COMMISSION STAFF WORKING DOCUMENT Analysis of the budgetary situation in Poland following the adoption of the COUNCIL RECOMMENDATION to POLAND of 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland and the Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Poland in response to the Council Recommendation of 21 June 2013
Date: 2013-11-15
Institutions: European Commission
Subjects: Poland, budget deficit, budgetary equilibrium, gross domestic product, stability pact













EUR-Lex - 52013SC0605 - EN











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52013SC0605

COMMISSION STAFF WORKING DOCUMENT Analysis of the budgetary situation in Poland following the adoption of the COUNCIL RECOMMENDATION to POLAND of 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland and the Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Poland in response to the Council Recommendation of 21 June 2013 /* SWD/2013/0605 final */










1.                      
Introduction

Poland is currently
subject to the corrective arm of the Pact. The Council opened the Excessive
Deficit Procedure for Poland on 7 July 2009 and recommended to correct the
excessive deficit by 2012. On 21 June 2013, the Council concluded that Poland had taken effective action but adverse economic events with major implications on
public finances had occurred, and issued revised recommendations. Poland was given a deadline of 1 October 2013 to take effective action to ensure a
sustainable correction of the excessive deficit by 2014. Poland has submitted a report on effective action ("REA") on 2 October 2013.
Section 2 of this
document presents the macroeconomic outlook underlying the report on effective
action and provides an assessment based on the Commission Forecast. The
following section presents the recent and planned fiscal developments,
according to the report on effective action, including an analysis of risks to
their achievement based on the Commission Forecast. In particular, it also includes
an assessment of the measures underpinning the report. Section 4 assesses the
recent and planned fiscal developments in 2013-2014 (also taking into account
the risks to their achievement) against the obligations stemming from the
Stability and Growth Pact. Section 5 presents the proposed new adjustment path
and section 6 summarises the main conclusions of the present document. 

2.                      
Macroeconomic developments 

The macroeconomic
scenario underpinning the report on effective action and the draft 2014 budget
is almost unchanged compared to the one used for the Convergence Programme
2013. After a sharp slowdown from an average real GDP growth of 4% over
2001-2011 to 1.9% in 2012 (Table 1) and an opening of a negative output gap
(-0.7% in 2012), the government projects for 2013 another year of weak economic
activity. Real GDP growth is forecast to reach 1.5%. Private consumption is set
to remain subdued (+1.1%) as households are expected to rebuild savings, while
investments are forecast to drop by 0.7% on account of cuts in public spending.
The positive contribution to growth from net external demand is expected to
shrink to 0.8 pp. of GDP. 
The government projects
some rebound in economic activity in 2014 with real GDP expanding by 2.5%. On
the back of better economic prospects, an improving labour market and consumer
sentiment, private consumption is expected to pick up by 2.1%. Investment is
set to increase by 4.4% driven by strong growth in private outlays. The
contribution of external trade is expected to be broadly neutral as import
accelerates in line with increasing domestic demand. 
For 2015, the government
expects that real GDP will grow at a robust rate of 3.8%. Private consumption
(+3.2%) and investments (+7.8%) are the main contributors, while external trade
is forecast to remain broadly neutral. 
According to the
Commission 2013 autumn forecast, which takes into account the outturn in the
first half of 2013, the macroeconomic situation in 2013 and the outlook for
2014 are somewhat better than the one underlying the latest Council
recommendation under Article 126(7) of the Treaty ("EDP baseline").
For 2013 real GDP is set to grow at 1.3% (compared to 1.1% in the EDP baseline)
on the back of a much better-than-expected contribution of net exports, which
more than compensate for a more negative contribution of inventories. Similar
to the Polish authorities, the Commission expects private consumption as well
as investment to become the main driver of economic growth in 2014 and 2015.
Real GDP is set to grow by 2.5% in 2014 (2.2% in EDP baseline) and 2.9% in
2015.
Table 1: Comparison of
macroeconomic developments and forecasts 
However, compared to the
Polish authorities, the Commission has a less optimistic view on domestic demand
growth over the forecast horizon and still expect a positive albeit declining
contribution to growth from net exports. In particular, the projection of
private consumption growth is much more conservative because the Commission
projects that households will continue to increase their saving rate more than
assumed in the government forecast. 
The development of the
saving rate is also a significant risk for the government's macroeconomic
scenario. Because the saving rate reached its lowest level ever in 2012, the
assumption of a relatively limited increase over the forecast horizon
significantly below the long term average seems to be too optimistic.
Additionally, the government expects significant positive effects of rebounding
external demand and recent changes in the Polish investment support framework
on private investment growth, which might turn out too optimistic. 

