Communication from the Commission to the Council - Assessment of the action taken by Poland in response to the Council Recommendation to Poland with a view to bringing an end to the situation of excessive government deficit
Date: 2010-02-03
Institutions: European Commission
Subjects: Poland, budget deficit, budget policy, budgetary assessment, economic analysis, economic forecasting, public finance

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EUROPEAN COMMISSION 

Brussels, 3.2.2010 
COM(2010) 24 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken by Poland in response to the Council Recommendation to 
Poland with a view to bringing an end to the situation of excessive government deficit  

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1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

Many  EU  countries  are  presently  facing  general  government  deficits  above  the  3%  of  GDP 
reference  value  set  in  the  Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The 
often  strong  deterioration  in  the  deficit  as  well  as  the  debt  positions  must  be  seen  in  the 
context  of  the  unprecedented  global  financial  crisis  and  economic  downturn  in  2008/09. 
Several factors are at play. First, the economic downturn brings about declining tax revenue 
and rising social benefit expenditure (e.g. unemployment benefits). Second, recognising that 
budgetary  policies  have  an  important  role  to  play  in  the  current  extraordinary  economic 
situation,  the  Commission  called  for  a  fiscal  stimulus  in  its  November  2008  European 
Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan 
explicated  that  the  stimulus  should  be  differentiated  across  Member  States  to  reflect  their 
different  positions  in  terms  of  public  finance  sustainability  and  competitiveness.  Finally, 
several  countries  have  taken  measures  to  stabilise  the  financial  sector,  some  of  which  have 
impacted  on  the  debt  position  or  constitute  a  risk  of  higher  deficits  and  debt  in  the  future, 
although some of the costs of the government support could be recouped in the future. 

The  Stability  and  Growth  Pact  requires  the  Commission  to  initiate  the  excessive  deficit 
procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference 
value.  The  amendments  to  the  Stability  and  Growth  Pact  in  2005  aimed  at  ensuring  that  in 
particular the economic and budgetary background was taken into account fully in all steps in 
the  EDP.  In  this  way,  the  Stability  and  Growth  Pact  provides  the  framework  supporting 
government  policies  for  a  prompt  return  to  sound  budgetary  positions taking  account  of  the 
economic situation, and thereby ensuring long-term sustainability of public finances. 

2. 

THE EXCESSIVE DEFICIT PROCEDURE FOR POLAND 

On  the  basis  of  the  data  notified  by  the  Polish  authorities  in  April  20091
  and  subsequently 
validated by Eurostat2
 and taking into account the Commission services’ spring 2009 forecast, 
the Commission adopted a report under Article 104(3) of the Treaty establishing the European 
Community  (TEC)  for  Poland  on  13  May  20093.  Subsequently,  and  in  accordance  with 
Article  104(4)  TEC,  the  Economic  and  Financial  Committee  formulated  an  opinion  on  the 
Commission report on 28 May 2009. 

On 24 June 2009 the Commission, having taken into account its report under Article 104(3) 
TEC  and  the  opinion  of  the  Economic  and  Financial  Committee  under  Article  104(4)  TEC, 
addressed to the Council, in accordance with Article 104(5) TEC, its opinion that an excessive 
deficit existed in Poland. Subsequently, acting upon a recommendation by the Commission, 
the Council decided on 7 July 2009 that an excessive deficit existed in Poland in accordance 
with  Article  104(6)  TEC,  and,  also  on  a  recommendation  by  the  Commission,  it  addressed 

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According to Council Regulation (EC) No 3605/93, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of  Poland  can  be  found  at:  http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance 
_statistics/procedure/edp_notification_tables. 
Eurostat news release No 56/2009 of 22 April 2009. 
All  EDP-related  documents 
at 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/poland_en.htm. 

following  website: 

for  Poland 

can  be 

found 

the 

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recommendations to Poland in accordance with Article 104(7) TEC with a view to bringing 
an end to the situation of an excessive government deficit by 2012. In its recommendations, 
the Council established a deadline of 7 January 2010 for effective action to be taken.  

3. 

