Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland
Date: 2013-05-29
Institutions: European Commission
Subjects: Poland, administrative transparency, budget deficit, budgetary equilibrium, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 393 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Poland 

{SWD(2013) 393 final}

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Poland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

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According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

On 7 July 2009, the Council decided, in accordance with Article 104(6) of the Treaty 
establishing  the  European  Community  (TEC),  that  an  excessive  deficit  existed  in 
Poland  and  issued  a  recommendation  to  correct  the  excessive  deficit  by  2012  at  the 
latest1,  in  accordance  with  Article  104(7)  TEC  and  Article  3  of  Council  Regulation 
(EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of 
the  excessive  deficit  procedure2.  In  order  to  bring  the  general  government  deficit 
below  3%  of  GDP  in  a  credible  and  sustainable  manner,  the  Polish  authorities  were 
recommended to implement the fiscal stimulus measures in 2009 as planned, ensure an 
average annual structural budgetary adjustment of at least  1¼% percentage points of 
GDP  starting  in  2010,  spell  out  detailed  measures  that  are  necessary  to  bring  the 
deficit  below  the  reference  value  by  2012  and  introduce  reforms  to  contain  primary 
current expenditure over the following years. The Council established a deadline of 7 
January 2010 for effective action to be taken. 

On  3  February  2010,  the  Commission  concluded  that  based  on  the  Commission 
services' 2009 autumn forecast, Poland had taken necessary action in compliance with 
the Council recommendation of 7 July 2009 to bring its government deficit below the 
3%  of  GDP  reference  value  and  considered  that  no  additional  step  in  the  excessive 
deficit  procedure  was  therefore  necessary.  On  the  basis  of  its  2011  autumn  forecast, 
the  Commission  considered  that  Poland  was  not  on  track  and  asked  for  additional 
measures,  which  Poland  provided.  Thus,  on  11  January  2012  the  Commission 

All  documents  related 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/poland_en.htm 
OJ L 209, 2.8.1997, p. 6. 

the  excessive  deficit  procedure  of  Poland  can  be  found  at: 

to 

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(5) 

(6) 

(7) 

confirmed  the  Polish  authorities  had  taken  effective  action  towards  a  timely  and 
sustainable  correction  of  the  excessive  deficit  and  no  further  steps  in  the  excessive 
deficit procedure of Poland were needed at the time3. 

According to Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on 
a  recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under 
Article  126(7)  TFEU,  if  effective  action  has  been  taken  and  unexpected  adverse 
economic  events  with  major  unfavourable  consequences  for  government  finances 
occur  after  the  adoption  of  that  recommendation.  The  occurrence  of  unexpected 
adverse economic events with major unfavourable budgetary effects shall be assessed 
against the economic forecast underlying the Council recommendation. 

In accordance with Article 126(7) TFEU and Article 3 of Council Regulation (EC) No 
1467/97,  the  Council  is  required  to  make  recommendations  to  the  Member  State 
concerned with a view to bringing the situation of an excessive deficit to an end within 
a  given  period.  The  recommendation  has  to  establish  a  maximum  deadline  of  six 
months for effective action to be taken by the Member State concerned to correct the 
excessive deficit. Furthermore, in a recommendation to correct an excessive deficit the 
Council  should  request  the  achievement  of  annual  budgetary  targets  which,  on  the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark. 

The  Commission  services’  2009  spring  forecast,  which  was  underlying  the  Council 
recommendation  under  Article  104(7)  TEC  of  7  July  2009,  projected  that  the  Polish 
economy would expand by 0.8% in 2010, while the years 2011 and 2012 were beyond 
that forecast's horizon. In 2009, real GDP increased by 1.6% and it was mainly driven 
by  fiscal  and  monetary  policy  easing,  inflows  of  EU  funds  financing  infrastructure 
investments  and  a  currency  depreciation.  The  pick-up  in  exports  and  the  rebound  of 
domestic demand led to a recovery in 2010 and 2011, when real GDP grew by 3.9% 
and 4.5%, respectively, thus GDP growth  in 2010 was well above the 0.8% of GDP 
expected in the Commission services' 2009 spring forecast. The Commission services' 
2009 spring forecast, which expected the closure of the output gap beyond the forecast 
horizon, implicitly assumed a growth rate of the Polish economy around its potential 
one in outer years. However, the Polish economy slowed down sharply in 2012 with 
real  GDP  growth  of  1.9%.  Investment,  especially  construction,  was  held  back  by 
government consolidation, subdued credit growth and households refraining from real 
estate  purchases.  Overall,  Poland  has  seen  relatively  resilient  economic  activity  in 
2009-2012,  albeit  with  real  GDP  growth  below  potential  in  2012,  mainly  resulting 
from the global economic and financial crisis. 

