(Updates with zloty on fourth paragraph, Moody’s comment in fifth.)
Oct. 11 (Bloomberg) -- Poland may fail to make “significant” cuts in the budget deficit next year as economic growth may slow to as low as 1.5 percent, said Dariusz Filar, an economic adviser to Prime Minister Donald Tusk.
The government’s goal of reducing the shortfall to 2.9 percent of gross domestic product is “practically impossible” and the euro region’s economy slowing to “near-zero” growth would limit Polish expansion to between 1.5 percent and 2.5 percent, Filar said in an interview yesterday. That would mean that the 2012 budget gap may be near this year’s 5.6 percent goal, he said.
Tusk’s Civic Platform party, which won a second election on Oct. 9, made its deficit pledge based on a forecast of economic growth remaining at this year’s 4 percent pace. The International Monetary Fund, BNP Paribas SA and Citigroup Inc. forecast growth slower than that as the economy sputters in the euro region, which buys 55 percent of the country’s exports.
““The new government has to begin thorough changes regardless of how unpopular they are,” Filar said. “The 2.9 percent deficit goal was very difficult even with a 4 percent economic growth, and looking at what’s going on in the euro zone now, it is practically impossible.”
The zloty retreated from a three-week high, declining 0.7 percent to 4.3338 per euro at 10:48 a.m. in Warsaw, from 4.3042 yesterday.
The risks to Polish economic growth are “clearly on the downside” and the country needs to prepare for a second stage of the global financial crisis that could inflict “successive shocks to the government’s balance sheet and the economy,” Jaime Reusche, an assistant vice president for sovereign risk at Moody’s Investors Service in New York, said yesterday in an e-mailed response to questions from Bloomberg News.
Reusche also said the government’s 2012 deficit goal “might be out of reach,”
The new government should consider canceling all tax incentives, increasing employers’ contribution to social-welfare funds and easing regulations for doing business, Filar said. It also needs to eliminate pension privileges for soldiers, policemen and miners as well as extend the working age, he added.
Without those measures, the Cabinet may have to resort to raising the value-added tax, a sales levy, or cutting transfers to private pension funds as Poland did earlier Filar said, adding that those are short-term solutions.
The European Commission may punish Poland for an excessive deficit by reducing its eligibility for European Union funding that helped the bloc’s largest eastern country avert a recession in 2009 and is boosting growth.
While Poland has a chance to receive 300 billion euros ($409 billion) from the next EU budget, the funds hinge on compliance with the EU’s fiscal requirements, Filar said.
--With assistance from Piotr Skolimowski in Warsaw. Editors: Balazs Penz, David McQuaid
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