ASSESSMENT OF EFFECTIVE ACTION TAKEN 

According to Regulation (EC) No 1467/974 and the revised Code of Conduct5 a Member State 
should  be  considered  to  have  taken  effective  action  if  it  has  acted  in  compliance  with  the 
Article 126(7) recommendation. The Code of Conduct states that the assessment of effective 
action  should  in  particular  take  into  account  whether  the  Member  State  concerned  has 
achieved the annual improvement of its cyclically adjusted balance, net of one-off and other 
temporary measures, initially recommended by the Council. In case the observed adjustment 
proves  to  be  lower  than  recommended,  a  careful  analysis  of  the  reasons  for  the  shortfall 
should be made. In case of a multi-annual adjustment, the Code of Conduct specifies that the 
assessment should mainly focus on the measures taken in order to ensure an adequate fiscal 
adjustment in the year following the identification of the excessive deficit. 

In its recommendation under Article 104(7) TEC of 7 July 2009, the Council recommended 
that  Poland  put  an  end  to  the  situation  of  an  excessive  deficit  by  2012,  in  a  credible  and 
sustainable  manner.  Specifically,  the  Council  recommended  the  Polish  authorities  to  (a) 
implement the fiscal stimulus measures in 2009 as planned, in particular the public investment 
plan,  while  structuring  a  supplementary  budget  in  such  a  way  to  avoid  any  further 
deterioration  in  public  finances;  (b)  ensure  an  average  annual  fiscal  effort  of  at  least  1¼ 
percentage  points  of  GDP  starting  in  2010;  (c)  spell  out  the  detailed  measures  that  are 
necessary  to  bring  the  deficit  below  the  reference  value  by  2012,  and  reforms  to  contain 
primary  current  expenditure  over  the  coming  years.  To  limit  risks  to  the  adjustment,  the 
Council further recommended a strengthening of the medium-term budgetary framework, for 
example by introducing a legal ceiling on the growth of primary current expenditure, as well 
as  improving  the  monitoring  of  budget  implementation  throughout  the  year.  The  Council 
established a deadline of 7 January 2010 for Poland to take effective action and to specify the 
measures that will be necessary to progress towards the correction of the excessive deficit. 

Poland is the only EU country to have recorded positive economic growth in 2009. Real GDP 
is  estimated  to  have  increased  by  1.7%,  while  in  spring  2009  the  Commission  services 
projected a decline by 1.4%. This positive performance reflects a constellation of favourable 
factors  including  sound  fundamentals  at  the  outset  of  the  crisis,  a  well  capitalised  and  not 
vulnerable financial sector, the closeness of the Polish economy and the early depreciation of 
the  currency.  Regarding  fiscal  policy,  the  authorities  allowed  a  full  operation  of  automatic 
stabilizers, and rapidly designed an investment-focused recovery plan. The size of the overall 
fiscal  stimulus  in  2009  –  measured  as  the  change  in  the  structural  balance  –  is  estimated  at 
about  2  percent  of  GDP.  At  the  same  time,  the  authorities  took  measures  to  contain  the 
increase in the government deficit. In January 2009, six months before the Council issued its 
recommendation  in  accordance  with  104(7),  they  adopted  a  consolidation  package  with  an 
estimated  impact  of  ¾%  of  GDP  consisting,  inter  alia,  of  reductions  in  administrative 
expenditure  and  increases  in  dividends  from  state-owned  enterprises.  Subsequently,  on 

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OJ L 209, 2.8.1997, p. 6. 
“Specifications  on  the  implementation  of  the  Stability  and  Growth  Pact  and  guidelines  on  the  format 
and  content  of  stability  and  convergence  programmes”,  endorsed  by  the  ECOFIN  Council  of  10 
November 2009. 