3.                      
Fiscal developments
3.1.                
Fiscal forecasts

In its update of the
Convergence Programme of April 2013 ("CP2013"), the Polish government
expected a general government deficit of 3.5% for 2013. In their assessment the
Commission considered this forecast as too optimistic and projected a general
government deficit of 3.9% with a downside risk because of strong
procyclicality of indirect and direct tax revenues, below standard revenue
elasticities.
Indeed, a significant
downward revision of expected tax revenues of the central government for 2013
by PLN 23.7 bn (1.5% of GDP) forced the Polish government to amend its 2013
budget in September. The amendment introduced expenditure cuts of 0.5% of GDP,
the rest of the revenue shortfall is reflected in an increase of the deficit by
1% of GDP[1]. 
The government's fiscal
forecast underpinning the REA, is profundly changed compared to the fiscal
forecast underpinning the CP2013. The government foresees a general government
deficit of 4.8% in 2013. It estimates the shortfall in general government
revenues at 1.2% of GDP (from 37.8% in the CP2013 to 36.6% in the REA) and
considers the significant reduction in particular in VAT, excise duties and
corporate income tax as cyclical. However, since the sizeable shortage in
revenues cannot be solely accounted for by a change in the composition of
growth and therefore in the underlying tax base[2], it seems
that not only cyclical aspects but also tax compliance/tax evasion has
contributed to lower revenues. 
The government projects
total expenditures of 41.5% of GDP, i.e. 0.1 pp. higher than in the 2013
Convergence Programme. Since the 2013 budget amendment reduced expenditure projections
by 0.5% of GDP, the numbers contained in the report on effective action
indicate that in addition to the revenue shortfall that the budget amendment
tried to compensate, an expenditure slippage of 0.6% of GDP (compared to the
Convergence Programme) occurred as well. While the government argues that this
expenditure slippage is cyclical and due to an increase in social expenditures
(they increased by +0.3% of GDP compared to CP2013),  this cyclical effect is
not reflected in a change in the underlying macroeconomic forecast, which has
remained unchanged since the CP2013. Moreveover, the cyclical part of social
expenditures, i.e. unemployment benefits, increased by less than 0.1% of GDP.
For 2014, the Polish
Ministry of Finance projects a general government surplus of 4.5% of GDP on the
back of the intended pension reform (see Box 1 for details). The reform
foresees a shift of a sizeable amount of assets (8.5% of GDP) from the second
pillar to the first pillar of the pension system, which under ESA-95 is treated
as a revenue. Since the asset transfer is a one-off transfer, in 2015 the
Polish authorities forecast a deficit of 3% of GDP. The improvement compared to
2013 is due to the permanent impact of other aspects of the planned pension
reform, in particular the higher number of contributors in the first pillar.
In 2013 and 2014, the
Commission 2013 autumn forecast is similar to the Polish authorities'. It
projects a deficit of 4.8% of GDP in 2013, the deterioration compared to the
EDP baseline being due to significant lower tax revenues. In 2014, the general
government balance is projected to be in surplus (+4.6% of GDP) as a
consequence of the one-off asset transfer from the second pillar of the pension
system (8.5% GDP).
For 2015 the Commission is
less optimistic compared to the Polish authorities and expect a general
government deficit of 3.3% of GDP. The difference of 0.3 pp is mainly due to
lower current revenues based on a more conservative nominal GDP growth
projection (see Section 2). Moreover, the Commission forecasts higher
government expenditure on intermediate consumption (by 0.3 pp of GDP) using as
a proxy growth rate nominal GDP (+4.7%), while Poland assumes an increase by
0.8% without a sufficient back up by enacted or publicly announced measures. At
the same time, Commission projects higher capital transfers from OFE to public
pension pillar, related to the changes in the pension system (gradual transfer
of assets to ZUS of those employees retiring within 10 years
("suwak")), which has not been included in the Polish projection
(yielding 0.36% of GDP in additional revenues in COM forecasts). 
Table 2. Composition of the
budgetary adjustment
The general government
gross debt in Poland is projected to remain below the 60% threshold over the
entire period under consideration. The intended pension reform is the main
driver behind this projection. Similar to the Polish authorities, the
Commission forecasts the general government gross debt to remain below the 60%
threshold over the entire period under consideration. General government
debt-to-GDP ratio is forecast to fall from 55.6% in 2012 to 51% in 2014, mainly
as an effect of the announced transfer of pension funds' assets of 8.5% of GDP,
before edging up to 52.5% in 2015. It has to be noted that the budgetary
forecasts are subject to implementation risks. 
Table 3: Debt developments

