Road to nowhere

As if two programs for reforming the country's fiscal policy were not enough, the World Bank chimed into the debate with its own 112-page diagnosis and remedy for the country's poor fiscal state of health.

The WB's report joined the controversial one proposed by finance minister and deputy prime minister Grzegorz Kołodko and the program put forth by Jerzy Hausner, the minister of economy, labor and social policy.

In a nutshell, Kołodko's reform plan calls for budgetary flexibility and the scrapping of some nondiscretionary costs, while putting into place more efficient social spending. It also seeks to lower the fiscal deficit to bring it into line with the economic requirements of the European Union's Maastricht Treaty, so that the county can adopt the euro in 2007.

At odds with Kołodko is Hausner who wants to drastically cut corporate tax rates to kick-start domestic demand and create jobs and put the adoption of the euro on the back burner. Hausner believes that a policy to push economic recovery and lower unemployment should take precedence over reducing the budget deficit.

Then enter the World Bank, which started working on its report a year ago at the behest of the former finance minister, who asked the organization to examine key issues of public finance reform and budget management. Like the other two programs, the WB's guidelines call for a tightening of fiscal policy, but underscore the needs for budget management, expenditure reform, increased privatization revenue, limits on contingent fiscal liabilities, decreases in taxation expenditures and reductions in the size of the public sector, among others.

Despite their differences, all three programs to varying degrees propose solutions for getting the country in economic shape by rebalancing its public finances in order to prepare for the significant fiscal adjustment it will face with EU accession next year. Such fast fiscal reform is necessary for the country to digest EU funds, to adhere to the union's stability and growth pact and to eventually adopt the euro.

Fiscal tightening is now the key factor in the country's run-up to the EU to prevent the loss of precious billions of union aid for much-needed development projects, as the country must ready itself to pay upcoming membership fees and provide cofinancing for projects.

However, we believe that nothing will come of the three plans as there will be no breakthrough on fiscal reform this year. The weakened SLD without a clear majority cannot push any program through parliament at present; and the opposition parties have their own ideas about fiscal reform and taxes.

Although some economists and politicians warmly received the WB's report, government leaders will not engage in further internal debate on fiscal reform so as to not discourage voters from going to the polls for the EU referendum in June. Nor will there be any hints of reform during the rest of the year as politicians will not press ahead with unpopular fiscal measures in light of the general elections in spring 2004.

In the meantime, Kołodko, Hausner and the World Bank along with the rest of the country will remain stuck on the road to nowhere when it comes to implementing a program of public finance reform. As a result, the country will likely lose a load of EU money during the next several years since it won't be able to take full advantage of structural funds. And all will be left with higher taxes, higher expenditures and higher budget deficits.