Temporary jump in deficit could be acceptable, says Rosati

A WBJ news round-up

Dariusz Rosati, a member of the Monetary Policy Council (RPP), said last week that a temporary increase in the government's budget deficit would be acceptable to the RPP, provided that the increase is part of a general program to reform public finances.

Rosati's comments came amidst concerns among some analysts and economists that the policies of Economy, Labor and Social Policy Minister Jerzy Hausner would not lead to deficit reduction at any cost.

"Minister Hausner said that, according to him, maybe it's not necessary to be concerned about a transitional increase of the deficit, but only under the condition that it leads to increased economic growth," Rosati said in a radio interview last Friday. "Personally, I can imagine a transitional period with an increased budget deficit in 2004, precisely because this is an exceptional year, but only if the government presents a trustworthy program to repair the public finances that first and foremost takes into account reforms on the expenditure side, which is the only way (the government) will be able to convince the financial markets and the National Bank of Poland that this increase is, indeed, temporary."

In order to convince the markets that the deficit increase is not a permanent new trend, the government would have to undertake many politically unpopular reforms that could face stiff opposition in parliament, analysts say. Some worry that Prime Minister Leszek Miller's government will not have the political wherewithal to push through spending reforms, despite his victory in a Sejm confidence vote a few weeks ago.

Market analysts are also concerned about the effect that an increased budget deficit would have on investment in the country. An increase in the deficit would make it harder for the government to bring it back in line with the deficit limit of 3 percent of GDP that is necessary for Poland to enter the euro zone. This could have negative effects on many investors who have speculated in favor of convergence.