POLISH OPPOSITION LEADER LAYS OUT PROSPECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 WARSAW 001205

SIPDIS

STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS
STATE FOR EB/OMA TIM FORSYTH
TREASURY FOR OASIA MATTHEW GAERTNER
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON
FRANKFURT FOR TREASURY FOR JIM WALLAR

E.O. 12958: DECL: 03/10/2016
TAGS: ECON EFIN ETRD PGOV PREL PL
SUBJECT: POLISH OPPOSITION LEADER LAYS OUT PROSPECTIVE
ECONOMIC PROGRAM

REF: WARSAW 1126

Classified By: DCM Cameron Munter, reasons 1.5 (b and d).


1. (C) Summary: Jan Rokita, the head of Poland's leading
opposition party (PO - Platforma Obywatelska/Civic Platform),
and the man expected to be the country's next Prime Minister
outlined the key planks of his economic policy at a March 1
meeting of the American Chamber of Commerce. Rokita said he
wants to reduce the cost of hiring workers by cutting taxes
and social payments, completing privatization and
deregulating the economy. He also said he would like to
reform the budget, cut public sector expenses and close
unnecessary government offices. Rokita favors quick adoption
of the Euro, and said he would be willing to consider its
unilateral adoption to reduce pressure on exporters from the
rising Zloty. Companies welcomed the expose, but note Rokita
will need the help of his prospective coalition partner, the
Law and Justice Party (PiS),with whom PO has policy
differences, to realize this ambitious agenda. PiS tends
toward statist and regulatory solutions to economic issues.
End Summary.

PO (Finally) Unveils a Program:
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2. (U) At a March 1 meeting of the American Chamber of
Commerce, Jan Rokita, the leader of the Civic Platform party
(PO) and the man expected to be PM in the next government,
sketched out three "mile posts" of his economic policy:

- limiting the tax wedge, which limits employment (Taxes,
health care and pensions add 43% to wage bills in Poland, one
of the highest such "wedges" in the EU);

- deregulation of the economy, including introducing reforms
to the legal system to reduce the complexity and cost of
doing business; and

- completing the process of privatizing state-owned
companies, including selling off the "resztowki" small shares
(typically less than 5%) which the State Treasury still owns
in privatized firms. He said a PO-led government would not
hold on to a so-called "golden share" conferring veto
authority over significant business decisions.


3. (U) Rokita also promised that a PO government will change
the operational philosophy of the current government, which
first increased public debt and later, in order to pay the
bills, raised taxes and the cost of business. Rokita
stressed that one of his top goals will be to cut public
spending. He called for the simplification of the entire tax
system, beginning with the step-by-step introduction of a
flat Personal Income Tax (PIT) followed eventually by the
introduction of a lower, unified VAT rate.

Health:
- - - -


4. (U) Rokita said that his government would oppose
increasing health taxes currently levied on salaries (9% in
2005),but would not reduce them. His government would first
focus on bringing better order to the current confused
system. After a couple of years, the government could
consider bringing new reforms to the sector, in particular
those which would base it more on the operations of the free
market. Rokita said that the country needs some time to
recover from three separate health reforms enacted by the SLD
government over the last two years.

Euro Adoption:
- - - - - - - -


5. (U) Perhaps unintentionally, the biggest news from the
event concerned Poland's adoption of the Euro. Rokita
forecast that public finance reforms and budget cuts could
lead to further appreciation of the zloty. To counter the
negative effect this would have on exporters, Poland may
adopt a fixed exchange rate, most likely by unilaterally
adopting the Euro. Most local economists have already
largely dismissed such an idea, which they believe would
leave the Zloty vulnerable to attack in the lead up to
implementation.

Cooperation with PiS:
- - - - - - - - - -


6. (U) Rokita was asked about the prospects for working
together in a coalition government with the other leading
opposition party, the Law and Justice Party (PiS),which has
at times argued for a strong role of the state in the
economy. PO and PiS have also differed publicly on tax
policy, privatization and Euro entry. Rokita said that PiS
is a responsible partner on public finance issues. He also
stressed, however, that the prime minister would be the prime
determiner of economic policy.

