Poland risks breaching EU deficit limit

Posted on September 26, 2016

WARSAW, POLAND - FEBRUARY 26: A woman with a pram waits for a street tram in the city center on February 26, 2016 in Warsaw, Poland. Poland, a member of the European Union, has shown solid economic growth and a vibrant democracy since 1989, though efforts of the ruling Law and Justice Party (PiS) to undermine democratic institutions such as the Consitutional Court and the impartiality of state-owned media mark a strong shift to the right in Polish politics and society. (Photo by Sean Gallup/Getty Images)©Getty

Warsaw’s flagship child benefit program is expected to cost ‘ several hundred million’ zlotys more than the budgeted 22bn zlotys

Bloated social spending, slower economic growth and challenges to the government’s taxation plans mean Poland is on course to exceed the EU’s fiscal deficit limit next year, economists have warned — risking another flashpoint between Warsaw and regulators in Brussels.

    Poland’s rightwing populist government has forecast a 2.6 per cent deficit this year and 2.9 per cent in 2017, banking on an increased tax haul to offset significantly higher spending. But a slowdown in economic growth and underwhelming forecasts have cast doubt on its ability to raise revenue, amid political pressure to follow through on costly election promises.

    The European Commission last week ruled that a new tax on supermarkets in Poland may be illegal and forced Warsaw to suspend the levy, cutting off an income stream designed to help pay for generous new social handouts.

    With no room for error, any slippage in its 2017 budget would see Warsaw exceed the EU’s limit on fiscal deficits of 3 per cent of GDP. This could prompt Brussels to place the bloc’s sixth-largest economy in its excessive deficit procedure (EDP) and imperil billions of euros in development funds earmarked for the country.

    “The government will be unable to keep its forecasts even this year,” said Grzegorz Poniatowski, director of fiscal policy at the independent Centre for Social and Economic Research in Warsaw. “And next year [extra spending] will not be a case of basis points. It will be a case of percentage points. I am sure the government will be unable to meet its goal.”

    Poland only exited the EDP last year after six years in the programme, which allows Brussels to impose a number of restrictions on countries that breach the 3 per cent limit.

    Relations between Brussels and the ruling Law and Justice party are already tense. The Commission has accused the rightwing Eurosceptic party of endangering rule of law and democracy with measures that have paralysed Poland’s highest court and given the government political control over public media channels and the prosecution service.

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    Two Commission officials told the FT on condition of anonymity that in the current climate it was unlikely to be lenient on Warsaw if the deficit exceeded the limits.

    The government has always stressed it would remain inside the 3 per cent threshold. But strong signals that Beata Szydlo, the prime minister, will use a cabinet reshuffle this week to fire Pawel Szalamacha, finance minister, who is viewed as one of the most fiscally hawkish members of the government, have added to concerns.

    A report by the state-owned Polish Press Agency on Friday saying Mr Szalamacha would lose his job prompted a 0.4 per cent fall in the zloty and a sell-off in Polish bonds and equities. Mr Szalamacha on Friday declined to comment on the report, which one senior government official told the FT was accurate.

    His ministry has faced increased scrutiny over how to fund the government’s flagship social benefit programme, which pays out 500 zlotys (€116) tax free every month to each family for every second and subsequent child. Law and Justice, which is strongly Catholic, conservative and pro-family, has already warned that next year the handouts will cost “several hundred million” zlotys more than the budgeted 22bn zlotys.

    Warsaw has said initiatives to reduce tax fraud and increase VAT receipts will offset the spending. But PKO Bank Polski, Poland’s largest lender, warned on Friday that it was reducing its 2016 GDP growth estimate to 3.2 per cent from 3.5 per cent after data showed the country’s economy had stuttered in the first half of the year.

    Next year [extra spending] will not be a case of basis points. It will be a case of percentage points. I am sure the government will be unable to meet its goal

    – Grzegorz Poniatowski, director of fiscal policy at Centre for Social and Economic Research in Warsaw

    “The budget assumptions for next year already appear over-optimistic,” said Otilia Dhand, senior vice-president at Teneo Intelligence. “The government will probably find it difficult to meet its spending promises without additional revenue while avoiding a relapse into the EDP.”

    Poland had earmarked 1.6bn zloty (€370m) from the tax on supermarket revenue introduced earlier this month, but was forced to abandon it after the EU launched an investigation into whether it breached state aid rules by targeting larger retailers. At the same time, a crackdown on VAT avoidance has not so far brought in the expected windfall.

    “I have never ever seen any country improve their tax collection by the amount they say they will,” said Mr Poniatowski. “This is impossible.”

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