Council opinion of 10 March 2009 on the updated convergence programme of Poland, 2008-2011
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Poland, budget estimate, economic convergence, economic forecasting, public finance, stability programme

20.3.2009

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Official Journal of the European Union

C 66/17

COUNCIL OPINION

of 10 March 2009

on the updated convergence programme of Poland, 2008-2011

(2009/C 66/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular
Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

On 10 March 2009, the Council examined the updated convergence programme of Poland, which
covers the period 2008 to 2011.

The Commission services' January 2009 interim forecast projects GDP growth to decrease from 5 %
in 2008 to around 2 % in 2009 mainly on account of the global financial crisis. The deterioration in
global trade flows affects Polish export-oriented sectors, while the financial crisis hampers FDI activity
and limits the availability of external financing to both the financial and non-financial sector. The
relatively high share of foreign currency denominated mortgages brings an additional drag on private
consumption in times of marked currency depreciation, while the Polish construction sector suffers
from falling prices and demand in the housing market. After hiking interest rates in the first half of
2008 (from 5,25 % in January 2008 to 6 % in June 2008) the National Bank of Poland eased mone-
tary policy by cutting interest rates to 5 % in the last two months of 2008. The nominal effective
exchange rate of the Polish zloty depreciated by 11,2 % during 2008. In view of the economic slow-
down the government has adopted a number of expansionary measures (chiefly tax reductions and a
surge in public investment) both ahead of the crisis and after its effects became visible. The planned
fiscal measures will stimulate both aggregate demand in the short term and strengthen the supply
side of the Polish economy in a longer term. A deterioration of the general government deficit by
about 1 percentage point to 3,5 % of GDP in 2009 is foreseen in the Commission services'
January 2009 interim forecast. In the absence of corrective measures, the deficit will decline only
marginally in 2010.

The macro-economic scenario underlying the programme envisages that real GDP growth will slow
down from 5,1 % in 2008 to 3,7 % in 2009 before recovering to an average rate of 4,2 % over the
rest of the programme period. Assessed against currently available information (2), this scenario
appears to be based on markedly favourable growth assumptions for 2009 and thereafter, as it is
based on an optimistic assessment of export market growth and does not take fully into account
more recent information pointing to a further deterioration in the economic situation. In particular,
little attention is paid to the situation of foreign currency denominated loans and housing market
developments, while the programme appears to downplay the effect of a decreasing credit growth on
private investment. The programme's projections for inflation are realistic.

For 2008, the general government deficit is estimated at 2,5 % of GDP in the Commission services'
January 2009 interim forecast, as targeted in the previous update of the convergence programme.
This is basically the result of lower revenue growth in 2008 (consistent with the lower estimated
GDP growth), offset by less dynamic expenditure.

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The assessment notably takes into account the Commission services' January 2009 forecast, but also other information

that has become available since then.

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Official Journal of the European Union

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(5)

(6)

(7)

(8)

(9)

The general government deficit is planned to improve to 2,5 % of GDP in 2009 according to the
December 2008 convergence programme, compared to a deterioration to 3,5 % projected in the
Commission services' interim forecast based on a less favourable macro-economic scenario. The esti-
mated net expansionary effect on the budget from discretionary measures exceeds 1 percentage point.
This includes the specific measures adopted in response to the economic downturn (‘Stability and
Development Plan’ announced on 30 November 2008). Due to a changing composition of tax
revenues in Poland, this does not feed into a corresponding deterioration of the structural balance,
which is estimated at about 1/3 percentage point.

The medium-term goal of the December 2008 convergence programme is to keep general govern-
ment balances below 3 % of GDP in a sustainable way, reducing them gradually in the programme
period, with a headline general government balance target of – 1,9 % in 2011. Due to the significant
deterioration in the macro-economic scenario, the achievement of the medium-term budgetary objec-
tive consistent with the nominal deficit targets, which is a general government structural balance
(cyclically-adjusted balance net of one-off and other temporary measures) of – 1 % of GDP, is post-
poned beyond 2011, the target year in the previous update. The adjustment path is based on sizeable
expenditure reductions, by 1,5 percentage points of GDP, while the revenue ratio is decreasing by
1 percentage point. However, the expenditure-reducing measures are not specified in the programme.
The programme projects a reduction of the debt ratio from almost 46 % of GDP in 2008 to less than
45 % in 2011 (with a 0,7 percentage point decrease in the last year of the programme). This contrasts
with the Commission services' interim forecast which projects a steep increase of the gross debt ratio
from 45,5 % in 2008 to slightly less than 50 % in 2010. The differences are mainly explained by
different forecasts for the evolution of the primary deficit.