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17 July 2009, immediately after adoption by the Council of a Recommendation to Poland with 
a  view  to  bringing  an  end  to  the  situation  of  excessive  deficit,  the  authorities  adopted  a 
supplementary  budget  including  additional  expenditure  cuts  of  0.2%  of  GDP  and  higher 
dividends  from  state-owned  companies  of  0.4%  of  GDP.  Despite  these  consolidation 
measures  and  significantly  better  economic  developments  than  expected  at  the  time  of  the 
Council  Recommendation,  the  government  deficit  is  estimated  by  the  authorities  to  have 
reached 7.2% of GDP in 2009, slightly higher than the 6.6% of GDP projected in the spring 
by the Commission services. Although available data does not allow a precise assessment of 
the reasons for the higher deficit, there is evidence that it partly reflects higher co-financing of 
EU-funded  projects  and  the  fact  that  higher  GDP  growth  did  not  fully  translate  into  higher 
revenue due to an unfavourable shift in growth composition and structural changes in the tax 
system before the crisis. 

In parallel, the authorities took important actions in 2009 to strengthen the fiscal framework. 
They  made  the  existing  debt  rule  more  restrictive,  by  introducing  additional  specific 
provisions on the type of measures to be implemented once public debt exceeds 55% of GDP. 
The fiscal planning horizon for the central state budget was extended from 3 to 4 years. Some 
reorganisation of the general government took place, aimed at increasing the transparency of 
public  accounts.  The  gradual  introduction  of  a  performance  budgeting  system  continued. 
Finally, the authorities are contemplating the introduction of expenditure rules in the course of 
2010, which would facilitate future consolidation.  

According  to  the  Commission  services’  autumn  2009  forecast,  the  budget  for  2010  is 
consistent with a slight deterioration of the structural balance in 2010. The budget foresees a 
sizeable  increase  in  public  investment  and  the  continued  full  play  of  automatic  stabilisers 
which, given the generous indexation rules, will imply a large increase in social transfers. At 
the  same  time,  it  includes  a  nominal  freeze  in  public  wages  –  total  compensation  of 
employees  in  the  general  government  sector  would  increase  by  less  than  1%  in  2010  – 
nominal reductions in other current spending, and increases in taxes on cigarettes and fuel oil. 
Importantly, the budget was based on cautious macroeconomic assumptions. Real growth was 
assumed to be 1.2%, while recent information suggests that a rate above 2% seems likely, and 
inflation was projected at 1%. This might lead to positive revenue surprises in 2010.  

In  a  letter  from  7  January  2010  to  Commissioner  Almunia,  Finance  Minister  Rostowski 
presented a fiscal consolidation plan for 2010-2012. The main measures announced included a 
gradual increase and equalisation of the retirement age for men and women at 67 years, the 
inclusion of uniformed services personnel in the general security system, and a broadening of 
the tax base (some specific professions will have to use fiscal cash registers) and additionally,  
an acceleration of privatisations starting from 2010. 6 

Overall, while not negligible, the fiscal effort implied by current policies for the period 2010-
2012  is  significantly  smaller  than  that  recommended  by  the  Council  in  July  2009  (3¾ 
percentage  point  of  GDP  over  the  period).  Although  the  improvement  of  the  economic 
outlook since the Commission services’ spring 2009 forecast implies that a smaller structural 
fiscal  effort  may  be  sufficient  to  correct  the  excessive  deficit  by  2012,  reducing  the 
government  deficit  below  3%  of  GDP  in  2012  will  require  an  intensification  of  the  fiscal 

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On  29  January  2010  the  Prime  Minister  unveiled  a  “Plan  for  development  and  consolidation  of 
finances”.  The  main  measures  include  a  reform  of  disability  benefits,  the  inclusion  of  uniformed 
services personnel in the general security system, reduction of VAT refunds (on corporate cars and fuel) 
and a broadening of the tax base (some specific professions will have to use fiscal cash registers). 

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effort  in  2011  and  2012.  The  success  of  the  authorities'  strategy  therefore  requires  a  very 
rigorous implementation of the budget in 2010 – to ensure strict respect of expenditure targets 
and that any windfall revenue is allocated to deficit reduction – and consolidation efforts in 
the 2011 and 2012 budgets which go well beyond those currently planned.  

4. 

