Gamblin' man

Grzegorz Kołodko missed his chance to dazzle the economic and investor community by sticking to the government's inflation plus 1% spending cap while simultaneously lowering the budget deficit for next year. Instead, the finance minister will have to endure increased skepticism about his policies after caving in to what appears to be political pressure ahead of October's local elections. In unveiling his 2003 budget last Thursday, the finance minister ramped up spending 2.4% in real terms - abandoning the Democratic Left Alliance's (SLD) self-imposed limit. True, Kołodko did lower the budget deficit target to 4.9% of gross domestic product compared to 5.4% this year. But that apparent demonstration of fiscal prudence was overshadowed by his optimistic projection of a 4.5% real increase in revenue in 2003. Given the current worldwide economic outlook here and abroad, no one, apart from the finance minister it seems, believes that 3.5% growth next year is likely. Those halcyon days of robust growth that Kołodko presided over during his first stint as finance minister in the mid-1990s are long gone indeed.

Kołodko's fuzzy numbers left economists and members of the Monetary Policy Council (RPP) shaking their heads. Bogusław Grabowski, a hawkish member of the council, called the spending-cap breach a blow to the government's fiscal credibility in the medium and long term. The International Monetary Fund, too, warned Poland that it was "absolutely critical" for the government to stick to its inflation-pegged spending limit. While the SLD has never really paid much attention to the opinions of the international community, it would be nice in this case if the government acquiesced and stuck to its spending cap. Kołodko's actions fly in the face of his purported goals. Dumping the spending cap will not convince the RPP, for example, that continuing to ease monetary policy is the best route to take if it cannot trust that the government is committed to reining in spending - or at least not changing the rules whenever it's convenient. If Kołodko was banking on the further lowering of interest rates to bring about the growth his 2003 budget is dependent on, he might already have to kiss his rosy revenue projections good-bye. The finance minister is also bent on adopting the euro in 2006, just two years after Poland is expected to join the European Union. But if the government continues to delay politically difficult spending cuts, relying instead on unrealistic growth assumptions to meet short-term party goals, Poland will only be backing itself in a corner that will be very difficult to get out of later. Of course, Kołodko, the eternal optimist, may also be gambling that growth will pick up once Poland wraps up negotiations on EU membership in December. Whatever his rationale, for Poland's sake, let's just hope he's right.