The budgetary outcomes projected in the programme are subject to downside risks. The favourable
assumptions regarding GDP growth lead to an optimistic estimate of revenue growth throughout the
programme period. In particular, the expected revenues from direct taxes and revenues other than
taxes, social contributions or property income in 2009 are on the high side. The macro-economic
scenario of the programme appears to assume that the fiscal stimulus measures in 2009 (personal
income tax reduction and a surge in public investment) are very effective in fuelling growth. This may
not fully materialise because high-income households with a comparatively high propensity to save
benefit most from the tax reform and there may be an underexecution of investment as in previous
years. In addition, certain expenditure such as social transfers and subsidies may rise more than
expected in 2009. For the outer years, the planned spending restraint is subject to risks in view of
(i) the electoral cycle; and (ii) the lack of information on concrete reform measures.

Although, based on the convergence programme, the budgetary position in 2008 includes a small
structural primary deficit, the long-term budgetary impact of ageing is among the lowest in the EU
according to the projections made in 2005, which are based on the common methodology. Recent
reforms, however, tend to raise expenditure in the long term. Maintaining high primary surpluses
over the medium term would contribute to limiting the risks to the long-term sustainability of public
finances, which are currently at a low level.

The overall track record of the budgetary framework is good when it comes to respecting the
budgetary targets. However, this is largely the result of strong growth and sizeable windfall revenues
in recent years as well as an unintended underexecution of expenditure plans (mainly investment).
The convergence programme refers to a planned amendment of the public finance law, which
includes a reduction of the amount of autonomous public funds not directly controlled by central or
local authorities, obligatory multiannual budgetary plans for the central State budget and local autho-
rities as well as modified fiscal rules. In addition, the programme confirms the planned implementa-
tion of performance budgeting with a gradually increasing institutional coverage. These are steps in
the right direction although the expected impact is limited.

(10)

In response to the financial crisis, the Polish government adopted a number of measures to ensure
the stability of the financial sector. The guarantees for bank deposits have been significantly increased,
with EUR 50 000 as a new threshold. The main measure, which is the increase in the ceiling for guar-
antees for inter-bank and corporate loans (by almost 2 % of GDP), is envisaged for 2009 only and
therefore planned to be temporary. In addition, the government has planned a capital injection (about
0,15 % of GDP)
intended for increasing loans to small and
medium-sized enterprises.

to the State-owned BGK bank,

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(11)

In line with the EERP agreed in December by the European Council, the fiscal stimulus measures
planned by the Polish government aiming at aggregate demand stimulation through increased public
investment in infrastructure, should also be beneficial for long-term potential growth and thus public
income tax cut reduces the tax wedge, though mainly for high-income
finances. The personal
tax-payers. These stimulus measures are not temporary. Given the risk of a high fiscal deficit, but still
relatively resilient growth, as indicated by the Commission services'
interim forecast, the fiscal
stimulus for 2009 adopted by Poland is an adequate response to the economic downturn. However,
all the planned measures need timely adoption by the government and parliament and implementa-
tion. As regards the structural measures, the sustainability of public finances will be improved by the
replacement of early pensions with less costly ‘bridge pensions’. Poland has also taken measures to
improve the quality of public finances (a new public finance law strengthening budgetary rules and
the control over autonomous funds, and further implementation of performance budgeting). These
measures are related to the medium-term reform agenda and the country-specific recommendations
proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs.

(12)

The projected fiscal stance is expansionary for 2009 and restrictive for 2010. A higher deficit in 2009
could result in higher interest expenditure because of risk aversion towards emerging markets. The
planned measures may be insufficient to ensure the accomplishment of the envisaged adjustment
after 2009. Moreover, the budgetary strategy should be backed up with specific deficit-reducing
measures in 2010 and 2011.

