Identifier
Created
Classification
Origin
06WARSAW240
2006-02-15 10:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Warsaw
Cable title:  

Poland's Stabilization Pact - What it means for the

Tags:  EFIN ECON PREL PL 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 WARSAW 000240 

SIPDIS

SENSITIVE

STATE FOR EUR/NCE DAVID KOSTELANCIK AND MICHAEL SESSUMS
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS, MWILSON, JKIMBALL
TREASURY FOR OASIA MATTHEW GAERTNER
FRANKFURT FOR TREASURY JIM WALLAR

E.O. 12958: N/A
TAGS: EFIN ECON PREL PL
SUBJECT: Poland's Stabilization Pact - What it means for the
Economy

REF: WARSAW 177

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

------------------------
SUMMARY AND INTRODUCTION
------------------------

UNCLAS SECTION 01 OF 04 WARSAW 000240

SIPDIS

SENSITIVE

STATE FOR EUR/NCE DAVID KOSTELANCIK AND MICHAEL SESSUMS
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS, MWILSON, JKIMBALL
TREASURY FOR OASIA MATTHEW GAERTNER
FRANKFURT FOR TREASURY JIM WALLAR

E.O. 12958: N/A
TAGS: EFIN ECON PREL PL
SUBJECT: Poland's Stabilization Pact - What it means for the
Economy

REF: WARSAW 177

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

--------------
SUMMARY AND INTRODUCTION
--------------


1. (SBU) On February 2, the ruling conservative Law and
Justice (PiS) party signed a stabilization pact with two
opposition parties - Self Defense (SO) and the League of
Polish Families (LPR). The pact includes a list of bills
the parties agree to support, and a shorter list of those
they will discuss. Details of bills related to the economy
are sketchy, with most no more than general goal statements.
Some of the proposed bills are pro-business, but others
reflect the new government's desire to increase control of
the economy and expand the social safety network. At a
minimum, the bills convey the impression that the GOP will
not place initial priority on serious tax reform or cuts in
public spending.

--------------
What is in the Pact?
--------------


2. (U) In agreeing to the stabilization pact, PiS, LPR and
SO agreed to support a package of approximately 144 bills in
2006, and to send another more controversial group of 15
bills, mostly developed by SO, to a working group composed
of representatives of the three parties for consultation.
This smaller set of controversial bills would be submitted
to the Sejm only after consultation and agreement by the
parties. This cable will concentrate on the economic bills
included in the pact.


3. (U) The majority of the economic bills listed contain
only a few words stating the bill's general intent. The
pact says little about the specific content of draft
legislation. As a result, local analysts must look to draft
bills written by PiS, SO, and LPR during the previous
session of the Sejm for clues to the likely intent of the
legislation.


4. (U) The Stabilization pact originally included three
appendices listing draft laws. The first appendix includes
a listing of the bills the three parties agree to support.
The second appendix includes the 15 controversial bills that
will be referred to a joint working group for analysis. The

third appendix lists other agreements reached by the
parties. Our analysis is based on the limited information
on the bills available at this time and discussions with
individuals familiar with PiS, LPR, and SO legislative
priorities.


5. (SBU) The proposed bills from Appendix One (those that
will be voted on by the Sejm and supported by the three
parties) that could impact the economy can be divided into
four groups: (1) bills that will further liberalize the
economy or remove bureaucratic obstacles faced by investors;
(2) bills that are expected to negatively impact the Polish
economy or U.S. business interests; (3) bills with the
potential to adversely affect Poland's economy depending on
how they are written; (4) and bills that do not directly
relate to the economy, but may have economic consequences.

--------------
First - The Positives
--------------


6. (SBU) A number of bills are likely to have a positive
effect on Poland's economy when passed. These include:

- A law to simplify procedures for establishing a company;

- Tax breaks for entrepreneurs undertaking innovative
projects;

- Legislation to allow supplementary voluntary insurance
for health care;

- Streamlined European patent issuance;

- Promotion of investment in Poland and of Polish companies
abroad;

- An amendment to the energy law that will bring it into
line with the EU on cogeneration and natural gas supply;

- A proposal to introduce transparent procedures for
appointing members of supervisory boards;
- The establishment of a "basket" of health care services
to receive guaranteed public funding, an act which will
finally demarcate the financial borders of the current open-
ended public system.

--------------
Next - The Negatives
--------------


7. (SBU) Local economic analysts expect the following bills
to have negative impact on Poland's business climate or
fiscal situation. These include:

- A draft bill on "Supply Agreements for State Defense and
Security" which "aims to ensure the more effective
harnessing of offset agreements for the country's economic
development". Depending upon the final wording, this bill
could place a greater burden on foreign defense firms to
make broad "off-set" trade and investment deals in order to
win a Polish defense tender;

- A bill requiring the replacement of the separate
supervisory bodies currently regulating banks institutions,
insurance companies, investment funds, and pension funds by
a single watchdog agency -- the Financial Supervision Office
(UNF). The UNF would absorb the Securities Commission, the
Insurance and Pension Fund Supervision Office, and starting
in January 2008, the Banking Supervision Commission. The
proposed UNF chief
(tipped to be Finance Ministry Under Secretary Cezary Mech)
will report directly to the prime minister and have broad
authority, including the right to submit legislative
proposals directly to the prime minister and to conduct
criminal investigations. (Comment: Many observers fear that
this would lead to a decrease in regulatory autonomy and
increased politicization of these key sectors. End
Comment.);

- A bill to providing fuel excise tax refunds to farmers;

- A bill to expand unemployment benefits for those unable
to find work; and

- The indexation of pensions to inflation and wage
increases. (Note: Preliminary estimates are that this
provision alone will cost over 3 billion zloty or around US
$1 billion. End note.).