3.2.                
Measures underpinning the report

For 2013, the Polish
authorities claim to have introduced measures of an overall deficit-reducing
effect of 1.1% of GDP. Out of these, the only new, significant measures
introduced since the Council recommendation of June 2013 are the expenditure
cuts provided in the 2013 budget amendment. Excluding the lower costs of
servicing of public debt in 2013 (which are out of direct control by the
authorities and thus do not qualify as a measure) they amount to 0.4% of GDP.
The largest cut contained in the 2013 budget amendment concerns planned defence
spending (0.2% of GDP). The other main reductions concern transport
infrastructure and special purpose reserves ("rezerwy celowe"), and
other smaller items to an overall effect of 0.2%. 
In 2014-2015, the main
new measure is the planned change to the second pillar of the penion system,
described in detail in the box below. 
 Box 1: Planned second pillar pension reform On 2 July the Polish government adopted a report on the pension system prepared by the Ministers of Labour and Finance, with a focus on the second pillar (OFEs). On 10 October, the government published draft law on a reform to the second pillar of the pension system (OFEs), based largely on the report. It is currently discussed in parliament and expected to come into force on 1 April 2014. The reform includes the following provisions: ·         All non-equity portfolios (mostly government bonds) held in the second pillar by OFEs would be transferred to the public social security scheme (ZUS). Roughly 51.5% of OFEs assets (equivalent to 8.5% of GDP) would be affected by this transfer. ·         The existing (and future) contributors would have to declare if they want to continue (enter) the current mixed system (ZUS + OFEs) or to move fully into PAYG ZUS. In case of no declaration within three months, they will be by default moved to ZUS. ·         For persons participating in the second pillar, the contribution to OFE would be permanently lowered to 2.92% of salary. ·         Starting 10 years before the retirement age, pension capital accumulated in OFE would be gradually transferred to ZUS. Payments of pensions will be executed by ZUS only. ·         Investment by OFEs in treasury bonds will be banned. Pension funds' benchmarks are to be changed to reflect their new investment mandate. Also, in line with an EU requirement, pension funds would be permitted to invest a higher share of their funds abroad. Pension funds' fees would be cut by half. OFEs would be banned from adversting (subject to prison terms of up to 2 years or PLN 1 million fine). Given the change in the Polish pension system it needs to be assessed (by Eurostat) if Poland can benefit any longer from the pension clause in the Stability and Growth Pact.. 
The effects of the
planned pension reform are as follows: 
(i) One-off asset
transfer
Under ESA-95, the
general government balance would improve by the value of the assets transferred
to ZUS from OFEs. This transfer would constitute one-off revenue and amounts to
8.5% of GDP[3].
Additionally, the lower general government debt would result in lower annual
interest payments (yielding 0.28% of GDP in 2014 and an additional 0.05% of GDP
in 2015[4]).
(ii) Contributions
The general government
balance would improve by the value of the those contributions no longer
transferred to the second pillar in the future, but would worsen by the
respective pension liabilities taken over by ZUS from OFEs. Since the
contributions to OFEs are currently much higher than the pensions paid by OFEs,
the overall impact on the government balance is expected to be positive in the
near future. The precise number depends on how many people decide to remain in
the second pillar. The Polish Ministry of Finance assumes that half of the
current members would remain in the second pillar. Based on this conservative
assumption, the estimated annual effect of the lower contributions to OFE
amounts to 0.2% of GDP in 2014 and an additional 0.22% of GDP in 2015. 
(iii) Gradual transfer
of assets to ZUS of those employees retiring within 10 years
("suwak")
The general government
balance would improve by the value of the pension capital which would be
gradually transferred starting 10 years before retirement (10% annually).
Again, the precise number depends on how many people decide to remain in the
second pillar. Under the baseline assumption that half of the current members
would remain in the second pillar, the estimated annual effect in 2014 amounts
to 0.26% of GDP and an additional 0.36% of GDP in 2015[5]. 
To sum up, a permanent and
decreasing impact of changes in the pension system on general government
deficit (excluding the one-off asset transfer of 8.5% of GDP in 2014) is likely
to amount to 0.74% of GDP in 2014 and an additional 0.63% of GDP in 2015[6]. 
After the EDP
recommendation in June 2013, apart from the pension reform, the Polish
government has introduced some changes to indirect taxes (increase in excise
duty on alcohol and a change to Value Added Tax (VAT) removing the possibility
to recover some of the expenses for housing purposes) with a deficit-decreasing
effect of 0.1% of GDP in 2014. For 2015, apart from the full-year effects of
the planned pension reform, there are no new measures which have been enacted
or publicly annnounced since the time of the EDP recommendation.
 Box 2. New fiscal measures since the Council EDP recommendation of 21 June 2013 
 Revenue || Expenditure 
 2013 
   || Amendment 2013 budget (net of lower debt financing costs) (-0.4%) 
 2014 
 Pension reform: transfer of non-equity assets to the first pillar (+8.5%) (one-off)* Pension reform: "suwak" (+0.3%)* Pension reform: opt-out (+0.2%) Changes to indirect taxes: excise on alcohol and VAT on housing expenditures (+0.1%) || Pension reform: Savings on debt-financing costs due to the assets transfer (-0.3%)   
 2015 
 Pension reform: "suwak" (+0.4%)* Pension reform: opt-out (+0.2%) ||   
 Note: A positive sign implies that revenue / expenditure increases as a consequence of this measure. Annual budgetary impacts are estimated by the Commission services and expressed as a % of GDP. Measures with a budget impact of at least 0.1% of GDP are listed. * These measures have an impact on revenues under ESA-95 but will not be treated as such under ESA-2010. 

