EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 11.6.2008 
SEC(2008) 2011 final 
  
Recommendation for a  
COUNCIL DECISION 
abrogating Decision 2005/183/EC on the existence of an excessive deficit in Poland 
(presented by the Commission) 
 
EN 2   EN EXPLANATORY MEMORANDUM  
1. B ACKGROUND  
Article 104 of the Treaty estab lishes that Member States shoul d avoid excessive deficits and 
lays down a procedure for their identification an d correction. The excessive deficit procedure 
(EDP) is further specified in Council Re gulation (EC) No 1467/97 on “speeding up and 
clarifying the implementation of the excessive deficit procedure”1, which is part of the 
Stability and Growth Pact. Acco rding to Article 104(2) of the Treaty, the Commission has to 
monitor compliance with budgetar y discipline on the basis of  two criteria, namely: (a) 
whether the planned or actual government defi cit exceeds the reference value of 3% of GDP 
(unless either the deficit ratio has declined substantially and continuously and reached a level 
that comes close to the reference value; or, a lternatively, the excess over the reference value is 
only exceptional and temporary an d the ratio remains close to the reference value); and (b) 
whether government debt exceeds the reference va lue of 60% of GDP (unl ess the debt ratio is 
sufficiently diminishing and approaching the reference value at a satisfactory pace). 
In accordance with the Protocol on the excessive  deficit procedure annexed to the Treaty, the 
Commission provides the data for the implementati on of the EDP. As part  of the application 
of this Protocol, Member States have to notif y data on government deficits and debt and other 
associated variables twice a year, namely before  1 April and before 1 October, in accordance 
with Article 4 of Council Regulation (EC) No 3605/932,3. As explained in the box below, 
Poland was among the countries which benefited from a transition period for implementing the Eurostat decision of 2 Marc h 2004 on the classification of funded pension schemes and as 
a result notified deficit and debt figures w ithout the net cost of the 1999 pension reform 
(currently amounting to around 2% of GDP an nually) until March 2007. Since then, deficit 
and debt figures have been notified in acco rdance with the Eurostat decision. Unless 
mentioned explicitly, all figures quoted in this document are in accordance with the Eurostat 
decision.
 
Box: The classification of pension schemes  
There are typically different pillars within a c ountry’s pension system, such as pay-as-you-go or 
unfunded systems and funded systems;  furthermore, pension schemes can be of the defined-benefit 
(DB) or defined-contribution (DC) variety. 
If a pension scheme is classified in the government sector, contributions collect ed and benefits paid by 
the scheme are government revenue and expenditure and contribute to the government balance. If a 
pension scheme is classified in a sector other than government, its contributions and benefits do not 
contribute to the government balance. The ESA 95 accounting rules state that pension schemes 
classified within government are those which are “i mposed, controlled and fi nanced by government”. 
On 2 March 2004, Eurostat clarified that funde d DC pension schemes do not fulfil these criteria 
because pensions paid by such schemes (i) depend pr imarily on financial markets performance (i.e. not 
under government control) and (ii) are financed  by reserves that are not economically owned by 
                                                 
1 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
2 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
3 The most recent notification of Poland can be found at: 
 http://epp.eurostat.ec.europa.eu/portal/page?_p ageid=2373,58110711&_dad=portal&_schema=portal. 
 
EN 3   EN government. Even if they are mandatory or if th ey are managed by government (for example, managed 
by the same government agency in charge of the pa y-as-you-go pillar) or if there is some government 
guarantee of a minimum pension, funded DC schemes should not be classified within government (*). 
A transition period, expiring in spring 2007 (first not ification of 2007), was granted to implement this 
decision (**). 
(*) Eurostat News Release No 30/2004 of 2 March 2004. 
(**) Eurostat News Release No 117/2004 of 23 September 2004.  
On 12 May 2004, the Commission initiated the ED P for Poland with the adoption of a report 
under Article 104(3), based on a general governme nt deficit of 4.1% of GDP (excluding 
pension reform cost) in 20034. On 5 July 2004, the Council decided, on a recommendation 
from the Commission, that Poland was in exce ssive deficit according to Article 104(6)5. The 
Council decision stated that the de ficit and the debt figures woul d have to be adjusted upward 
if the funded pension schemes were excluded fr om the general government sector following 
the Eurostat decision on the classification of  the funded pension schemes (see box). At the 
same time, and also based on a Commi ssion recommendation, the Council addressed 
recommendations under Article 104(7) to Poland w ith a view to bringing the situation of an 
excessive government deficit to  an end, by 2007 at the latest6. On 28 November 2006, the 
Council decided under Article 104(8), on a recommendation from the Commission, that 
action taken until then by the Polish authorities was inadequate7. On 27 February 2007, the 
Council issued new recommendations under Ar ticle 104(7) based on a recommendation by 
the Commission.  
In its second recommendation under Article 104(7), the Council recommended that the Polish 
authorities put an end to the excessive defici t situation by the origin al deadline of 2007 and 
reduce the general government deficit in a cred ible and sustainable manner and to this end 
ensure an improvement of the structural balan ce (i.e. the cyclically-a djusted balance net of 
one-off and other temporary measures) by at l east 0.5 percentage points of GDP between 
2006 and 2007. The Council established the d eadline of 27 August 2007 for the Polish 
authorities to take effective action. In addition, the Council invited Poland to ensure that 
budgetary consolidation towards its medium-term objective of a structural  deficit of 1% of 
GDP was sustained after the excessive deficit would have been corrected. 
                                                 