(13) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most of the optional data (1).

temporary. The planned measures will stimulate both aggregate demand in the short

The overall conclusion is that Poland is planning an adequate fiscal stimulus, some measures of which are
not
term and
strengthen the supply side of the Polish economy in a longer term. Given the optimistic GDP growth fore-
casts, the budgetary outcomes projected in the programme are subject to downside risks, according to the
Commission forecasts, throughout the whole period covered by the current update. In addition, for the
outer years,
the planned spending restraint will have to be backed up with specified measures, as
appropriate.

In view of the above assessment and also given the need to ensure sustainable convergence, Poland is invited
to:

(i) implement the 2009 fiscal plans, including the stimulus measures in line with the EERP and the frame-

work of the SGP, while avoiding to breach the reference value, as targeted by the Government;

(ii) back up the consolidation strategy for 2010 and 2011 with specific deficit-reducing measures;

(iii) reinforce the budgetary framework through better control over expenditure, including the swift imple-

mentation of the amended public finance act and performance budgeting.

Comparison of key macro-economic and budgetary projections

2007

2008

2009

2010

2011

Real GDP
(% change)

CP Dec 2008

COM Jan 2009

6,7

6,7

5,1

5,0

3,7

2,0

4,0

2,4

4,5

n.a.

CP Mar 2008

6,5

5,3

5,0

5,0

n.a.

(1) The programme provides additional non-compulsory data which have to be checked for consistency.

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2007

2008

2009

2010

2011

n.a.

n.a.

1,5

n.a.

n.a.

HICP inflation
(%)

CP Dec 2008

COM Jan 2009

CP Mar 2008

Output gap (1)
(% of potential GDP)

CP Dec 2008

COM Jan 2009 (2)

CP Mar 2008

2,6

2,6

2,6

1,3

2,2

1,1

4,2

4,2

3,5

1,0

2,2

0,7

2,9

2,9

2,9

2,5

2,5

2,5

2,5

n.a.

n.a.

– 0,1

– 0,6

– 0,5

0,1

– 1,1

– 0,2

– 0,9

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
revenue
(% of GDP)

General government
expenditure
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

CP Dec 2008

– 3,6

– 4,0

– 1,8

– 1,3

COM Jan 2009

– 3,6

– 4,1

– 3,5

– 2,9

CP Mar 2008

– 2,6

– 3,5

– 4,2

– 4,6

CP Dec 2008

40,0

39,8

40,7

40,0

39,7

COM Jan 2009

40,0

39,6

40,2

40,3

CP Mar 2008

40,0

40,0

39,2

38,7

n.a.

n.a.

CP Dec 2008

42,0

42,6

43,2

42,4

41,7

COM Jan 2009

42,0

42,1

43,8

43,7

CP Mar 2008

42,0

42,5

41,2

40,1

n.a.

n.a.

CP Dec 2008

– 2,0

– 2,7

– 2,5

– 2,3

– 1,9

COM Jan 2009

– 2,0

– 2,5

– 3,6

– 3,5

CP Mar 2008

– 2,0

– 2,5

– 2,0

– 1,5

CP Dec 2008

COM Jan 2009

CP Mar 2008

0,5

0,5

0,2

– 0,3

0,1

0,2

– 0,2

– 1,2

– 1,3

– 0,2

0,3

0,8

n.a.

n.a.

0,5

n.a.

n.a.

CP Dec 2008

– 2,5

– 3,1

– 2,5

– 2,1

– 1,7

COM Jan 2009

– 2,8

– 3,4

– 3,7

– 3,0

CP Mar 2008

0,6

0,5

0,1

– 0,1

n.a.

n.a.

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Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

CP Dec 2008

COM Jan 2009

CP Mar 2008

CP Dec 2008

COM Jan 2009

CP Mar 2008

2007

2008

2009

2010

2011

– 2,5

– 2,8

– 2,2

44,9

44,9

44,9

– 3,1

– 3,4

– 2,7

45,9

45,5

44,2

– 2,5

– 3,7

– 2,1

45,8

47,7

43,3

– 1,9

– 2,9

– 1,4

45,5

49,7

42,3

– 1,7

n.a.

n.a.

44,8

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the

information in the programmes.

(2) Based on estimated potential growth of 5,2 %, 4,9 %, 4,2 % and 3,7 % respectively in the period 2007-2010.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,2 % in 2010,
deficit-increasing, and zero for other years according to the most recent programme and the Commission services' January 2009
interim forecast.

Source:
Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.