52.2 billion złoty – that is the Finance Ministry's estimate of Poland's budget deficit next year, nearly twice what it is this year. The figure inches towards some 7 percent of GDP, far higher than the 3 percent limit mandated by the European Union.
The media are bursting with outrage and amazement. Was this not the same government that purported to be fiscally responsible? That only a few months ago was assuring us that we would be entering the ERM-II pre-euro zone waiting room in the second half of this year?
Interestingly however, analysts seem unsurprised and un-alarmed. As the global economic crisis deepened and continued to affect Poland, everyone was sure the country's budget deficit would grow sharply over this year's. And taking Poland's growth this year into account – as likely the only EU country to avoid recession – such a high deficit seems a small price to pay for relative economic prosperity.
Indeed, many analysts believe the FM has overshot the mark, purposefully underestimating economic growth next year, in order to bring the deficit in even lower during a presidential election year, allowing PM Tusk – who will certainly run for president – to claim that things are better than had been predicted.
Still, the announcement brings into question the government's credibility. When it was telling us earlier this year that we would be entering ERM-II, few bought it, and no one was worried when it didn't happen. The same now goes for these vastly upwards-revised budget figures. When we know the government isn't telling us the truth, why isn't anyone calling them on it? Why aren't PO's poll numbers dropping dramatically?
Part of the reason is that there are very few options to choose from – practically no one expects that PiS or SLD, the other viable parties in the Parliament, would do much better with Poland's fiscal headaches. Next week's cover story in
WBJ (available in stores Monday, September 14) will examine this phenomenon. The PO-PSL government has promised much and delivered little, with its inability to sell off the country's distressed shipyards to a foreign investor being the latest example. Still, PO currently looks well-placed to hang on to power.
And one final note: This week
WBJ is pleased to announce the publication of
Investing in Poland 2010, a new annual publication on the investment climate in Poland's cities and regions, with special sections on Poland's macroeconomics, its Special Economic Zones and its Technology Parks. It is simply an essential resource for anyone with an investment in Poland, or considering locating one here.
Investing in Poland 2010 will be available starting tomorrow at the Economic Forum in Krynica, and thereafter at shops and kiosks across the country, as well as at embassies, consulates, chambers of commerce and via WBJ.pl.
Just as one drama at state-owned, formerly number-one bank PKO BP ends, a new one begins.
Last month, the treasury and finance ministries were wrangling over the dividend the bank would pay out. The Prime Minister stepped in and settled the matter, but it now looks like the bank's supervisory board (which had believed that paying out the bank's entire zł.3 billion in 2008 profits as a dividend would hurt its lending capabilities) held a grudge against the bank's now-former president, Jerzy Pruski, who had been in favor of paying out all of the bank's profits as a dividend.
Mr. Pruski won the dividend battle, but not the war it appears. The supervisory board dismissed Mr. Pruski on Tuesday. No justification was given, but it is generally understood that the fight over the dividend had been the last straw.
Now the bank is left without a leader (though a deputy president has taken on the role of CEO temporarily) in the middle of a global financial crisis. The situation is reflecting poorly on PKO as a state-owned company – but we already knew that state-owned companies were chaotic and not necessarily profit-driven. However, it also reflects poorly on the government, whose internal conflicts have spilled over into one of Poland's most important financial institutions.
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In other news, the polls keep popping up showing that Jolanta Kwaśniewska – wife of former leftist president Aleksander Kwaśniewski – would beat Prime Minister Donald Tusk in next year's presidential election. Today's front page of Gazeta Wyborcza shows that she would trounce Tusk in a head-to-head matchup, 57% to 43%. As I write this entry, Ms. Kwaśniewska is appearing on television, telling the interviewer that she is quite happy where she is, and has no intention of entering politics. That may be true – but if these polls keep appearing, the pressure from Poland's more-or-less leaderless Left for her to run will be overwhelming. There's also a good chance that Mr. Tusk's popularity isn't about to rise anytime soon, as Poles seem to be tiring of the inability of the Tusk government to effect change.
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There's also a lot of talk today about a meeting scheduled for next week between the Prime Minister and President to discuss the changes in the budget. Boiled down, this meeting will be about taxes, as the government will almost certainly have to raise some to close some gaping holes in the budget. But Civic Platform (PO), the larger party in the government coalition, doesn't want to risk its pro-business, low-tax credentials, as well as its one major tax victory – the lowering of income tax and the change to two tax brackets, which came into place in January of this year. Instead, the government has said that it wants to increase VAT rates, which could bring in quite a bit of money with a small percentage rise.
But higher VAT would affect everyone buying products, including Poland's poorest, who already have it worse than previously on account of the crisis. Civic Platform's government coalition partner, the Polish People's Party (PSL), has said that it won't approve of such a measure, and the main opposition, Law and Justice (PiS), has echoed that view.
They prefer a rise in taxes for Poland's richest and/or a return to the three-bracket system. That would have PO go back on its promises, and it is anyway questionable how much revenue this would generate, considering the drop in income for Poland's richest this year, and the poor earnings of the companies they own and manage.
Poland's consumption, on the other hand, continues to be surprisingly strong. People are still going shopping, despite the hard times. A VAT rise thus seems much more likely to bring in the needed funds to the Treasury. Can the government convince a grumpy electorate that a rise in prices at the shops is the best way to save Poland's finances?
So it's tax-the-rich vs. Realpolitik. Look for a big battle over this one.