4 SEC(2004) 826. 
5 OJ L 62, 9.3.2005, p. 18. 
6 All EDP-related documents for Poland can be found at the following website:  
http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm. 
7 OJ L 414, 30.12.2006, p. 81. 
 
EN 4   EN Table 1: Adjustment endorsed by the Council on 27 February 2007 
% of GDP, unless indicated otherwise  2006 2007 
General government balance  
change in structural balance 
p.m.: Real GDP growth (%) −3.9 
 
5.4 deficit close to 38 
at least +0.5 
5.1 
Note : Structural balance = cyclically-adjusted balance excluding one-off and other temporary measures. 
Source : Council recommendation under Article 104(7) and, for real GDP growth, Council opinion on the 
November 2006 update of the convergence programme, both adopted on 27 February 2007. 
On 20 November 2007, i.e. after the expiry of the deadline for taking action set in the Council 
recommendation, the Commission adopted a comm unication to the Council, which concluded 
that the action taken by Poland in response to  the Council recommendation was consistent 
with the recommendation. While the Commission expressed concer n about the du rability of 
the correction of the excessive deficit in 2008 and 2009, no further steps under the EDP were 
recommended at that stage9. In its meeting of 4 December  2007, the Council concurred with 
this assessment. Both the Commission and the C ouncil invited the Polish authorities to submit 
as soon as possible an updated convergence programme describing their medium-term 
strategy for the whole legislature, consistent with a durable correction of the excessive deficit and further progress towards the medium-term objective. A new programme was submitted at the end of March 2008. The Commission is recommending a Council opinion on this 
programme together with this r ecommendation for a Council decision.  
According to Article 104(12), a Council decision on the existence of an excessive deficit is to 
be abrogated, on the basis of a Commission re commendation, when the ex cessive deficit in 
the Member State concerned has, in th e view of the Council, been corrected. 
2. R
ECENT DEFICIT DEVELOPMENTS  
Since peaking at 6.3% of GDP in 2003, the genera l government deficit d eclined by more than 
1 percentage point annually on average to reach 2% of GDP in 2007, based on the data 
provided by the Commission (Eurostat) fo llowing the reporting by Poland before April 
200810, 11,12. The outturns were generally better than targeted thanks to positive growth 
                                                 
8 In its recommendation, the Council referred to  the November 2006 updat e of the convergence 
programme, which targeted a deficit of 3.4% of GDP in 2007 and which “ assumes that, for the purpose 
of abrogating the decision on th e existence of an excessive deficit under Article 104(12), the 
Commission and the Council could, as foreseen in Article 2(7) of Regulation (EC) No 1467/97, consider 
the cost to the budget of the 1999 pension reform [estimated at around 2% of GDP in 2007] according 
to a linear degressive scale amounting to 60 % in 2007. The Council recalls that for Poland to benefit from this provision, the deficit should have declined substantially and continuously and have reached a 
level that comes close to the reference value. As the deficit has declined subs tantially and continuously 
over the period 2004-2006, the outcome for the 2007 deficit and the outlook thereafter will determine whether this provision can be applied to Poland ”. 
9 SEC(2007) 1543. 
10 Eurostat News Release No 54 of 18 April 2008. 
11 Deficit ratios are usually revised – upwards or downwards – after the publication of the first outcome in 
the spring notification. For the EU Member States as a whole, the re visions are usually relatively small 
and on average insignificantly di fferent from zero. In view of th e distance between the currently 
 
