US embassy cable - 05WARSAW1205

C O N F I D E N T I A L SECTION 01 OF 03 WARSAW 001205 
 
SIPDIS 
 
STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS 
STATE FOR EB/OMA TIM FORSYTH 
TREASURY FOR OASIA MATTHEW GAERTNER 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON 
FRANKFURT FOR TREASURY FOR JIM WALLAR 
 
E.O. 12958: DECL: 03/10/2016 
TAGS: ECON, EFIN, ETRD, PGOV, PREL, PL, Polish Elections 
SUBJECT: POLISH OPPOSITION LEADER LAYS OUT PROSPECTIVE 
ECONOMIC PROGRAM 
 
REF: WARSAW 1126 
 
Classified By: DCM Cameron Munter, reasons 1.5 (b and d). 
 
1. (C) Summary: Jan Rokita, the head of Poland's leading 
opposition party (PO - Platforma Obywatelska/Civic Platform), 
and the man expected to be the country's next Prime Minister 
outlined the key planks of his economic policy at a March 1 
meeting of the American Chamber of Commerce.  Rokita said he 
wants to reduce the cost of hiring workers by cutting taxes 
and social payments, completing privatization and 
deregulating the economy.  He also said he would like to 
reform the budget, cut public sector expenses and close 
unnecessary government offices. Rokita favors quick adoption 
of the Euro, and said he would be willing to consider its 
unilateral adoption to reduce pressure on exporters from the 
rising Zloty.  Companies welcomed the expose, but note Rokita 
will need the help of his prospective coalition partner, the 
Law and Justice Party (PiS), with whom PO has policy 
differences, to realize this ambitious agenda.  PiS tends 
toward statist and regulatory solutions to economic issues. 
End Summary. 
 
PO (Finally) Unveils a Program: 
- - - - - - - - - - - - - - - 
 
2. (U) At a March 1 meeting of the American Chamber of 
Commerce, Jan Rokita, the leader of the Civic Platform party 
(PO) and the man expected to be PM in the next government, 
sketched out three "mile posts" of his economic policy: 
 
- limiting the tax wedge, which limits employment (Taxes, 
health care and pensions add 43% to wage bills in Poland, one 
of the highest such "wedges" in the EU); 
 
- deregulation of the economy, including introducing reforms 
to the legal system to reduce the complexity and cost of 
doing business; and 
 
- completing the process of privatizing state-owned 
companies, including selling off the "resztowki" small shares 
(typically less than 5%) which the State Treasury still owns 
in privatized firms.  He said a PO-led government would not 
hold on to a so-called "golden share" conferring veto 
authority over significant business decisions. 
 
3. (U) Rokita also promised that a PO government will change 
the operational philosophy of the current government, which 
first increased public debt and later, in order to pay the 
bills, raised taxes and the cost of business.  Rokita 
stressed that one of his top goals will be to cut public 
spending.  He called for the simplification of the entire tax 
system, beginning with the step-by-step introduction of a 
flat Personal Income Tax (PIT) followed eventually by the 
introduction of a lower, unified VAT rate. 
 
Health: 
- - - - 
 
4. (U) Rokita said that his government would oppose 
increasing health taxes currently levied on salaries (9% in 
2005), but would not reduce them.  His government would first 
focus on bringing better order to the current confused 
system.  After a couple of years, the government could 
consider bringing new reforms to the sector, in particular 
those which would base it more on the operations of the free 
market.  Rokita said that the country needs some time to 
recover from three separate health reforms enacted by the SLD 
government over the last two years. 
 
Euro Adoption: 
- - - - - - - - 
 
5. (U) Perhaps unintentionally, the biggest news from the 
event concerned Poland's adoption of the Euro.  Rokita 
forecast that public finance reforms and budget cuts could 
lead to further appreciation of the zloty.  To counter the 
negative effect this would have on exporters, Poland may 
adopt a fixed exchange rate, most likely by unilaterally 
adopting the Euro.  Most local economists have already 
largely dismissed such an idea, which they believe would 
leave the Zloty vulnerable to attack in the lead up to 
implementation. 
 
Cooperation with PiS: 
- - - - - - - - - - 
 
6. (U) Rokita was asked about the prospects for working 
together in a coalition government with the other leading 
opposition party, the Law and Justice Party (PiS), which has 
at times argued for a strong role of the state in the 
economy.  PO and PiS have also differed publicly on tax 
policy, privatization and Euro entry.  Rokita said that PiS 
is a responsible partner on public finance issues.  He also 
stressed, however, that the prime minister would be the prime 
determiner of economic policy. 
 
