Poland hoping for growth pick-up as budget deficit spikes

By bne IntelliNews April 16, 2013

Tim Gosling in Prague -

Poland's target for the budget deficit in 2013 continues to come under threat due to the slowing economy's effect on tax revenue. The gap rose close to 70% of the full-year target in just the first quarter, the finance ministry announced on April 15, leaving Warsaw potentially facing tough choices.

The deficit stood at PLN24.41bn at the end of March, equal to 68.6% of the full-year plan for 2013, the finance ministry said, according to Dow Jones. The hole in the state accounts is the widest at this point in time for a decade, and poses a serious risk to the planned deficit of PLN35.57bn, which is around 2.6% of GDP, for the full year.

The hit to revenue from the continued slowdown in the economy in the first three months of the year did the bulk of the damage. Revenue totaled PLN61.37bn, or just 20.5% of the full-year target. Of that, value-added and other indirect taxes brought in PLN39.79bn, or 20.7% of the annual plan. Budget expenditure amounted to PLN85.77bn, or 25.6% of the annual target.

The 2013 deficit goal is built on an assumption the economy will grow 2.2%. However, with growth, consumption, and inflation all dragging their heels, tax revenue is clearly at risk of missing its target. The sharp slowdown in 2012 forced Poland to relax its deficit target from 2.9% to 3.5% of GDP, and dropped its original target figure of 2.2% for 2013 at the same time.

While the budget deficit often runs very high early in the year as tax revenue lags government spending, and often decreases later in the year, the trend so far in 2013 is well above last year. At the end of February, the deficit had pushed to 60.9% of the full-year plan, while the gap at the same point of 2012 was just 46.8% of the goal.

Ludwik Kotecki, chief economist at the finance ministry, claimed to Dow Jones in March that Warsaw still hopes to avoid amending the budget, which is based on growth of 2.2% for the year. He also pointed to two potential sources of revenue and savings-the central bank's profit and lower-than-planned borrowing costs-which give the government some leeway. "Central bank net profit and lower borrowing costs, thanks to all-time low yields, increase chances for the budget to be carried out in its current shape," Kotecki said.

Last year, the central bank earned PLN8.6bn, with 95% of the profit going toward the budget. According to media speculation, this year's central bank profit will be somewhere between PLN4-5bn, while the budget plans for only PLN0.4bn.

Kotecki also claimed that the second half of the year will show a rebound in the economy. However, the finance ministry admitted yet again on April 12 that it is mulling a cut to its 2013 growth forecast. It warned it could soon drop the prediction to 1.5%, as domestic demand continues to dwindle and demand for Polish exports out of the Eurozone struggles.

Political fallout

A significant failure to hit fiscal targets would be embarrassing for Prime Minister Donald Tusk and his government. As the crisis has unfolded across the EU, they have evolved to become one of the staunchest supporters of the European project and its demands for closer fiscal union.

That enthusiasm has only grown as Brussels attempts to achieve just that by extending greater fiscal oversight over member states. Tusk has clearly sensed that Poland needs to book a place at the top table of the EU before that tighter structure is built, and a two-speed EU fully evolves. In that spirit, he has also revived debate over Poland's entry to the euro - a process which demands fiscal indicators are kept in line, including a threshold deficit of 3% of GDP.

Two of the more obvious options that Warsaw has to boost revenues revolve around the country's large state-controlled companies.

On the one hand, Warsaw is already pushing them to make large dividend payouts. The huge investments demanded by the government for its drive towards energy independence are unlikely to be put aside, but managers could find themselves further reined in on M&A ambitions. For instance, lender PKO BP and copper miner KGHM have been talking up their lust for acquisitions again recently.

On the other hand, Poland's privatisation target of PLN5bn for 2013 is modest, and could be boosted. However, the capital markets remain shaky, while a significant chunk of the most attractive state assets have been handed over to state bank BGK to sell in order to finance Polskie Inwestycje Rozwojowe - the recently announced government fund designed to boost growth by attracting private investment to infrastructure projects.

Meanwhile, Warsaw is exploring avenues for savings. Deputy Economy Minister Jerzy Pietrewicz said on April 9 that the government intends to cut renewable energy subsidies in a bid to stem expenditure, Bloomberg said. Of course it doesn't hurt that Tusk's administration has been in confrontation with investors for months over a plans to design a new incentives strategy; extra impetus for its bid from fiscal management demands won't hurt its cause. Poland estimates that the cost of state support for renewables will rise to PLN10.8bn in 2020 from PLN5.5bn next year.

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