4.                      
Compliance with Council recommendations

Box 3. Council recommendations
addressed to Poland
On
21 June 2013, the Council recommended Poland under Art. 126(7) of the Treaty to
correct its excessive deficit by 2014. To this end, 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 balance of at least
0.8% and 1.3% of GDP respectively, based on the updated Commission 2013 spring
forecast. 
On
9 July, the Council addressed recommendations to Poland in the context of the
European Semester. In particular, in the area of public finances the Council
recommended to Poland to reinforce and implement the budgetary strategy for
the year 2013 and beyond, supported by sufficiently specified measures for both
2013 and 2014, to ensure a timely correction of the excessive deficit by 2014
in a sustainable manner and the achievement of the fiscal effort specified in
the Council recommendations under the EDP. A durable correction of the fiscal
imbalances requires credible implementation of ambitious structural reforms,
which would increase the adjustment capacity and boost potential growth and
employment. After the correction of the excessive deficit, pursue the
structural adjustment effort that will enable Poland reaching the medium-term
objective by 2016. With a view to improving the quality of public finances
minimise cuts in growth-enhancing investment, reassess expenditure policies
improving the targeting of social policies and increasing the cost
effectiveness and efficiency of spending in the healthcare sector. Improve tax
compliance, in particular by increasing the efficiency of the tax
administration. Ensure the enactment of a permanent expenditure rule in 2013
consistent with the rules of the European System of Accounts. Take measures to
strengthen annual and medium-term budgetary coordination mechanisms among
different levels of government.

