Bloomberg News

Poland to Overshoot Deficit Target as Economy Slows

September 05, 2012

Poland will overshoot its 2012 budget-deficit target as the European Union’s biggest eastern economy slows to its weakest pace in three years amid the euro region’s debt crisis.

Prime Minister Donald Tusk’s government now expects a shortfall of 3.5 percent this year, compared with a previous goal of reducing it to within the EU’s limit of 3 percent, Finance Minister Jacek Rostowski told a news conference Warsaw today.

“Now that we know what’s happening with growth, it won’t be possible,” Tusk said at the briefing, which came after the government approved a 2013 draft budget yesterday that lowered the forecast for growth. Poland’s fiscal reputation remains “satisfactory” and financial stability is the priority, the premier said.

Tusk, 55, must weigh EU deficit demands against concerns that further spending cuts may damp growth in the nation of 38 million people, whose gross domestic product per capita is 40 percent below the 27-nation bloc’s average. Austerity measures to tackle the debt crisis helped suffocate growth in EU nations from Romania and Spain.

No Cut

Poland’s central bank kept borrowing costs today at the highest level since 2009, even after the economy slowed to 2.4 percent in the second quarter from a year earlier, down from 3.5 percent in the January-March period. The zloty retreated to a six-week low, sliding to 0.3 percent at 1:50 p.m. in Warsaw.

Gross domestic product will rise 2.2 percent instead of a previously forecast 2.9 percent, according to a 2013 draft budget. Employment will grow 0.2 percent, wages will increase 1.9 percent and inflation will average 2.7 percent, it said.

Tusk has said he will give a parliamentary speech, probably next week, to outline measures aimed at tackling threats to the economy. The government has said it’s sticking to a 2.5 percent growth target for 2012, down from last year’s 4.3 percent.

Next year’s central budget deficit will total 35.6 billion zloty ($10.7 billion), 600 million zloty more than planned for this year, the government said yesterday. The general shortfall, which includes all state expenses and is the measure monitored by the EU, wasn’t revised from 2.2 percent of output.

Zero Growth

Keeping the 2.2 percent goal for 2013 would “mean we end up next year with zero growth or even a recession,” said Jakub Szulc, a member of Tusk’s Civic Platform who sits on Parliament’s Public Finances Commission.

“We can’t drop the long-term goal for a 1 percent deficit in 2015, but next year’s plan obviously needs to be adjusted,” Szulc said by phone from Warsaw yesterday. “Foreign investors will understand this because it’s growth that matters for the international credibility of countries these days.”

The European Commission, the EU’s executive arm, has given Poland until the end of this year to cut the deficit to 3 percent from 5.1 percent last year and 7.8 percent in 2010.

Failing to do so may cost the country access to development grants that totaled 67 billion euros ($84 billion) and added an average of 1 percentage point per year to gross domestic product in the seven years through 2013. Rostowski said today he expects Poland to exit the EU’s so-called excessive deficit procedure.

EU Forecast

The Brussels-based commission forecasts the economy will grow 2.7 percent in 2012, the most in the EU. The expansion slowing next year to less than the 1.6 percent rate posted in 2009, when Poland was the only EU member to avoid a slump, “can’t be ruled out,” Maja Goettig, a member of Tusk’s Council of Economic Advisers, said by phone on Aug. 31.

“There is room to reduce which, if necessary, I’m sure we’ll utilize,” Narodowy Bank Polski Governor Marek Belka told Bloomberg Television in a weekend interview during at a meeting of central bankers and economists in Jackson Hole, Wyoming. Belka will hold a press conference at 4 p.m. in Warsaw to comment on today’s rate decision.

Tusk, who began his second term in October, doesn’t face any immediate political threats to his coalition, which has a four-seat majority in parliament. The current legislature’s term ends in three years.

Still, 64 percent of Poles are increasingly concerned about the economy’s future, up 5 percentage points from July, according to an Aug. 14-23 poll of 1,011 people by Warsaw-based researcher CBOS. No margin of error was given.

‘I dont think this undermines the credibility of policies overall given the current environment,’’ Benoit Anne, an emerging-markets strategist at Societe Generale in London, said about the budget overshoot. “I am happy to give them a break on that one.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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