WARSAW: Poland's new government has started scaling back on election promises of higher public spending in a bid to avoid a deficit blow-up, but it may still overshoot the European Union's three-percent ceiling next year.
In the latest in a string of announcements on cutbacks, Finance Minister Pawel Szalamacha said on Thursday that one of the main campaign policy plans of the conservative Law and Justice party (PiS), a tax cut for small and medium-sized companies, would not be implemented next year.
This follows Prime Minister Beata Szydlo saying earlier this week that a higher personal tax allowance, another major campaign policy plan which a former finance minister said could cost the budget over 20 billion zlotys ($5 billion) annually or 1 percent of GDP, would not be implemented next year.
"It seems the new government is adjusting election promises to budget possibilities," said Grzegorz Maliszewski, chief economist at the Warsaw-based Bank Millennium.
PiS has also hinted at watering down its flagship election promise of paying families 500 zlotys ($127.52) per month per child starting with the second child, a policy the central bank said could cost about 15 billion zlotys per year.
PiS had earlier outlined ahead of the vote a plan to raise public spending by 2.3 percent of GDP per year, raising the prospect it may struggle to find budget revenue to finance its plan.
That contributed to weakness in the zloty currency and drew warnings from rating agencies that a deficit slippage could pressure Poland's ratings.
THRESHOLD
The watering down and postponing of campaign promises may still not be enough to bring Poland's deficit below the 3 percent ceiling. Economy Minister Mateusz Morawiecki, former chief executive at the Spanish-owned BZ WBK Bank, told state news agency PAP in comments published on Thursday that the deficit would be somewhere in the range of 2.8-3.2 of gross domestic product.
Szalamacha has repeatedly said the government would keep the deficit below the EU's ceiling of about 3 percent of GDP.
Most analysts polled by Reuters believe this will the case, with the 2016 deficit forecast standing at 2.90 percent.
The bond market seems also to believe the deficit will be kept in check. Poland's 10-year bond yield fell by 80 basis points since mid-June to 2.60 percent, a move also helped by the expected additional monetary easing in the euro zone.
The deficit reached 3.2 percent last year, allowing Poland to exit the EU's so-called excessive deficit procedure.
Re-entering the procedure could expose Poland to a risk of loosing access to billions of euros in EU development aid, which forms one of the pillars of the ruling party's plan to boost economic growth.
Hungary's Prime Minister Victor Orban, whose nationalist-minded economic policies have inspired PiS leaders and who has clashed with the EU on various policy issues, exited the excessive deficit procedure in 2013, two years earlier than Poland did.
Poland's central bank governor Marek Belka, who said earlier the budget would not bear the cost of election promises and warned or risks to banks' stability, told the Puls Biznesu newspaper in comments published on Wednesday that economic policy will likely become wiser as the election campaign fades.
"If you go from being in opposition to being in government, you immediately come to your senses," Belka said.
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