Questions remain

Doubts surrounding Budget 2004, problems beyond next fiscal year...and how it all may influence Poland's debut on the EU stage.

By Aleksander Nowacki

Even as international financial institutions and the central bank president renewed calls for a radical fiscal reform, in an attempt to step up the pressure on the government to act, the top economic policy makers' pronouncements indicate that changes are unlikely in the foreseeable future. Little wonder that the markets are reacting nervously.

Minister of Economy, Labor and Social Policy and Deputy Prime Minister, Jerzy Hausner, has effectively extinguished any hopes of cuts in government spending in the foreseeable future, saying that expenditures would instead be "rationalized." His pronouncement comes in the wake of the International Monetary Fund's report, which gave the economy's prospects a generally favorable assessment. The report stressed, however, that the headway the country has made could easily be squandered, should fiscal reform not go through. At the same time, Leszek Balcerowicz, president of the central bank, evoked the ghost of a full-fledged financial crisis, saying that the country could go down the path that led to Argentina's collapse two years back.

These fears were not abated by next year's budget, which, economists say, is likely to create a build-up of problems that would have to be solved in the future. The mounting burden of public debt, set to edge up to 47.9 percent in 2004, compared to just 45.9 percent the previous year, means that the costs of servicing will have to be shouldered by future years' budgets, says Krzysztof Rybiński, chief economist at BPH PBK. What is more, finance minister Andrzej Raczko says that he expects the ratio of public debt to GDP to break the 55 percent barrier in 2005.

"The credibility of policy-making is very low," says Jan Winiecki, chief economist at West LB, "therefore any policy statement ... perceived to be harmful for the future course of the Polish economy is reacted upon strongly, often nervously." That is, Winiecki says, how the markets reacted to the accumulation of negative news coming from the top two economic policy-makers last week.

While the government is talking of adopting the euro by 2008, economists see its policies as putting off that prospect well beyond this decade. Winiecki points out that, after all the expenditure is included, next year's deficit amounts to 7.8 percent. Rybiński calls the budget "an attempt at creative accounting of budget expenditure on an unprecedented scale," and says that, following EU accession, the rules of calculating the deficit will have to change. It is therefore unlikely, he says, that the deficit could be cut to under three percent, as the euro area's Growth and Stability Pact requires.

While the focus remains squarely on the size of the deficit, there is the equally worrying issue of the public debt to GDP ratio. Both the Pact and this country's constitution rule that the ratio must not exceed 60 percent. While there is still a long way to go before the debt reaches that barrier, its spectacular rise envisaged by the government threatens budget stability in future years.

According to Winiecki, worrying signals about the membership of the next year's Monetary Policy Council (RPP) have already weakened the złoty. Should the RPP prove more malleable to political demands, the currency could plunge next year. As 15 percent of the public debt is held by foreign creditors, just 10 percent depreciation would mean an automatic increase in the aggregate public debt. As shown by the three possible scenarios of economic development in the coming years, published by the Finance Ministry, this could mean that the 60 percent barrier would be broken as early as 2005. Bogusław Grabowski, RPP member, says there was "a grave threat" of that happening as soon as next year. This, in turn, would necessitate the introduction of drastic measures to lower this level, as the constitution requires. That, however, could stifle growth and thus contribute to the budget's woes.