PO Experts Still Working on Details:
- - - - - - - - - - - - - - - -


7. (C) A group of economists preparing PO's economic program
recently provided more details to Econoffs, while stressing
that "nothing" is fixed yet, as PO advisers are still
preparing policy positions on many issues. The two most
surprising elements related to privatization and investments.
On privatization, they criticized the current government for
not having a more coherent plan for privatization, but
selling 'anything and everything' without any regard for
sequence. The economists argued the next government will
want to first come up with a broader strategy, including
determining whether the government will want to retain
influence in some key sectors, before proceeding with the
sale of large, complicated companies like the national gas
company, refineries and electricity plants. They expect a PO
government will pursue full privatization (i.e., 100% sale)
of state-owned companies, rather than the current
government's practice of selling smaller shares (e.g.,
20-30%). PO criticizes these partial sales, noting they may
complicate future sales, and also leave open the possibility
that the government can appoint members of company boards,
interjecting politics into business decisions.

8.(C) On investments, they expressed disappointment that
foreign investors have not responded more quickly to Poland's
EU entry. They argued that the new government will have to
look at providing better incentives to attract companies (we
suggested clearer tax and regulatory policies would be more
useful, and contested the assertion that foreign investors
have been slow over the last 18 months).


9. (C) The economists stressed the importance of cutting
expenditures, particularly on social policies, particularly
by better targeting expenditures to truly needy recipients.
They singled out the farmers' pension system in particular,
arguing that the current government had failed largely
because it felt constrained for ideological reasons in
arguing that "rich" farmers should be taxed rather than
receive extensive benefits. The next government will not
suffer the same handicap, and intends to pursue a simpler
reform to cut expenditures in this area. They also believe a
number of reforms in how the budget is drafted can reduce
spending and improve monitoring. In January, Rokita publicly
called for a complete overhaul of the budget formulation
process, giving the PM more direct control over spending
decisions. He also called for closing a number of government
offices and merging some ministries.


10. (C) Tax policy, including the introduction of a flat tax,
is another perennial favorite. The economists argued that
introducing flat PIT and CIT would reduce compliance costs
for companies, while also making Poland more competitive in
attracting foreign investment. Finally, they stressed the
importance of reforming the legal system, although they are
very aware of how difficult it will be in Poland to overcome
the opposition of entrenched lawyers and judges.

Market Reaction:
- - - - - - - -


11. (U) Markets are generally encouraged by Rokita's
comments, which they interpret as favoring adopting the Euro
sooner rather than later, although they have noted tax cuts
would make quick adoption of the Euro more difficult because
that would require lower budget deficits. There had been
some doubt about what the new government would do, as various
party officials in the two leading opposition parties have
issued contradictory statements over the last month,
including one PiS comment questioning whether Poland should
adopt the Euro at all. On the whole, Rokita's comments were
overshadowed by the news that PM Belka will make a statement
on March 3, possibly regarding plans for June elections
(reftel).

Comment:
- - - -


12. (C) The private sector has been assuming for a year now
that PO would lead the next government, and that it would
introduce more business-friendly legislation than the current
government. Companies have clung to the assumption that PO
would be good for business despite the lack of any evident
economic program, or ongoing policy coordination with PiS,
with which it will almost certainly have to include as a
coalition partner, and other opposition parties on important
issues like adoption of the Euro. Meanwhile, private
discussions with PO officials and MP's have suggested that
the party was long on generalities, but desperately short on
specific policy suggestions. One economist from the Adam
Smith think tank said publicly that he "had not seen any
reasonable solutions coming from either" PO or PiS. Rokita's
solid performance at the AmCham helped reassure companies
that PO is now developing a coherent economic program, even
if individual policies are still clearly moving targets. With
a general election possible as soon as June, it is high time
that PO begin to present more specific policies, even if
doing so is likely to generate more controversy.


ASHE