(8) 

The  Commission  services'  2013  spring  forecast  projects  an  increase  in  real  GDP  of 
only  1.1%  in  2013.  Private  consumption  is  forecast  to  grow  by  0.8%  due  to  falling 
employment, subdued wage growth and households rebuilding their savings. The trend 
in  gross  fixed  capital  formation,  particularly  in  infrastructural  construction,  is  set  to 
remain  negative  with  a  decline  of  2.6%,  reflecting  further  fiscal  consolidation,  weak 
external  demand  and  subdued  credit  growth.  In  2014,  some  pick  up  of  the  economy 

3 

Communication from the Commission to the Council on assessment of budgetary implementation in the 
context  of  the  ongoing  Excessive  Deficit  Procedures  after  the  Commission  services'  2011  autumn 
forecast – COM(2012) 4 final, 11.1.2012. 

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(9) 

with a real GDP growth of 2.2% is expected, although this is subject to risks in both 
directions depending on the speed of global recovery.  

The  general  government  deficit  had  jumped  to  7.4%  of  GDP  in  2009  (from  3.7%  of 
GDP  in  2008)  due  to  a  sizeable  fiscal  stimulus  and  strong,  in-built  expenditure 
dynamics  predicated  on  high  growth.  After  the  excessive  deficit  procedure  was 
launched, consolidation measures in 2010 targeted the public sector wage bill, current 
spending and increased excise duties. Despite these consolidation measures of 0.6 % 
the headline deficit increased to 7.9% of GDP in 2010, driven by a sizeable increase in 
public  investment  (0.4%  of  GDP)  and  intermediate  consumption  (0.5%  of  GDP). 
Since  2011,  the  headline  deficits  have  been  influenced  by  continued  consolidation 
effort,  including  cuts  in  social  contributions  transferred  to  open  pension  funds, 
increases in VAT rates and revenue-increasing changes in other taxes, the introduction 
of a temporary expenditure rule and cuts in spending on active labour market policies. 
Thus, the headline deficit decreased to 5% of GDP in 2011.  

(10)  The  general  government  deficit,  according  to  actual  data  reported  in  the  Eurostat 
notification of April 2013, reached 3.9% of GDP in 2012. The 2012 deficit outturn is 
higher than the expected 3.5% of GDP publicly announced by the Polish authorities in 
September  2012.  In  particular,  interest  expenditure  and  social  transfers  were  higher 
than  projected.  On  the  revenue  side,  indirect  taxes,  VAT  in  particular,  were 
substantially  lower  than  forecast.  An  even  worse  outcome  was  prevented  by  lower 
execution  of  public  investments,  partly  counterbalanced  by  lower  capital  transfers 
received. 

(11)  The Commission services' 2013 spring forecast projects the general government deficit 
at 3.9% of GDP in 2013 (against Poland's deficit target for 2013 of 3.5% of GDP) and, 
under a no-policy-change assumption, at 4.1% of GDP in 2014. Taking into account 
additional  measures  contained  in  the  2013  update  of  the  Polish  Convergence 
Programme  (CP),  which  was  published  after  the  cut-off  date  of  the  Commission 
services' 2013 spring forecast hardly change the assessment. For 2013 the CP does not 
incorporate  new  discretionary  measures.  Although  the  CP  envisages  keeping  VAT 
rates  at  their  current  level  instead  of  lowering  them,  the  inclusion  of  this  measure 
would, according to Commission estimates, reduce the 2014 deficit to 3.7% of GDP. 
Therefore,  the  Commission  service’s  spring  forecast  has  been  updated  with  the 
measures included in the CP in order to have an accurate baseline scenario for the new 
recommendation.  

(12)  The  main  downside  risk  to  budgetary  targets  in  2013  and  beyond  is  –  based  on  past 
evidence  –strong  procyclicality  of  indirect  and  direct  tax  revenues,  below  standard 
revenue  elasticities  used  in  the  forecast.  In  particular,  it  was  experienced  in  2012 
when,  despite  an  increase  in  the  tax  base,  indirect  tax  revenues  fell  driven  by  an 
increase in VAT refunds and VAT arrears.  

(13)  The structural deficit decreased from 8.3% of GDP in 2010 to 5.4% in 2011 and 3.8% 
in  2012.  Consolidation  measures  implemented  over  this  period  targeted  in  particular 
indirect  taxes,  disability  contributions,  contributions  to  open  pension  funds,  public 
sector  (excluding  local  government)  wage  bill  and  intermediate  consumption.  These 
measures were sizeable and covered both, revenue and expenditure side. Cumulatively 
they amounted to 2.1 % of GDP in 2011 and to 1.6% of GDP in 2012. 

(14)  The  average  annual  apparent  fiscal  effort  over  the  period  2010-2012  is  estimated  at 
1.5%  of  GDP.  When  adjusted  for  the  significant  upward  revision  in  potential  output 
growth since the time when the recommendation was issued (-0.3pp) and because of 

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revenue  unexpectedly  growing  at  a  lower  rate  than  would  have  been  implied  by  the 
GDP  growth  based  on  standard  elasticities  (+0.4pp),  the  average  annual  adjusted 
structural effort (1.6% of GDP) exceeds the recommended average annual fiscal effort 
(1¼% of GDP) over 2010 - 2012. The bottom-up approach estimates the cumulative 
size of  consolidation measures at some  4.3%  of GDP over 2010-2012. Thus,  Poland 
has taken effective action.  