--------------
Then - Positives or Negatives?
--------------


8. (SBU) There is a large group of bills about which we
don't have enough information to determine whether they will
have a negative or positive effect on the economy including:

- A proposed change to the Central Bank (NBP) charter
obliging it - like the US Federal Reserve - to consider
economic growth as well as inflation in its decision-making;
(Comment: This bill could limit the NBP's independence - a
goal of both PiS and SO. Przemyslaw Gosiewski, Chairman of
the PiS parliamentary caucus, recently stated that the
number of Monetary Policy Council (MPC) members also remains
an open issue. Dissolution of the MPC is not likely as it
is a constitutional body. End Comment.)

- An amendment to the law on public tenders which would
bring Polish regulations in line with EU laws and liberalize
procedures. The proposal would raise the contract threshold
above which a public tender is mandatory from 6,000 to
60,000 Euros. The contracting authorities will only be
obliged to draw up contract regulations ensuring fair
competition and equal treatment of bidders. Critics fear
that this new law could invite increased political
interference and corruption.

- Tax reform remains a huge question. The pact only
mentions six tax laws that will be amended. PiS originally
promised a draft tax reform package at the end of January
2006, which has been delayed until March. Signals from the
Ministry of Finance the need to pay for new social programs
such as the one-off payments for child-bearing will preclude
tax cuts. Amendments to the VAT Act are also promised and
these may include simplifications the Ministry of Finance
previously has been reluctant to accept. The proposed law
on inheritance and gift taxes will reportedly eliminate the
taxation of assets inherited within a nuclear family. Solid
taxpayers (e.g., state-owned enterprises that have been
operating for a specific time and are not expected to
unexpectedly shut down) would reportedly receive extra tax
privileges;

- A provision to lengthen maternity leaves;

- A proposal to turn-over the supervision of State-owned
companies to gminas (the lowest level of territorial
administration in Poland).

--------------
The Unknown Impact of Non-Economic Bills
--------------


9. (U) These bills are the hardest to quantify as, with
most of the other bills, details are still unknown.
However, bills that may affect Poland's economic and
financial picture although not strictly financial bills
include:

- A draft bill creating a Central Anti-Corruption Office,
which includes provisions for disclosure of discrepancies in
operations of institutions receiving public funding;

- A draft bill on State security requiring the secret
services to submit reports to the government and Sejm on
economic and energy security, as well as an assessment of
privatization deals from an economic security perspective.

--------------
The 15 items to be discussed at a later date
--------------


10. (U) The GOP has released no details of the 15 bills to
be discussed by the working group other than names of draft
laws included in the agreement. Many appear to be laws that
Samobrona (SO) previously introduced in the Sejm during the
election campaign. Most would increase government control
of the economy or expand the social safety net, thus
increasing the fiscal deficit - if passed in a similar form.
(Note: Some observers think these bills are unlikely to be
passed any time soon and that they have been included as a
face-saving gesture for the LPR and SO supporters of these
populist measures. They include:

- A law to establish a turnover tax on all businesses;

- A law on developing a system of benefits for the
unemployed;

- A law to establish additional benefits for the poorest
pensioners;

- A law on large-sized retail centers (note: we believe
this would attempt to limit hypermarket development. End
note.);

- Laws to provide additional pension benefits to local
administration heads and veterans;

- A law that would provide incentives to farmers to produce
and use bio-fuels.

--------------
Comment - A Costly Puzzle
--------------


11. (SBU) The Stability Pact has been described as a
hodgepodge of ideas cobbled together to satisfy various
eclectic constituencies. Neither PiS nor the Ministry of
Finance has been able to quantify the fiscal impact of the
bills. Many of the bills, if implemented, will boost social
spending, but do little to increase revenues or cut outlays
in other areas. Thus it is unclear how these ideas would be
financed. For example, the proposed new unemployment
benefit alone could cost more than current GOP expenditures
on national defense and public security, and only slightly
less than spending on healthcare.


12. (SBU) Business is disappointed that the majority of
initiatives seem to strengthen the state's role in the
economy and support rural development, rather than focusing
on tax cuts and structural reform. Local economists
generally agree that the bills are at best unclear in their
effects and at worst might increase the fiscal deficit and
throw sand in the economic gears. Post believes that the
stabilization pact's economic legislation represents further
fiscal drift, rather than reform. At a minimum, the bills
appear to indicate that the GOP is not considering at this
time serious tax reform or cuts in public spending. In the
final analysis, the devil will be in the details. However,
the preliminary impression which has been created is that
the GOP intends to expand the scope for administrative
interventions in the economy and increase Poland's already
excessive rate of social welfare spending.

ASHE