EN 5   EN surprises resulting in windfall revenues as well  as the incomplete execution of expenditure 
plans. 
The 2007 general government deficit outturn was 2.0% of GDP, compared to 3.4% projected 
in the November 2006 convergence programme. Mu ch higher real and nominal GDP growth 
than assumed in November 2006 was the main r eason, but also expenditure was restrained. In 
particular, high profitability of companies allo wed for growth in subsidies to be contained, 
while the rapid fall in unemployment and the lack of indexation imposed by the Hausner 
plan13 curtailed growth in social transfers. In addition, compensation of public sector 
employees was lower than planned. Finally, gove rnment investment was lower than projected 
because of a slower absorption of EU funds than planned. Ov erall, the expenditure-to-GDP 
ratio was 1.5 percentage point lower than proj ected in November 2006. On the revenue side, 
revenue from indirect taxes a nd social contributions turned out better than envisaged in 
November 2006, mainly thanks to a much hi gher employment and wage growth. These 
positive surprises were offset by a lower performa nce of other revenue items (direct taxes due 
to an increase in tax brackets). Overall, this led to a revenue ratio s lightly below the planned 
one. 
3. D EFICIT PROJECTIONS FOR 2008-2009  AND BEYOND  
For 2008, the Commission services’ spring 2008 for ecast projects that the general government 
deficit will increase to 2.5% of GDP, in line  with the target in the March 2008 convergence 
programme. GDP is expected to grow by 5.3% and 5% in 2008 and 2009, respectively. The 
Commission services foresee th at private consumption accele rates in 2008 to 5.6% supported 
by the social contributions cuts and decelerates  to 4.7% in 2009 because  of a deteriorating 
external environment weighing on consumers’ confidence. 
The increasing general government deficit re sults from the Polish 2008 budget, which targets 
a worsening of the central state balan ce (non ESA95) by about 0.8% of GDP in 2008 
compared to the 2007 outturn because of a numb er of deficit-increasing measures adopted 
before the parliamentary elections of Oct ober 2007. Most of them will reduce government 
revenues: a second cut in social  contributions and pe rsonal income tax relief for families. On 
the expenditure side, the 2008 budget envisages hi gher public investme nt and restores the 
generous (inflation plus wage growth) annual indexation of pens ions and disability benefits. 
The deficit-increasing measures will be partly offset by improved tax compliance, higher taxable income, and excise duty hikes related to the EU tax harmonisation. 
                                                                                                                                                        
 
reported deficit for 2007 and the deficit reference value, there is a very low probability that potential 
future revisions in government accounts would raise the 2007 deficit ratio in excess of 3% of GDP. 
12 In accordance with Article 2(7) of Regulation (EC) No 1467/97, a decision to abrogate a decision on the 
existence of an excessive deficit should take into account the net cost of a pension reform introducing a 
multi-pillar system that includes a mandatory, fully funded pillar if the deficit has declined substantially 
and continuously and has reached a level that comes close to the reference value. Since the 2007 general government deficit was below the 3%-reference value ther e is no need to consider the application of this 
Article. 
13 The most comprehensive and specific attempt at expend iture reform so far, proposed in 2003 and aimed 
at reducing public expenditure on social protection, public administration and state aids. Among other 
things, the Hausner plan replaced annual indexati on with an indexation af ter cumulated inflation 
exceeds 5% or every three years (whatever comes first). 
 
EN 6   EN In 2009, the general government defi cit ratio is expected  to rise margina lly to 2.6% of GDP 
according to the spring 2008 Commission forecast , which is based on the no-policy-change 
assumption. The March 2008 convergence programme, which assumes the implementation of some deficit-decreasing measures that remain to  be specified, envisa ges a general government 
deficit of 2.0% of GDP. 
The spring forecast projects the structural defi cit to widen by approximately ¼ percentage 
point of GDP in 2008 but to narrow by about ⅓ percentage point in 2009, resulting from the 
improvement in the labour market st imulated by the cuts in the tax wedge
14. 
The main goal of the budgetary strategy presented in the March 2008 convergence 
programme is to reach the MTO,  a structural deficit of 1% of GDP, by 2011, i.e. one year 
after the end of the programme period. The budge tary adjustment is expenditure-based and 
back-loaded to 2009 and 2010. 
4. D EBT DEVELOPMENTS AND PROJECTIONS  
After having reached its peak of 47.6% of GD P in 2006, the debt ratio appears to be on a 
declining path. Significant debt reduction was achieved in 2007, when the ratio decreased by 
almost 2½ percentage points to 45.2% of GDP  mainly thanks to high nominal GDP growth 
but also to the appreciation of the z łoty. Gross debt is pr ojected to fall more slowly this year 
and next to about 44% of GDP in 2009, according to the spring 2008 forecast under the no-
policy-change assumption.  
5. C ONCLUSIONS  
The general government deficit decreased from  6.3% of GDP in 2003 to 2.0% in 2007, below 
the 3% of GDP reference value. The defi cit reduction in 2007 mainly reflected higher 
economic growth, which together with expenditu re restraint (partly due to an incomplete 
execution of investment plans) reduced the ex penditure ratio compared to budget plans. The 
revenue ratio came in close to  target, with windfall revenues from favourable economic 
conditions offset by direct ta x cuts and underperformance in other revenue categories. The 
structural balance, i.e. the cyclically-adjus ted balance net of one-off and other temporary 
measures, improved by about 1½ percentage point of GDP, well above the fiscal effort of at 
least 0.5 percentage point recommended by the Council. According to the Commission 
services’ spring 2008 forecast, the headline deficit is expected to increase to 2.5% of GDP in 
2008 and, on a no-policy change basis, to 2.6% in  2009. This indicates that the deficit has 
been brought below the 3% of GDP ceiling in a credible and sustainable manner. 
General government gross debt declined fr om 47.6% of GDP in 2006 to 45.4% in 2007, 
below the 60% of GDP reference value. Acco rding to the Commission services’ spring 2008 
                                                 