(15)  The European Commission Fiscal Sustainability Report 2012 shows that Poland does 
not face a risk of fiscal stress in the short run. The country is at medium sustainability 
risk in a medium term and at a low risk in a long-term perspective, providing the plans 
for  fiscal  consolidation  are  fully  implemented.  The  2012  Ageing  Report  indicates  a 
limited projected increase in total age-related public expenditure over the years 2010-
60.  Nevertheless,  Poland  still  needs  to  implement  long-term  sustainability-enhancing 
policies,  but  this  effort  is  below  the  average  improvement  required  for  the  EU  as  a 
whole. 

(16)  Public debt declined to 55.6% of GDP in 2012  from 56.2% of GDP  in 2011, on the 
back  of  sizeable  stock-flow  adjustment.  The  Commission  services’  2013  spring 
forecast  projects  its  increase  to  57  ½%  of  GDP  in  2013  and,  based  on  a  no-policy-
change assumption, to almost 59% of GDP in 2014.  

(17) 

In order to reduce the deficit below the 3% of GDP threshold by 2013, thus extending 
the deadline by one year, the required structural effort would amount to at least 1.4% 
of  GDP.  Such  a  yearly  effort  would  be  higher  than  requested  in  the  Council 
Recommendation of 7 July 2009 (1¼ % of GDP), despite the fact that fiscal risk has 
fallen  since  2009  as  the  headline  deficit  is  at  a  much  lower  level  and  debt  remains 
below the 60% threshold. As a consequence, a more gradual pace of consolidation is 
affordable as it would also reduce output costs, which would be sizeable if a correction 
had  to  be  done  in  2013.  In  particular,  because  the  time  available  after  the 
recommendation  to  enact  the  required  measures  would  be  limited.  Therefore,  they 
have  to  be  scaled  up  to  be  able  to  achieve  an  impact  of  about  1%  of  GDP  over  the 
entire year. 

(18) 

In view of the above and consistent with the rules of the Stability and Growth Pact, an 
extension of the deadline to correct the excessive deficit by two years is warranted. 

(19)  Correcting  the  excessive  deficit  by  2014  would  be  commensurate  with  intermediate 
headline  deficit  targets  of  3.6%  of  GDP  for  2013  and  3.0%  of  GDP  for  2014.  The 
underlying improvement in the structural budget balance implied by these targets are 
0.8%  of  GDP  in  2013  and  1.3%  of  GDP  in  2014.  This  implies  a  need  of  additional 
measures of 0.4% of GDP in 2013 and 0.4% of GDP in 2014, on top of those already 
included in the spring forecast and in the update of the Convergence Programme with 
an estimated budgetary impact of 0.25% in 2013 and 0.4% of GDP in 2014. 

(20)  Poland  fulfils  the  conditions  for  the  extension  of  the  deadline  for  correcting  the 
excessive general government deficit as laid out in Article 3(5) of Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure, 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

Poland should bring an end to the excessive deficit situation by 2014 at the latest. 

Poland should reach a headline deficit target of 3.6% of GDP in 2013 and 3.0% of 
GDP  in  2014,  which  is  consistent  with  an  annual  improvement  of  the  structural 

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(3) 

(4) 

balance  of  at  least  0.8%  and  1.3%  of  GDP  respectively,  based  on  the  updated 
Commission services' 2013 spring forecast. 

Poland  should  rigorously  implement  the  measures  already  adopted 
,  while 
complementing  them  with  additional  measures  sufficient  to  achieve  a  correction  of 
the excessive deficit in 2014 at the latest. 

The  Council  establishes  the  deadline  of  [01  October  2013]  for  Poland  to  take 
effective action and, in accordance with Article 3(4a) of Council Regulation (EC) No 
1467/97, to report in detail the consolidation strategy that is envisaged to achieve the 
targets. 

Furthermore, Polish authorities should (i) improve the quality of public finances, in particular 
through minimising cuts in growth-enhancing infrastructure investments, a careful review of 
social  expenditures  and  their  efficiency;  (ii)  improve  tax  compliance  and  increase  the 
efficiency of tax administration and (iii) make the institutional framework of public finances 
more binding and transparent, including through prompt adoption of a permanent expenditure 
rule  on  the  general  government  budget.  Finally,  to  ensure  the  success  of  the  fiscal 
consolidation strategy, it will be important to back the fiscal consolidation by comprehensive 
structural  reforms,  in  line  with  the  Council  recommendations  addressed  to  Poland  in  the 
context  of  the  European  Semester.  Beyond  the  report  foreseen  in  recommendation  (4),  the 
Polish  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations in a separate chapter in the convergence programmes, until full correction 
of the excessive deficit has taken place. 

This recommendation is addressed to the Republic of Poland. 

Done at Brussels,  

For the Council 
The President 

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