FACTBOX-Key political risks to watch in Poland

WARSAW Tue Feb 1, 2011 7:12am EST

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WARSAW Feb 1 (Reuters) - Poland's centrist ruling party appears on track to win an autumn general election despite rising criticism over its shakeup of the pension system, a large budget deficit and its handling of relations with Russia.

Opinion polls put Prime Minister Donald Tusk's Civic Platform (PO) ahead of its rivals, though with a narrowing lead, and it looks set to become the first Polish party since the end of communism in 1989 to win a second consecutive four-year term.

A PO-led government is viewed as broadly pro-business, but Tusk has disappointed liberal supporters by ruling out radical fiscal reforms and trusting mainly in Poland's accelerating economic growth to cut debt.

Winter disruption to Poland's railway network and delays in an ambitious motorway construction programme have eaten into public support for Tusk and his party.

From the nationalist right, the Tusk government stands accused of betraying Polish interests in a dispute with Russia over the causes of a plane crash last April that killed then-president Lech Kaczynski and many other top officials.

Following are the key political risks facing Poland:

REINING IN DEBT

Poland's public debt remains well below western European levels, but the government is anxious to prevent it topping 55 percent of gross domestic product (GDP) as this would by law trigger painful spending cuts likely to hurt support for PO.

The government raised value-added tax by one percentage point on Jan. 1 -- it is now 23 percent for many items. It has also capped discretionary spending, targets more cuts in state administration and aims to raise $5 billion in privatisation revenues this year, on top of the $8 billion raised in 2010.

More controversially, the government last month announced changes to a much-feted 1999 pension system reform that will involve diverting some employee contributions from private sector pension funds back to the state system. [ID:nLDE6BT11Y]

The move, a milder version of Hungary's root-and-branch pension reforms, has drawn criticism from Polish business lobbies and economists who say it is a short-sighted stopgap measure that conceals the need for deeper structural reforms.

Economic liberals want Poland to raise the retirement age, cut social spending programmes and step up privatisations.

For the government, the pension reform, due to take effect on April 1, will help to cut state borrowing needs.

It also hopes economic growth will curb a budget deficit seen at about 8 percent of gross domestic product (GDP) in 2010.

The economy expanded by 3.8 percent last year, preliminary data show, and is expected to grow by 4.0 percent this year, up strongly from 1.7 percent in 2009 when Poland was the only member of the 27-nation European Union to avoid recession.

What to watch:

-- Will financial markets start to demand that Poland tackle its deficit more aggressively? They appear fairly relaxed for now but Poland could start to stand out more in the region as other countries tighten their belts.

-- Social tensions. Poland, unlike some other EU countries, has not seen serious industrial unrest but some social groups could stage protests if Warsaw delivers on plans to lay off 10 percent of the public sector.

COUNTDOWN TO PARLIAMENTARY POLL

Polish opinion polls consistently give PO a sizeable lead over its nearest rival, the conservative-nationalist Law and Justice Party (PiS), though the margin varies widely from six to as much as 30 percentage points. [ID:LDE70S08J]

In municipal elections late last year, PO secured a relatively modest 34 percent of the vote against 27 percent for PiS and 16 percent for the opposition leftists.

President Bronislaw Komorowski, elected on a PO ticket last summer, works smoothly with the government and has not vetoed its laws, unlike his predecessor Lech Kaczynski, who died along with 95 others in the April plane crash.

PiS leader Jaroslaw Kaczynski, the late president's twin brother, has indirectly helped the government by moving away from the middle ground he briefly occupied when running against Komorowski in last year's presidential election.

But Kaczynski can rely on the support of his core voters, mostly older, staunchly Catholic Poles who share his distrust of the EU, Germany and above all Russia.

Kaczynski's more hardline rhetoric led a group of moderate PiS deputies to break away late last year to form a new centre-right grouping but it has failed to win much support.

Working possibly in the government's favour, Poland takes over the European Union's rotating six-month presidency on July 1, providing Tusk and his ministers with opportunities to impress voters by playing a bigger role on the European stage.

PO wants the parliamentary election to be on October 23.

What to watch:

-- Will PO's current coalition partner, the small Peasants' Party (PSL), stay in the government until the end or quit early to try to distance itself from the more economically liberal PO?

EURO HOPES

Poland's fiscal challenges and the euro zone's woes have pushed back Tusk's membership drive and Warsaw now only rarely speaks on the issue, noting the euro zone must solve its own troubles before considering adding more members.

Though joining the euro zone remains an official strategic objective for Warsaw, some in Poland have cooled to the idea as the free-floating zloty's sharp fall during the financial crisis played a key role in helping Poland escape recession.

PO needs to win, alone or with allies, a two-thirds majority in the new parliament in order to amend the constitution to pave the way for eventual euro adoption. Such a change has so far been blocked by PiS, which is sceptical on the euro.

What to watch:

-- Will Tusk's government revive preparing plans to put the zloty up for entry into the pre-euro ERM-2 mechanism?

THE BEAR NEXT DOOR

Last year's plane crash emboldened Russia and Poland to step up a cautious diplomatic rapprochement after years of chilly ties, culminating in a visit to Warsaw by President Dmitry Medvedev in December.

But the mood soured after Moscow's report into the disaster placed blame solely on the Polish pilots and on Polish officials who it says put pressure on them to land in thick fog.

The Tusk government accepts that the Polish side was largely responsible but says Russian ground control and poor infrastructure may also have contributed to the disaster.

Kaczynski has accused Moscow and Tusk of being in cahoots to conceal the true causes of a crash he says would never have happened if he had still been prime minister. He lost power to Tusk in the last general election in 2007.

Kaczynski will shun official events marking the first anniversary of the crash on April 10 and will hold his own rival commemoration instead.

What to watch:

-- What will Poland's own report into the crash reveal when it is published in March? Will Russia accept Poland's request that they try to mesh the two reports into a final, definitive and mutually acceptable text?

-- Will Tusk sack Defence Minister Bogdan Klich, as the opposition and some commentators have demanded, over mistakes they say he has made since the Smolensk crash?

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Writing by Gareth Jones, Editing by Sonya Hepinstall)

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