14 There seems to be a particularly high potential for reducing the shadow economy and stimulating labour 
activity in Poland, as suggested by the significant difference between the registered unemployment rate 
and the unemployment rate from labour force surveys (about 3 percentage points in the beginning of 
2008). Furthermore, Poland has one of the lowest activity rates in the EU (63½% compared to almost 71% in the EU in the second half of 2007), especially for those aged  55+. Moreover, the steep increase 
in corporate-income and sm all-business personal-income tax revenues in the recent years in Poland may 
be partly explained with a better compliance fo llowing a reduction of initially high tax rates. 
 
EN 7   EN forecast, the debt ratio is expected to fall further to around 44% of GDP by 2009 (on a no-
policy change basis). 
From an overall assessment, it follows that the excessive deficit situation in Poland has been 
corrected. Accordingly, the Commission recommends  to the Council to abrogate its decision 
on the existence of an exce ssive deficit in Poland.  
Table 2: Budgetary developments, 2003-2009 
2008 2009 % of GDP, unless indicated 
otherwise 2003 2004 2005 2006 2007 
COM CP(2) COM(3) CP(2) 
General government balance −6.3 −5.7 −4.3 −3.8 −2.0 −2.5 −2.5 −2.6 −2.0 
Total revenues 38.4 36.9 39.0 40.0 40.4 40.1 40.0 39.7 39.2 
Total expenditure 44.6 42.6 43.3 43.8 42.4 42.6 42.5 42.3 41.2 
Of which: − interest expenditure 3.0 2.8 2.8 2.7 2.6 2.7 2.3 2.7 2.3 
– gross fixed capital formation 3.3 3.4 3.4 3.9 4.1 4.5 5.2 4.8 5.0 
Primary balance −3.3 −2.9 −1.5 −1.1 0.6 0.2 −0.2 0.1 0.3 
One-off and temporary measures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 
Structural balance(1) −5.9 −5.9 −4.2 −4.0 −2.5 −2.7 −2.8 −2.3 −1.9 
Structural primary balance(1) −2.9 −3.1 −1.4 −1.3 0.1 0.0 −0.5 0.3 0.4 
Pm Real GDP growth (%) 3.9 5.3 3.6 6.2 6.5 5.3 5.5 5.0 5.0 
Pm Output gap −1.0 0.4 −0.4 0.6 1.2 0.5 0.7 −0.7 −0.2 
(1) Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
(2) Cyclically-adjusted and structural balances and ou tput gaps according to th e programme as calculated 
by Commission services on the basis of the information in the programme. 
(3) No-policy change assumption. 
Sources: Commission services’ spring 2008 forecast (COM) and March 2008 update of the convergence 
programme (CP).  
 
