Poland Continues to Chip Away at its Budget Deficit

UNCLAS WARSAW 002496

SIPDIS


SENSITIVE

STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON
TREASURY FOR OASIA MATTHEW GAERTNER

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL PL
SUBJECT: Poland Continues to Chip Away at its Budget Deficit
Despite Slower Growth

Ref: Warsaw 1624

(U) This cable is sensitive, but unclassified, and NOT for
Internet distribution.


1. (U) In early June, the Ministry of Finance released its
initial assumptions for the 2006 budget, officially kicking
off the six month budget drafting season. The Ministry of
Finance purposely proposed conservative estimates for growth
(4%) and inflation (1.5%). Finance also set the budget
deficit at 30 billion Zloty ($10 billion),which is forecast
to be 3% of GDP, excluding pension reform costs authorized
by Eurostat (reftel). These totals would bring Poland's
public debt to 45.1% in 2006, using ESA-95 methodology (and
to 53% under Polish methodology).

2005 Budget On Track to Beat Deficit Target
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2. (SBU) The 2005 budget forecast a 35 billion Zloty ($10.5
billion) deficit. Through the end of May, the cumulative
total was 54% of the total for the year, almost 10% lower
than the Ministry of Finance had expected. Part of the
explanation comes in higher-than-expected VAT revenues in
January and February, stemming from strong consumer demand
which has since moderated. Finance has also delayed some
investments and has paid less than expected in pension fund
support. Finance Minister Gronicki has publicly speculated
that the budget deficit for 2005 could total 33 billion
Zloty ($10 billion). Financial analysts have expressed
concern that slowing investment and consumer spending could
translate into lower taxes, especially VAT, which could put
pressure on the deficit. Gronicki has told us privately
that he is confident Finance will be able to manage
expenditures to meet or beat the deficit target.

Financial Sector Reaction
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3. (SBU) Local economists applaud the conservative
assumptions for the 2006 budget, which they generally find
realistic. However, they have doubts that the 2005 budget
deficit will be as low as forecast, primarily because
Finance expected to reap 3.75 billion Zloty ($1.1 billion)
in fiscal savings from several reform measures under the
Haunser plan which parliament ultimately rejected. The most
significant of these was reform of the farmers' pension
system. Analysts also expect VAT revenues to be 3 billion
Zloty ($900 million) lower than forecast. Finance has
proposed increasing excise taxes, which would raise an
additional 2 billion Zloty ($600 million) in 2005, while
lower debt servicing costs will save an additional one
billion Zloty ($300 million). Altogether, local economists
estimate this year's budget deficit could grow by between 8
and 9 billion Zloty ($2.4-$2.7 billion).

Comment
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4. (SBU) Comment: The Ministry of Finance is in the odd
position of having to prepare the budget for the next
government, which will be formed after general elections on
September 25. The structure of Poland's budget law will
give the next government little scope to introduce
significant changes in the draft. The budget law requires
the government to submit its budget assumptions, for
example, by September, after which parliament cannot change
them. To cite another, the budget law also requires that
all changes in personal and corporate income tax be approved
by November 30 before going into effect on January 1 of the
next calendar year. We believe the current government has
prepared a solid set of assumptions which should be
realizable. The reduction in the deficit to 3% of GDP is
particularly noteworthy, compared to 5.7% in 2003 and 4.6%
in 2004. That said, we also suspect the current government
is indulging in a bit of gamesmanship, and may include
politically sensitive reforms (e.g., farmers' pensions) in
the budget which prove difficult for the next government to
achieve.

Ashe


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2005WARSAW02496 - Classification: UNCLASSIFIED