PO Experts Still Working on Details: 
- - - - - - - - - - - - - - - - 
 
7. (C) A group of economists preparing PO's economic program 
recently provided more details to Econoffs, while stressing 
that "nothing" is fixed yet, as PO advisers are still 
preparing policy positions on many issues.  The two most 
surprising elements related to privatization and investments. 
 On privatization, they criticized the current government for 
not having a more coherent plan for privatization, but 
selling 'anything and everything' without any regard for 
sequence.  The economists argued the next government will 
want to first come up with a broader strategy, including 
determining whether the government will want to retain 
influence in some key sectors, before proceeding with the 
sale of large, complicated companies like the national gas 
company, refineries and electricity plants.  They expect a PO 
government will pursue full privatization (i.e., 100% sale) 
of state-owned companies, rather than the current 
government's practice of selling smaller shares (e.g., 
20-30%).  PO criticizes these partial sales, noting they may 
complicate future sales, and also leave open the possibility 
that the government can appoint members of company boards, 
interjecting politics into business decisions. 
 
8.(C) On investments, they expressed disappointment that 
foreign investors have not responded more quickly to Poland's 
EU entry.  They argued that the new government will have to 
look at providing better incentives to attract companies (we 
suggested clearer tax and regulatory policies would be more 
useful, and contested the assertion that foreign investors 
have been slow over the last 18 months). 
 
9. (C) The economists stressed the importance of cutting 
expenditures, particularly on social policies, particularly 
by better targeting expenditures to truly needy recipients. 
They singled out the farmers' pension system in particular, 
arguing that the current government had failed largely 
because it felt constrained for ideological reasons in 
arguing that "rich" farmers should be taxed rather than 
receive extensive benefits.  The next government will not 
suffer the same handicap, and intends to pursue a simpler 
reform to cut expenditures in this area.  They also believe a 
number of reforms in how the budget is drafted can reduce 
spending and improve monitoring.  In January, Rokita publicly 
called for a complete overhaul of the budget formulation 
process, giving the PM more direct control over spending 
decisions.  He also called for closing a number of government 
offices and merging some ministries. 
 
10. (C) Tax policy, including the introduction of a flat tax, 
is another perennial favorite.  The economists argued that 
introducing flat PIT and CIT would reduce compliance costs 
for companies, while also making Poland more competitive in 
attracting foreign investment.  Finally, they stressed the 
importance of reforming the legal system, although they are 
very aware of how difficult it will be in Poland to overcome 
the opposition of entrenched lawyers and judges. 
 
Market Reaction: 
- - - - - - - - 
 
11. (U) Markets are generally encouraged by Rokita's 
comments, which they interpret as favoring adopting the Euro 
sooner rather than later, although they have noted tax cuts 
would make quick adoption of the Euro more difficult because 
that would require lower budget deficits.  There had been 
some doubt about what the new government would do, as various 
party officials in the two leading opposition parties have 
issued contradictory statements over the last month, 
including one PiS comment questioning whether Poland should 
adopt the Euro at all.  On the whole, Rokita's comments were 
overshadowed by the news that PM Belka will make a statement 
on March 3, possibly regarding plans for June elections 
(reftel). 
 
Comment: 
- - - - 
 
12. (C) The private sector has been assuming for a year now 
that PO would lead the next government, and that it would 
introduce more business-friendly legislation than the current 
government.  Companies have clung to the assumption that PO 
would be good for business despite the lack of any evident 
economic program, or ongoing policy coordination with PiS, 
with which it will almost certainly have to include as a 
coalition partner, and other opposition parties on important 
issues like adoption of the Euro.  Meanwhile, private 
discussions with PO officials and MP's have suggested that 
the party was long on generalities, but desperately short on 
specific policy suggestions. One economist from the Adam 
Smith think tank said publicly that he "had not seen any 
reasonable solutions coming from either" PO or PiS.  Rokita's 
solid performance at the AmCham helped reassure companies 
that PO is now developing a coherent economic program, even 
if individual policies are still clearly moving targets. With 
a general election possible as soon as June, it is high time 
that PO begin to present more specific policies, even if 
doing so is likely to generate more controversy. 
 
 
ASHE