Package 2000: good idea on shaky ground
The "Package 2000" announced by Kolodko calls for inflation to fall to 5% by 2000 and annual gross domestic product growth of 5% to 6% each year until then. The plan also cuts taxes and forecasts a budget deficit of just 1.5% of GDP, compared to the current level of 2.8%.
Late Tuesday, President Aleksander Kwasniewski rowed in behind the plan, saying it would be essential to Poland joining the European Union.
But economists, who welcomed the program, said it will push the government to complete structural reforms of public finances, namely the social security and agricultural systems. If the government adopts the program, but not the reforms, it could kill the program in its infancy.
"This program hinges on the reform of the social security system," said Maciej Krzak, chief economist for ING Bank. "Poland has reached a point where structural reforms become the most important reforms again."
Pushing forward with the program and the badly needed reforms will require political finesse on Kolodko's part, economists said. The Peasants Party (PSL) is likely to view the plan with a jaundiced eye given its opposition to the reform plans and much of the government's privatization program.
Two days before Kolodko presented his road map to the government, the PSL questioned the impact the plan could have on some favored social programs. Some also believed the party's attempts to tie greater control over the economy into the reshuffling of the cabinet were also meant to blunt the program.
"It could be in reaction to Kolodko's coming forward with this whole program," said Krzysztof Bledowski, chief economist with Pioneer First Polish Trust Fund. "They fear that if they let SLD run the show with this they will have nothing left to say."
And even if the reforms are successful, they may not be enough to create the economic model Kolodko has in mind. Bledowski noted that spending on the social security system, which now accounts for about 20% of government revenues, is likely to "grow heavier than lighter" in the first few years of a reform initiative.
This could prevent the government from bringing the budget deficit down to the 1.5% of GDP level called for in the plan. If government spending is not reduced, it could make reducing inflation a much more difficult task.
Reaching 5% will be extremely difficult even if the budget deficit falls in accordance with the plan, said Richard Conquest, chief economist for Central and Eastern Europe at ABN-AMRO Hoare Govett.
"Each marginal point becomes increasingly difficult," Conquest said. "Nonetheless, setting the objective in the first place is extremely positive. This is a healthy exercise."
But economists and the PSL will both have to hold off judgment of the plan until more is known about it. Kolodko has for the past two weeks painted the program with broad strokes in speeches and interviews, but provided little detail on how it would work.
"He's proposing steps in the right direction," ING's Krzak said. "But he's very vague."
Economists wanted to know how Kolodko would pay for parts of the plan that seek to stimulate business growth.
In addition to lowering the budget deficit, the minister called for lowering the corporate tax rate to 32% by 2000 from the current 40% through a series of 2% annual reductions, cutting the three-tier system of personal income taxes to 20%, 30% and 40% from the current 21%, 33% and 45%.
"We don't know about the contents of the package," lamented Witold Michalek, director of the Business Center Club lobbying group in Warsaw. "It says about final results, but not about how much it is going to cost, for example in terms of tax reduction."
"This initiative was very welcome. There was a need for long-term planning and this is what the package is about," said Markus Rodlauer, the International Monetary Fund's senior representative in Poland. "It is feasible. Now the inflation rate is below 20%, so it could be 5% in 2000."
Late Tuesday, President Aleksander Kwasniewski rowed in behind the plan, saying it would be essential to Poland joining the European Union.
But economists, who welcomed the program, said it will push the government to complete structural reforms of public finances, namely the social security and agricultural systems. If the government adopts the program, but not the reforms, it could kill the program in its infancy.
"This program hinges on the reform of the social security system," said Maciej Krzak, chief economist for ING Bank. "Poland has reached a point where structural reforms become the most important reforms again."
Pushing forward with the program and the badly needed reforms will require political finesse on Kolodko's part, economists said. The Peasants Party (PSL) is likely to view the plan with a jaundiced eye given its opposition to the reform plans and much of the government's privatization program.
Two days before Kolodko presented his road map to the government, the PSL questioned the impact the plan could have on some favored social programs. Some also believed the party's attempts to tie greater control over the economy into the reshuffling of the cabinet were also meant to blunt the program.
"It could be in reaction to Kolodko's coming forward with this whole program," said Krzysztof Bledowski, chief economist with Pioneer First Polish Trust Fund. "They fear that if they let SLD run the show with this they will have nothing left to say."
And even if the reforms are successful, they may not be enough to create the economic model Kolodko has in mind. Bledowski noted that spending on the social security system, which now accounts for about 20% of government revenues, is likely to "grow heavier than lighter" in the first few years of a reform initiative.
This could prevent the government from bringing the budget deficit down to the 1.5% of GDP level called for in the plan. If government spending is not reduced, it could make reducing inflation a much more difficult task.
Reaching 5% will be extremely difficult even if the budget deficit falls in accordance with the plan, said Richard Conquest, chief economist for Central and Eastern Europe at ABN-AMRO Hoare Govett.
"Each marginal point becomes increasingly difficult," Conquest said. "Nonetheless, setting the objective in the first place is extremely positive. This is a healthy exercise."
But economists and the PSL will both have to hold off judgment of the plan until more is known about it. Kolodko has for the past two weeks painted the program with broad strokes in speeches and interviews, but provided little detail on how it would work.
"He's proposing steps in the right direction," ING's Krzak said. "But he's very vague."
Economists wanted to know how Kolodko would pay for parts of the plan that seek to stimulate business growth.
In addition to lowering the budget deficit, the minister called for lowering the corporate tax rate to 32% by 2000 from the current 40% through a series of 2% annual reductions, cutting the three-tier system of personal income taxes to 20%, 30% and 40% from the current 21%, 33% and 45%.
"We don't know about the contents of the package," lamented Witold Michalek, director of the Business Center Club lobbying group in Warsaw. "It says about final results, but not about how much it is going to cost, for example in terms of tax reduction."
"This initiative was very welcome. There was a need for long-term planning and this is what the package is about," said Markus Rodlauer, the International Monetary Fund's senior representative in Poland. "It is feasible. Now the inflation rate is below 20%, so it could be 5% in 2000."
