US embassy cable - 05WARSAW2496

UNCLAS WARSAW 002496 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON 
TREASURY FOR OASIA MATTHEW GAERTNER 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PREL, PL, Economy 
SUBJECT: Poland Continues to Chip Away at its Budget Deficit 
Despite Slower Growth 
 
Ref: Warsaw 1624 
 
(U) This cable is sensitive, but unclassified, and NOT for 
Internet distribution. 
 
1. (U) In early June, the Ministry of Finance released its 
initial assumptions for the 2006 budget, officially kicking 
off the six month budget drafting season.  The Ministry of 
Finance purposely proposed conservative estimates for growth 
(4%) and inflation (1.5%).  Finance also set the budget 
deficit at 30 billion Zloty ($10 billion), which is forecast 
to be 3% of GDP, excluding pension reform costs authorized 
by Eurostat (reftel).   These totals would bring Poland's 
public debt to 45.1% in 2006, using ESA-95 methodology (and 
to 53% under Polish methodology). 
 
2005 Budget On Track to Beat Deficit Target 
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2. (SBU) The 2005 budget forecast a 35 billion Zloty ($10.5 
billion) deficit.  Through the end of May, the cumulative 
total was 54% of the total for the year, almost 10% lower 
than the Ministry of Finance had expected.  Part of the 
explanation comes in higher-than-expected VAT revenues in 
January and February, stemming from strong consumer demand 
which has since moderated.  Finance has also delayed some 
investments and has paid less than expected in pension fund 
support.  Finance Minister Gronicki has publicly speculated 
that the budget deficit for 2005 could total 33 billion 
Zloty ($10 billion).  Financial analysts have expressed 
concern that slowing investment and consumer spending could 
translate into lower taxes, especially VAT, which could put 
pressure on the deficit.  Gronicki has told us privately 
that he is confident Finance will be able to manage 
expenditures to meet or beat the deficit target. 
 
Financial Sector Reaction 
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3. (SBU) Local economists applaud the conservative 
assumptions for the 2006 budget, which they generally find 
realistic.  However, they have doubts that the 2005 budget 
deficit will be as low as forecast, primarily because 
Finance expected to reap 3.75 billion Zloty ($1.1 billion) 
in fiscal savings from several reform measures under the 
Haunser plan which parliament ultimately rejected.  The most 
significant of these was reform of the farmers' pension 
system.  Analysts also expect VAT revenues to be 3 billion 
Zloty ($900 million) lower than forecast.  Finance has 
proposed increasing excise taxes, which would raise an 
additional 2 billion Zloty ($600 million) in 2005, while 
lower debt servicing costs will save an additional one 
billion Zloty ($300 million).  Altogether, local economists 
estimate this year's budget deficit could grow by between 8 
and 9 billion Zloty ($2.4-$2.7 billion). 
 
Comment 
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4. (SBU) Comment: The Ministry of Finance is in the odd 
position of having to prepare the budget for the next 
government, which will be formed after general elections on 
September 25.  The structure of Poland's budget law will 
give the next government little scope to introduce 
significant changes in the draft.  The budget law requires 
the government to submit its budget assumptions, for 
example, by September, after which parliament cannot change 
them.   To cite another, the budget law also requires that 
all changes in personal and corporate income tax be approved 
by November 30 before going into effect on January 1 of the 
next calendar year.  We believe the current government has 
prepared a solid set of assumptions which should be 
realizable. The reduction in the deficit to 3% of GDP is 
particularly noteworthy, compared to 5.7% in 2003 and 4.6% 
in 2004. That said, we also suspect the current government 
is indulging in a bit of gamesmanship, and may include 
politically sensitive reforms (e.g., farmers' pensions) in 
the budget which prove difficult for the next government to 
achieve. 
 
Ashe 
 
 
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 2005WARSAW02496 - Classification: UNCLASSIFIED