Poland seen keeping gradualist fiscal stance

WARSAW Wed Oct 13, 2010 11:19am EDT

Jan Krzysztof Bielecki, head of Economic Council and advisor to Poland's Prime Minister Donald Tusk, speaks with editorial staff during a Reuters Summit in Warsaw October 13, 2010. REUTERS/Peter Andrews

Jan Krzysztof Bielecki, head of Economic Council and advisor to Poland's Prime Minister Donald Tusk, speaks with editorial staff during a Reuters Summit in Warsaw October 13, 2010.

Credit: Reuters/Peter Andrews

WARSAW (Reuters) - Poland's slowly-slowly approach to reducing its budget deficit and public debt load is justified and will persist even after next year's election, a top adviser to Prime Minister Donald Tusk said on Wednesday.

Jan Krzysztof Bielecki, himself a former prime minister, also said he was concerned about a possible rapid appreciation of the Polish zloty as a result of funds flowing into emerging economies such as Poland.

"I am not saying I am relaxed (on the public finances) but I see also positive signals that give more time for a step-by-step gradual adjustment and reduction of the structural deficit," Bielecki told the Reuters Central European Investment Summit.

"The pace (of fiscal consolidation) is something I am not convinced you have to accelerate dramatically."

Some economists have accused Tusk's center-right government of complacency over a budget deficit now expected to hit 7.9 percent of gross domestic product this year under European Union accounting standards. Public debt is nearing a 55 percent of GDP threshold under domestic accounting standards that would by law trigger painful spending cuts.

The government has announced a 1 percentage point hike in Value Added Tax and a cap on discretionary spending to help tame the deficit, but has ruled out radical spending cuts or tax hikes ahead of the parliamentary election due next autumn.

But Bielecki, who served as prime minister in 1991 and who headed Poland's Pekao Bank before becoming a Tusk adviser earlier this year, played down expectations that Warsaw might speed up the pace of fiscal reforms after the election.

NO "MASSIVE REFORMS" SEEN

"There is a misunderstanding that immediately after the election this government plans massive reforms, painful spending cuts. Not at all," said Bielecki, who is close to Tusk.

Bielecki said the government would have to come clean with voters on its fiscal plans for 2012 in a budget due to be drawn up before the election.

"I am sure the government will accelerate (work) on the 2012 budget...There will be no surprise, all will be clear," he said.

His comments on the fiscal situation contrasted with Elzbieta Chojna-Duch, a member of the Polish central bank's Monetary Policy Council (MPC), who told the summit on Tuesday the government was relying too much on one-off measures such as sell-offs of state assets to balance its books.

Ratings agencies have sounded relatively calm about Poland's finances but Moody's Investors Service analyst Anthony Thomas told the summit the government must act decisively to tackle the deficit after the 2011 election.

Bielecki attributed Poland's big deficit mainly to pension system reforms, which put a temporary burden on the budget, as well as to a large inflow of EU funds for infrastructure projects that are co-financed by Poland and to tax cuts agreed in 2007 that helped the country avoid recession last year.

"But 2011 will mark the peak of the EU funds-related spending," Bielecki said, adding that he did not expect public debt to breach the 55 percent of GDP threshold.

Asked what the priorities of Tusk's ruling Civic Platform should be if, as expected, it wins re-election, Bielecki cited an overhaul of the bloated public health sector that would allow for competition between providers of services.

He also urged the removal of legal and other restrictions that have pushed Poland down to 72nd position in the World Bank's international rankings for the ease of doing business.

ZLOTY APPRECIATION

But Bielecki said he was concerned that Poland, where the economy grew 1.7 percent in 2009 and is expected to expand more than 3 percent this year, might become a victim of its own success if its currency rose too fast.

"If the markets...see quantitative easing is continuing in western Europe and they get very low yields on its bonds then they will come here for arbitrage on Polish treasury bonds. Then we may see a too rapid appreciation of the zloty," he said.

"Too rapid inflows are not good" for the economy.

The zloty has climbed about 4.8 percent against the euro since July 1. But in general, government officials are not expressing concern about currency appreciation, and they are not suggesting steps to try to limit it.

Bogdan Klimaszewski, deputy head of the finance ministry's debt department, told the summit this week that future zloty appreciation was likely to be gradual and that growing foreign investment in Polish bonds was positive, since it was mostly long-term investment.

(Editing by Andrew Torchia)