AWS rejects austerity plan
By : Jeffrey Sparshott
With an eye toward the Sept. 23 parliamentary elections, Prime Minister Jerzy Buzek (http://www.kprm.gov.pl)'s cabinet last week threw out a proposal for an austerity budget that would have raised taxes and made substantial spending cuts in a number of areas, including politically sensitive pensions and wages. The cabinet is scheduled to consult on a new draft, approve a final version by late September and send it to the Sejm no later than Sept. 30. Parliament then has until the end of December to pass a budget.
But regardless of what the cabinet sends to the Sejm, the true shape of public finances may not be known until October or November, analysts said.
"The plan prepared by the current government will probably not be the final one," said Iwona Pugacewicz-Kowalska, an economist with Bank Pekao. "I would expect the new government to prepare budget amendments. So we will see this amount of the deficit later this year, maybe mid-October or November."
Poll projections show the opposition Democratic Left Alliance (SLD) wiping out the reigning Solidarity Election Action (AWS) coalition. In a television interview last week, Buzek said that Economy Minister Janusz Steinhoff would meet with the opposition to help formulate the budget.
The fiscal uncertainty is casting a cloud over this week's Monetary Policy Council (RPP) meeting, where the government and the market are hoping for an interest rate reduction. The RPP has staged a series of rate cuts this year and July inflation figures announced last week coupled with a lax domestic demand are fueling hopes that the 10-member council will knock at least another percentage point from some of the highest real-borrowing costs in the region. The central bank's main interest rate is 15.5%.
But the projected budget gap could more than counter the historically low inflation figures and limit the RPP (http://www.nbp.pl)'s will to cut interest rates during its monthly meeting Tuesday and Wednesday, analysts said. July's consumer price index was 5.2% year on year, the Central Statistical Office (GUS) (http://www.stat.gov.pl/english/index.htm) said last week, the lowest since Poland adopted a market economy.
"(The RPP) is facing a serious dilemma now," said Marcin Mroz, senior economist with SG Bank. "It is a favorable macroeconomic environment to cut rates now and at the same time the economy shows signs of slowing down so there is no danger of demand pressure. From this point of view they can easily cut rates 100 to 150 basis points. But fiscal uncertainty gives a powerful weapon to hawkish members of council."
The fiscal uncertainty is also a danger to the overall economy, he said.
"How long will markets withstand this fiscal turmoil, this mess?" Mroz asked. "So far we haven't seen any signs of panic or a withdrawal from Polish assets. This may continue in the short term."
Much will depend on how the government's budget project unfolds. Buzek and his cabinet last week sent Finance Minister Jaroslaw Bauc back to the drawing board after it rejected his austerity plan by saying that it underestimated economic growth in 2002.
Overestimating growth this year forced the government to revise 2001's budget.
Bauc assumed a maximum GDP growth of 2.9% in 2002 and had set that year's budget deficit at zl. 35.3 billion ($8.4 billion), a figure that, depending on economic growth, could bring the deficit to 4.5% of GDP compared to a 3.9% target this year.
Most economists see a zl. 40 billion ($9.52 billion) deficit possibly more than 5% of GDP as the maximum the country's central budget could afford.
"According to our estimates a deficit higher than zl. 40 billion will be hard to finance next year," Pugacewicz-Kowalska said. Buzek last week said that the 2002 central budget deficit could not be more than zl. 40 billion.
That cap follows concerns that borrowing costs would be too high and income from privatization of state-owned assets too low to make up any greater difference between revenue and expenses. Already this year tax and privatization revenues are well below the original 2001 budget plan and the government was forced to revise borrowing and cut spending. As of July, privatization revenue came in at zl. 2.13 billion ($507 million), or 11.8% of government expectations for the entire year. Several forecasts see zl. 10 billion ($2.38 billion) as the maximum privatization income in 2002.
Bauc projected a 2002 worst-case scenario that foresees without greater revenues from taxes and significant spending cuts a budget deficit around zl. 90 billion ($21.4 billion), or 11% of GDP, compared to zl. 29.1 billion ($6.9 billion) this year. To counter that bleak forecast, the Finance Ministry proposed greater revenues through higher VAT taxes, cancellation of some personal-income tax deductions and a temporary tax on imports. Savings would come via cancellation of nearly 90 bills recently passed by the Sejm that boost spending, including allowance bills for families and children, forestation, economic development, and teacher wages. The most controversial savings would come from freezing public sector wages and adjusting pensions. Additional savings are also possible through reduced investments, cutting government reserves or altering Social Insurance Administration (ZUS) subsidies.
"It was only a first draft by the finance minister," Mroz said. "I am not very surprised it was rejected. That doesn't mean that there will be no austerity package at all. I think that without any painful measures aimed at socially sensitive expenditures, the government will be willing to accept the proposal. Now there is much ado about nothing. We have to wait and see the next step."
Buzek told public television that any budget savings would not come at the expense of retirees and pensioners.
