Face the Music and Revise

The global economic crisis has contributed to an increasing number of member states breaching the EU budget deficit limit. The list of countries with budget gaps above the allowed three percent of GDP includes the UK, Hungary, France, Spain, Ireland, Greece, Lithuania, Latvia, Malta and Romania. This autumn, more countries are likely to join the list, including Belgium, Germany, Italy, Holland, Austria, Portugal, Slovenia, the Czech Republic and Slovakia. Poland, despite the much-vaunted good shape of its economy, has been warned of exceeding the limit as well. Only last year the deficit amounted to 3.9 percent – 0.9 percent above the limit agreed in Maastricht. The European Commission forecasts the gap to be 6.6 percent of the GDP in 2009, and even over seven percent for next year, which marks a rising long-term tendency.

So far Poland has indeed weathered the crisis well. However, the GDP forecast as planned in the 2009 budget proved too optimistic to match reality. Since the beginning of 2009, experts and financial institutions have lowered the GDP forecast for Poland and it seemed almost certain that the rose-tinted budget plan would be in need of revision. The country’s income turned out to be lower than predicted, and combined with soaring debt, the result is a deficit gap wider than expected.

The growing debt was not much of an issue as long as the debt-to-income ratio remained within the EU limit of 60 percent. This has been the case for the last couple of years, when despite a growing deficit the budget gap was decreasing thanks to growing income. In 2004 it amounted to 41.4 billion złoty, 27.5 billion in 2005, 25 billion in 2006, and 16 billion in 2007. In hindsight, this was a time of prosperity ideally suited to introducing long-postponed reforms and offsetting the growing debt. But in today’s economic slowdown, the tax income has significantly dropped and now the deficit is rising dramatically.

The Finance Ministry announced that the drop in tax income (204 billion złoty instead of the planned 251 billion) along with a decrease in individual consumption are the main reasons for the need for a revised budget plan. The remedies include expense cuts and finding additional sources of income. A change in the financing of road construction projects will provide almost half of the expenses cuts. In fact, this change involves EU funds, which will be granted for the projects in the coming years.

All in all, this manoeuvre has led to Poland counting on EU help with the deficit gap. An additional source of income announced in the revision is the currency changeover. By exchanging the EU funds into złoty this year, the government is hoping for an increase in the value of the currency in 2010, which will raise the net value of the funds. For the time being the Finance Minister plans no further revisions to the current budget. Still ahead is the real challenge: the budget plans for the following years. Should Poland reach the 60 percent limit next year, the 2012 budget would leave virtually no room for any deficit. In order to achieve this within two years, expenses would have to be reduced and the income increased by 60 to 70 billion złoty.

This budget revision is naturally a political issue, and the opposition is attempting to block the government’s actions to show their inability to manage the budget in an economic slowdown. The opinion polls prove that the public is not happy with the way the government is dealing with the current economic situation. At the same time, the introduction of the euro (originally planned for 2012), meeting the EU’s fiscal requirements, and lowering the deficit by 1.25-1.5 percent of the GDP per year will all pose great challenges in both the political and economic arenas.

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