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Budget 2000 approved by the government, rocky road ahead

The government has approved next year's budget, which envisages a PLN12.7bn deficit or 1.88% of planned GDP, down from 2.15% expected this year. The budget assumes GDP growth of 5.2% (down on the previous forecast of 5.6%), and inflation of 5.2% (year-end) and 5.7% (annual average). The finance ministry reduced its forecast for GDP growth as a result of expected tighter monetary policy and expectations of weaker than initially anticipated demand for Polish exports. The finance ministry raised spending by PLN1.5bn in the budget draft, without changing the planned deficit. The higher revenues come from an unexpected "windfall NBP profit", which was raised by some PLN2bn. This was only partly offset by a PLN400m decline in tax revenues due to lower growth assumptions. PLN1.4bn of the extra revenue will be spent on a larger subsidy for the Social Security Office.

The budget draft assumes both a lower budget deficit on a cash basis and a lower consolidated fiscal deficit. However, in our opinion, the government has underestimated the consolidated public sector deficit as it has not taken into account factors such as the compensation scheme, which will boost spending by at least 0.5% of GDP next year.

The budget has been passed to parliament. Under the Polish constitution, parliament cannot increase the budget deficit, but it can, however, play with certain revenue indicators to boost planned revenues and thus raise spending. Alternatively, it could follow the government's lead and increase the planned loan to ZUS or set up articles for new loans to other institutions or sectors. Because loans do not count as spending this would not violate constitutional law, but it certainly would be a violation from an economic point of view. The process of "spoiling the budget" has already started. The parliamentary committee of public finances rejected the government's proposal to remove VAT exemptions for companies employing disabled persons. If the Lower House approves this it would cost the budget some PLN1.3bn. (...)

The cancellation of a planned EUR400m (US$414.4m) Eurobond issue this year could indicate high liquidity in public finances. It was cancelled because of the expected large foreign currency inflows from privatisation (PLN15bn). The central bank and finance ministry are working on ways to keep most of this cash in foreign currency so as not to artificially boost demand for the zloty. Good public finance liquidity was also confirmed by August money supply data showing that government sector net debt at the central bank declined by PLN4.8bn or by 7.3%.

However, one has to bear in mind that the better performance of the central budget would be more than offset by the government's PLN4bn loan to the Social Security Office (ZUS), which would represent a significant widening of the consolidated public finance sector. Some PLN1bn of this PLN4bn loan has already been allocated and the rest is due to be disbursed later this year. According to ZUS, its total loans taken from commercial banks to pay current pensions have reached PLN3.1bn. If this PLN3.1bn is added to the consolidated public sector deficit it becomes more and more evident that fiscal policy is less restrictive in 1999 than in 1998. If the full loan is given to ZUS, the total incremental ZUS deficit would amount to some 1-1.1% of GDP and the consolidated fiscal deficit would reach 4-4.1% of GDP versus 3.4% in 1998. Such loose fiscal policy would lead to higher domestic demand, higher current account deficit and higher inflation. While this is not very surprising, as in most economies fiscal policy becomes looser during an economic downturn, we continue to remain worried about the transparency of fiscal policy. In an attempt to keep the central budget deficit on target, more and more deficit items are put "below the line" in the budget or outside the budget.

On the other hand, this could be good news for the zloty because in order to support ZUS the government will have to accept payment for privatised assets in zloty. It remains to be seen whether the government will benefit from the delay in the reform of pensions and give ZUS funds that were initially allocated for private pensions funds (PLN3bn out of PLN4bn subsidy earmarked in the 1999 budget law). In this case, there would be no exchange rate impact as these funds have already been exchanged into zloty.

Source: "Polish Capital and Money Market", October 1999

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