014 and replace existing value-added tax rates with rates of 6, 8 and 23 percent, PAP said. VAT on processed foods will drop to 6 percent from 7 percent, while the tax on unprocessed foods will rise to 6 percent from 3 percent.

"Investors would prefer to see spending cuts rather than income increases," said Dariusz Lasek, head of debt investments at Union Investment TFI in Warsaw. "What's important is the way the deficit is reduced because economic growth should be optimized."

According to the draft four-year plan, Poland's public debt won't exceed 55 percent of GDP through 2014, PAP reported. Anything more than 55 percent would force the government to raise taxes and cut spending to narrow the gap within two years under Poland's public finance law.

Poland's public debt may reach 53.9 percent of GDP this year, according to the European Commission's spring economic forecasts released in May.

"It's highly probable that public debt will exceed 55 percent of gross domestic product next year, so the government needs to cut the deficit to tame it," said Maja Goettig, chief economist at Bank BPH in Warsaw. "Poland needs quick action, and in the short run only tax increases will mend finances."

Poland's budget picture may improve as the economy rebounds. The government forecasts GDP will expand 3.5 percent next year, after growth slowed to 1.8 percent in 2009 as the global recession curbed demand for Polish exports. Wages will rise an average of 3.7 percent, and the unemployment rate will fall to 9.9 percent at the end of next year from 11.6 percent currently, according to government estimates.

The "budget is staggering under the burden of entitlement spending," Goettig said. "However, due to the election calendar and opposition within the ruling coalition, we are not going to see any concrete solutions in this plan, only an outline, quite optimistic forecasts and some ad hoc measures."

Source:   Bloomberg Business Week