Bauc budget draws criticism
Finance Minister Jaroslaw Bauc's 2001 budget draft, which proposes to curb the state deficit to 1.6% of gross domestic product (GDP) next year from an expected 2% this year, is beginning to arouse suspicions of accounting sophistry.
Last week analysts criticized Bauc's intention to count as government savings the cash that the state Social Security Office (ZUS) receives in subsidies. From a fiscal viewpoint, budget transfers into pension funds should more appropriately be counted as expenditures, said Dariusz Filar, chief economist for Bank Pekao.
Also, Filar said, the fiscal gap projection should actually be raised to 2.6% instead of 1.7% because Bauc includes income from the sale of third-generation mobile phone licenses (UMTS), which amounts to $7 billion, as budget revenue.
Disagreement with Bauc over these and other accounting interpretations led to the resignation Thursday of the head of the Finance Ministry's analysis department, Witold Skrok. However, on a private radio station Friday, Bauc said that as a public officer, Skrok should not try to stir up politics. "He was moved from working on the budget so his reaction might result from some kind of frustration," Bauc said.
Krzysztof Blendowski, chief strategist at Wood & Co. brokerage, said that in addition to questions of interpretation, state spending will actually increase by 12% in 2001, even though Bauc is touting his budget structure as having the fiscal restraint needed to curb Poland's current account (C/A) gap.
Analysts said Bauc's budget would not bring down the country's 17.5-21.5% interest rates, the highest in Central Europe.
"To bring the deficit gap down, I believe the Finance Ministry has resorted to some creative accounting (and that) very ambitious assumptions have been used," Blendowski said.
Filar said he doesn't necessarily agree that the finance minister is playing accounting tricks, but added that Bauc has only caused confusion about whether he's committed to strong economic policy. "I would call the budget moderately restrictive," Filar said.
Adding to the confusion is that the fiscal gap has now been superseded by the "economic gap," a new measurement analysts are also trying to come to grips with. While the fiscal gap kept track of the central budget deficit, the local administration deficit and the state-funds deficit, the economic gap is the sum of the fiscal deficit plus government compensation payments, minus pension fund payments.
The Solidarity Election Action (AWS) government has been under intense pressure to bring down the economic deficit to curb the C/A deficit, which consumes 8% of GDP. The central bank has warned of increased interest rates if the deficit
doesn't drop below 2% of GDP in 2001.
However, May's C/A deficit figures, released Monday, did brighten the overall economic picture. May's $376 million vs. $850 million in April beat expectations by several hundred million dollars.
"This was achieved mainly due to an increase in exports of $2.44 billion compared to $2.03 billion in April," Filar said. Another boost was $324 million that poured in from unclassifiable trade, he said, partly resulting from Germany's economic recovery. And the euro, which was worth only $ 0.89 at the beginning of May, strengthened to near parity by the end of the month. Because 60% of export contracts are expressed in euros while the C/A deficit in is dollars, this led to the better figures.
The trade deficit stood at $881 million in May vs. $1.075 billion in April, while National Bank of Poland figures show that exports were up 22.7% over May 1999 and imports up 10%. This confirms a trend toward increased exports that started to become visible in Central Statistical Office (GUS) statistics a few months ago.
Maciej Reluga, an economist with ING Barings, said the C/A figures for May of which the trade deficit is only one component saw improvement in almost every category. Net income, for example, which often shows a deficit of around $100 million, posted a $100 million surplus. A net services deficit, often at $200 million, improved to $100 million, he said.
Analysts expect monthly C/A deficits to be closer to $800 million in the coming months and the deficit to hover around 8% of GDP before falling somewhere around 7.5% at year's end. ING calculations put May's deficit at 7.9% of GDP. The government's official year-end target is 5.4-6.8%.