CONCLUSIONS 

On current information it appears that Poland has taken action towards the correction of the 
excessive deficit within the time limits set by the Council. In particular the Polish authorities:  

•  implemented  the  fiscal  stimulus  measures  in  2009  as  planned,  including  the  public 
investment  plan,  while  taking  measures  to  avoid  an  excessive  increase  in  the  general 
government deficit; 

•  introduced  a  2010  budget  based  on  cautious  macroeconomic  assumptions  and  including 
measures to contain the deficit, and announced the first elements of a fiscal consolidation 
programme for the period 2010-2012; 

•  strengthened the fiscal framework, and initiated work to introduce expenditure rules, which 

is expected to facilitate consolidation in the years ahead. 

There are, however, considerable risks attached to the fiscal strategy of the Polish authorities. 
Even  taking  into  account  the  better  than  anticipated  growth  prospects,  further  sizeable 
consolidation  measures  will  be  needed  to  bring  the  deficit  below  3%  in  2012.  Against  this 
background,  new  stimulus  measures  should  be  avoided,  the  2010  budget  be  strictly 
implemented, windfall revenue be allocated to deficit reduction, and additional consolidation 
measures be prepared for the following years.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive  deficit  procedure  of  Poland  are  needed  at  present.  Calling  for  a  prompt 
implementation  of  the  planned  measures,  the  Commission  will  continue  to  closely  monitor 
budgetary developments in Poland in accordance with the Treaty and the SGP. 

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Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Output gap 
(% of potential GDP) 

General government balance 
(% of GDP) 

Primary balance 
(% of GDP) 

Cyclically-adjusted balance 
(% of GDP) 

Structural balance1 
(% of GDP) 

Government gross debt 
(% of GDP) 

2007 

COM autumn 2009 forecast  6.8 
6.6 
COM spring 2009 forecast 
6.8 
National forecast 
COM autumn 2009 forecast  2.6 
3.4 
COM spring 2009 forecast 
n.a. 
National forecast 
COM autumn 2009 forecast  −1.9 
−1.9 
COM spring 2009 forecast 
−1.9 
National forecast 

COM autumn 2009 forecast  0.4 
0.4 
COM spring 2009 forecast 
0.4 
National forecast 

COM autumn 2009 forecast  −2.9 
−3.2 
COM spring 2009 forecast 
n.a. 
National forecast 
COM autumn 2009 forecast  −2.9 
−3.2 
COM spring 2009 forecast 
n.a. 
National forecast 
COM autumn 2009 forecast  45.0 
44.9 
COM spring 2009 forecast 
45.0 
National forecast 

2008 
5.0 
4.8 
5.0 
2.6 
3.5 
n.a. 
−3.6 
−3.9 
−3.6 
−1.4 
−1.7 
−1.4 
−4.7 
−5.3 
n.a. 
−4.7 
−5.3 
n.a. 
47.2 
47.1 
47.2 

2009 
1.2 
−1.4 
1.7 
−0.4 
−1.5 
n.a. 
−6.4 
−6.6 
−7.23 
−3.8 
−3.7 
n.a 
−6.3 
−6.0 
n.a. 
−6.4 
−6.0 
n.a. 
51.7 
53.6 
n.a 

2010 
1.8 
0.8 
2.62 
−2.2 
−3.8 
n.a. 
−7.5 
−7.3 
n.a. 
−4.6 
−4.3 
n.a. 
−6.6 
−5.8 
n.a. 
−6.6 
−5.6 
n.a. 
57.0 
59.7 
n.a. 

2011 
3.2 
n.a. 
n.a 
−2.3 
n.a. 
n.a. 
−7.6 
n.a. 
n.a. 
−4.6 
n.a. 
n.a. 
−6.7 
n.a. 
n.a. 
−6.7 
n.a. 
n.a. 
61.3 
n.a. 
n.a. 

1 Cyclically-adjusted balance excluding one-off and other temporary measures. 
2  The  latest  available  information  in  the  letter  from  Finance  Minister  Mr  Rostowski  to  Commissioner  Mr 
Almunia of 7 January 2010. 
3 “Plan for development and consolidation of finances” of 29 January 2010. 
Sources: Commission services’ autumn 2009 forecast; Draft Budget for 2010 (September 2009); October 2010 
fiscal notification; Letter from Finance Minister Mr Rostowski to Commissioner Mr Almunia of 7 January 2010. 

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