Poland’s economy: A costly recovery

Date: 11/10/03

Poland faces a struggle to put its fiscal house in order

JUST a few weeks ago it seemed that Poland's economic outlook was rosy. The economy grew by nearly 4% in the year to the second quarter of 2003, fuelled by buoyant exports and private consumption, and it seemed likely to keep up that pace. This is its fastest growth surge since the late 1990s boom ended. As business picked up, the stockmarket rose, by a sharp 18.5% in August alone. Those economists who had scoffed at the (ex-communist) centre-left government's forecast of at least 3% growth this year now admit that the target will be met comfortably.

Yet summer chirpiness has given way to autumn gloom. The problem is the government's shambolic public finances. The zloty has fallen to its lowest-ever level against the euro, as financial markets take fright. A member of the central bank's monetary policy council has even spoken of a “national crisis”. This week, the economics and labour minister, Jerzy Hausner, belatedly unveiled promised plans to cut spending, by as much as four percentage points of GDP over 2004-07. But the details lacked credibility, and the markets remain unconvinced.

All this is a further blow to the prime minister, Leszek Miller, who had already been enfeebled by a string of corruption scandals. It was only in June that the finance minister, Grzegorz Kolodko, resigned after a row with Mr Hausner. Mr Miller sided with Mr Hausner and put him in charge of all economic policy.

Despite this week's burst of apparent fiscal austerity, Mr Hausner has proved as willing as, say, any French finance minister, to flout the fiscal rules that Poland and other countries due to join the European Union next May are supposed to obey - notably to keep budget deficits under 3% of GDP if they are to join the euro. An expansionary budget for next year will bring down the corporate-tax rate from 27% to 19% and increase the deficit to an admitted 5.3% of GDP (or over 7%, if disguised spending is included). A recent report from the finance ministry has conceded that Poland's public-debt-to-GDP ratio will come perilously close next year to the 60% ceiling that is both fixed by the country's constitution and laid down as one of the Maastricht criteria for qualifying for the euro. Even if his plans are implemented, which is unlikely, Mr Hausner's new cuts will make only a small difference.

Foreign investors fear that a fiscal crunch is looming, and that this week's measures may not fend it off. Moody's, a rating agency, says that “large mandatory expenditures in the budget”, especially “generous social spending”, must be curbed. It adds that recent attempts to trim the deficit have focused more on raising taxes than on cutting spending.

Mr Hausner claims to want to redress that balance. One acid test is how brutally he reforms Polish farmers' fraud-ridden and state-subsidised social insurance fund, known as KRUS, which exempts all landowners, including rich ones, from contributing. Disability benefits, which according to a World Bank report eat up no less than 4% of GDP every year, also need trimming. That means reassessing the 2.5m or so beneficiaries, many of whom cheat. “Streamlining these two programmes would generate huge savings,” argues Malgorzata Markiewicz of CASE, an economic think-tank in Warsaw. But the politics of doing it will be testing.

Parliament has many MPs from populist and peasant parties, and Mr Miller's Democratic Left, whose poll ratings have slumped, is loth to take unpopular measures before general and presidential elections in 2005. Besides, unemployment is stuck at around 20%. Both the reforms that Mr Hausner wants to make and his spending cuts may yet end up pending in the next government's in-tray. And by then Poland's official aim of adopting the euro in 2008 may be a forlorn hope.

Poland faces a struggle to put its fiscal house in order.