EN 8   EN Recommendation for a  
COUNCIL DECISION 
abrogating Decision 2005/183/EC on the existence of an excessive deficit in Poland 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing th e European Community, and in particular 
Article 104(12) thereof, 
Having regard to the recomm endation from the Commission, 
Whereas: (1) By Council Decision 2005/183/EC of 5 July 2004
15, following a recommendation 
from the Commission in accordance with Artic le 104(6) of the Treaty, it was decided 
that an excessive deficit existed in Poland. The Council noted that the general 
government deficit was 4.1% of GDP in 2003, above the 3% of GDP Treaty reference 
value, while general government gross debt stood at 45.4% of GDP, below the 60 % of 
GDP Treaty reference value. The Council decisi on stated that the deficit and the debt 
figures would have to be adjusted upw ard if the funded pension schemes were 
excluded from the general government sector  following the Eurostat decision on the 
classification of the funded pension schemes16. 
(2) On 5 July 2004, in accord ance with Article 104(7) of th e Treaty and Article 3(4) of 
Council Regulation (EC) No 1467/97 of 7 Ju ly 1997 on speeding up and clarifying the 
implementation of the excessive deficit procedure17, the Council made, based on a 
recommendation from the Commission, a reco mmendation addressed to Poland with a 
view to bringing the excessive deficit situation to an end by 2007 at the latest. The 
recommendation was made public. 
(3) On 28 November 2006, the Council decided under Artic le 104(8), on a 
recommendation from the Commission, that  action taken until then by the Polish 
authorities was inadequate18. On 27 February 2007, the Council issued a new 
recommendation under Article 104(7), on a recommendation from  the Commission, 
confirming the 2007 deadline for the corr ection. The recommendation was made 
public. 
                                                 
15 OJ L 62, 9.3.2005, p. 18. 
16 Eurostat News Releases No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004. 
17 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
18 OJ L 414, 30.12.2006, p. 81. 
 
EN 9   EN (4) In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of an excessive deficit is to be abrogate d when the excessive deficit in the Member 
State concerned has, in the view  of the Council, been corrected. 
(5) In accordance with the Protocol on the excessive deficit pro cedure annexed to the 
Treaty, the Commission provides the data for the implementa tion of the procedure. As 
part of the application of this Protocol , Member States are to notify data on 
government deficits and debt and other a ssociated variables tw ice a year, namely 
before 1 April and before 1 October, in  accordance with Article 4 of Council 
Regulation (EC) No 3605/93 of 22 November  1993 on the application of the Protocol 
on the excessive deficit procedure annexed to the Treaty establishing the European 
Community19. 
(6) Based on data provided by the Commission (Eurostat) in accordance with Article 
8g(1) of Regulation (EC) No 3605/93 follo wing the notification by Poland before 1 
April 2008 and on the Commission services ’ spring 2008 forecast, the following 
conclusions are warranted: 
– the general government deficit was reduced from 3.8% of GDP in 2006 to 
2.0% of GDP in 2007, which is below the 3% of GDP deficit reference value. 
This compares with a target of 3.4% of GDP set in the November 2006 update 
of the convergence programme, 
– the much better 2007 deficit outturn comp ared to the target was supported by 
much higher real GDP growth than assumed in the November 2006 convergence programme. In addition, re lative to GDP, the government spent 
less on social transfers (due to l ack of indexation in 2007), subsidies, 
investment and compensation of employees . Overall, total expenditure was by 
1.5 percentage point lower than pla nned in the November 2006 convergence 
programme. The improvement in the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) is estimated at 1½ percentage point of GDP in 2007, 
– with lower GDP growth than in 2 007, the spring 2008 forecast projects the 
deficit to increase in 20 08 to 2.5% of GDP, but remain below the reference 
value, driven mainly by cuts in social contributions, personal income tax relief 
and an increase of social transfers toge ther with higher investment. This is the 
same as the official deficit target set in the March 2008 update of the convergence programme. For 2009, the spri ng forecast projects the deficit to 
broadly stabilise on a no-policy change basis. This indicates that the deficit has been brought below the 3% of GDP reference value in a credible and 
sustainable manner, 
– nonetheless, the structural balance is projected to deteri orate slightly by ¼ 
percentage point of GDP in 2008 and, on a no-policy change basis, improve by about ⅓ percentage point in 2009. This has to be seen against th e need to make 
                                                
 
19 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
 
EN 10   EN progress towards the medium-term object ive (MTO) for the budgetary position, 
which for Poland is a structur al deficit of 1% of GDP, 
– government debt declined from 47. 6% of GDP in 2006 to 45.2% in 2007. 
According to the spring 2008 forecast, the debt ratio is projected to remain well below the 60% of GDP threshold and fall further to around 44% by end-2009. 
(7) In the view of the Council, the excessive  deficit in Poland has been corrected and 
Decision 2005/183/EC should therefore be abrogated. 
HAS ADOPTED THIS DECISION: 
Article 1 
From an overall assessment it follows that the excessive deficit situation in Poland has been 
corrected. 
Article 2 
Decision 2005/183/EC is hereby abrogated. 
Article 3 
This Decision is addressed to the Republic of Poland. 
Done at Brussels, 
 For the Council 
 The President