It's the flat tax, stupid

Poles will vote in parliamentary elections on September 25 and recent opinion polls show the center-right is poised to win a majority in the next parliament. While the general economic aims of the leading parties are similar, and both are determined to form a stable two-party coalition cabinet, the details seem to pose a bit of a problem. Time will tell how many of the electoral promises are kept, but here we present the programs of Poland's potential new coalition government.

Taxes

Civic Platform (PO): The party wants to follow Slovakia's example and promises 3x15 percent reform - a single rate for VAT and personal and corporate income taxes. This would replace the current 19-40 percent personal income tax scale, lower the corporate and VAT taxes and remove most tax breaks and exemptions.

Law & Justice (PiS): The party wants to introduce two personal income tax brackets of 18 and 32 percent and later lower the top level to 28 percent. It criticizes the flat-tax proposals, saying they would benefit only top earners. The party promises zł.6 billion in tax rebates and breaks for families with children.

Privatization and market liberalization

PO: The party promises to speed up privatization by selling off stakes held by the state in partially-privatized companies, including top insurer PZU, oil group PKN Orlen, PKO BP bank, and copper producer KGHM. It wants the state to retain full control of infrastructure such as gas and oil pipelines and the power grid.

PiS: The conservatives have voiced concern about foreign dominance in the banking sector and called on Polish authorities and regulators to block the upcoming merger of Pekao and BPH. It has also expressed concern about Russia's influence in the oil sector and favors keeping a majority stake by the state in national champions, such as bank PKO BP. It wants the state to retain a blocking share of 25 percent plus one in sectors considered key to Poland's economic security. It says privatization revenues should amount to zł.7-10 billion a year with some zł.4-6 billion worth of sell-offs carried out via the Warsaw Stock Exchange.

Euro

PO: It wants Poland to join the euro as quickly as possible, and says 2009 entry should be realistic and believes economic benefits clearly outweigh potential risks and costs. The party's economic experts have said it would be desirable for Poland to peg the złoty to the euro in the ERM-2 mechanism as soon as April 2006.

PiS: The party warns of risks of a "premature link" between the złoty and the euro in the pre-euro ERM-2 trading band and says early euro adoption may slow the convergence of Poland's economy with the rest of the EU. Party officials say they are not fundamentally opposed to the euro, but want to see detailed analyses of its effects on the economy.

Public finances

Both parties promise to extend the budget planning horizon to medium-term fiscal plans from present one-year plans.

PO: The party is promising a radical revamp of public finances, shifting the budget's focus to specific tasks and away from the present tug-of-war between various ministries and agencies seeking budget funding. The party has said it will seek to bring next year's central budget deficit below zł.30 billion or some three percent of GDP. PO leader Jan Rokita has said his party would seek to cut spending by some zł.20 billion, around 10 percent of 2005 expenditure.

The party has said it would seek savings in spending on pensions and social benefits as well as on administration, made possible by the simplified tax system.

PiS: The conservatives say they want to freeze the budget deficit at zł.30 billion in 2006-2009, reducing it from this year's ceiling of zł.35 billion, an equivalent of 3.6 percent of GDP. The party says it can stimulate growth with a mix of investment incentives and tax cuts, which would allow the deficit to fall below the EU's ceiling of three percent of GDP from 2007 onwards. The conservatives say there should be no cutbacks in social spending and they would seek savings by reducing bureaucracy.

Monetary and exchange-rate policy

PO: The party insists on strict central bank independence and argues there is no point in tampering with its organization given that it will hand over monetary policy to the European Central Bank with the adoption of the euro anyway.

PiS: The party wants to scrap the Monetary Policy Council, a 10-member body that is made up of the bank's governor and nine members appointed by the president, the Senate and the lower house of parliament. The plan is part of the conservatives' proposals to streamline public administration. The conservatives say monetary policy should be "harmonized" with the government's policies aimed at creating jobs and fostering economic growth. Its experts argue that interest rates are too high and the złoty too strong. (Reuters)