4.1.                
Compliance with EDP recommendations (assessment
of effective action)

The current assessment
of the effective action is based on the Commission 2013 autumn forecast. It
takes into account the economic and budgetary developments since the June
Council revised recommendations under Article 126(7), including the measures
taken to deliver effective action included in the REA. It assesses in parallel
if the nominal target is met and if the recommended change in structural budget
balance is ensured after correction for revisions to the estimates of (i)
potential output growth compared to that underlying the growth scenario in the
Council recommendation, and (ii) the impact on revenue of revisions of the tax
content of economic activity relative to what is implied by long-term standard
elasticities. This top-down approach in the assessment is complemented by a
careful analysis, including a bottom-up assessment of consolidation measures
undertaken by the Polish government. All these elements are taken into account
in the final conclusion. 
The general government
deficit in 2013 is projected to reach 4.8% of GDP. Consequently, Poland will miss the headline deficit target of 3.6% of GDP recommended by the Council for
2013. In 2014, a general government surplus of 4.6% of GDP is expected and the
headline deficit target is set to be fulfilled although it is due to the
one-off transfer of pension funds' assets (8.5% of GDP)[7].
Thus, a detailed
assessment of the structural effort is required to see whether Poland has made sufficient progress towards a timely and sustainable correction of its
excessive deficit. The structural deficit is estimated to reach 4.0% of GDP in
2013 compared to 3.3% at the time of the EDP recommendation. The change in the
structural balance for this year is estimated at -0.3% of GDP. After adjusting
for the revision in potential output growth since the time when the
recommendation was issued (+0.1 pp.) and for revenue shortfalls (compared to
that implied by the standard elasticities) (+0.5 pp.), the corrected change in
the structural balance (0.3% of GDP) is still below the recommended annual
fiscal effort (0.8% of GDP) for 2013.
This creates a strong
presumption of lack of effective action, which has to be confirmed by a careful
analysis of measures taken. On the revenue side, there have been no significant
new measures since the EDP recommendations, while on the expenditure side, the
government in the 2013 budget amendment cut expenditure by 0.4% of GDP (this
number excludes the lower costs of servicing of public debt, which are out of
direct control by the authorities and thus do not qualify as a measure).
These budget cuts have
been partially offset by an overall non-cyclical expenditure slippage of 0.2%
of GDP[8]. To estimate
the non-cyclical expenditure overrun, the Commission compared the adjusted EDP
baseline scenario to the adjusted Commission 2013 autumn forecast, taking into
account the impact of the economic cycle on government expenditure:
·       
The EDP baseline scenario was corrected for the
2012 expenditure execution using the Eurostat October 2013 notification. This
avoids mistaking base-year effects (i.e. change in the result for 2012) for
expenditure under- and over-execution in 2013. 
·       
In a second step, the Commission adjusted the
2013 autumn forecast and excluded the effect of the 2013 budget amendment cuts
in order to derive pre-2013 budget amendment expenditure forecast. 
A comparison of the two
adjusted forecasts shows that the total expenditure (before the 2013 budget
amendment) is 0.3% of GDP higher than in the corrected EDP baseline scenario.
This difference is driven by an increase in intermediate consumption (0.2% of
GDP), social transfers (0.1% of GDP) and other current expenditure (0.1% of
GDP), and is moderated by a fall in capital expenditure (0.1% of GDP). 
Even assuming that the
entire increase in social expenditures is cyclical and therefore outside the
control of the government (as is the slight decrease in debt servicing costs),
would result in a non-cyclical expenditure overrun of 0.2% of GDP. 
Therefore, the bottom-up
analysis of new discretionary measures complemented by an assessment of
expenditure developments which are not outside the control of the government
shows an overall fiscal effort of 0.2% of GDP. This falls short of the
additional measures referred to in recital (19) of the Council Recommendation of
0.4% of GDP and confirms that Poland has not implemented structural effort as
recommended by the Council.
For 2014 the Commission
2013 autumn forecast projects a structural balance of ‑3.2% of GDP. The
change in the structural balance in 2014 is estimated at +0.8% of GDP. After
adjusting for the revision in potential output growth since the time when the
recommendation was issued (+0.1 pp.) and for revenue shortfalls (compared to
that implied by the standard elasticities) (+0.5 pp.), the corrected change in
the structural balance (1.4% of GDP) is above the recommended annual fiscal
effort (1.3% of GDP) for 2014. 
Overall, based on
Commission 2013 autumn forecast Poland is forecast to miss the nominal deficit
target for 2013 and the recommended structural effort for this year. For 2014,
the targets – in terms of both nominal deficit and structural effort -
specified in the Council recommendation of June 2013 are forecast to be reached[9]. However,
under a no-policy-change assumption, the correction of the excessive deficit
forecast for 2014 seems not sustainable on the basis of the Commission
projection for 2015 as the deficit is set to reach 3.3% of GDP.
Table 4: Change in structural
balance 

4.2.                
Compliance with fiscal European Semester
recommendations

The structure of the
additional cuts in 2013 and 2014 broadly follows the Council recommendation,
though part of it (e.g. railways, defence spending) is to be attributed to
investment spending. However, the government has not presented any plans to
reassess expenditure polices improving the targeting of social policies or
increasing the cost effectiveness and efficiency of spending in the healthcare
sector, as recommended by the Council. Furthermore, the government has not yet
addressed the need to improve tax compliance, in particular by increasing the
efficiency of the tax administration, which becomes urgent in view of recurrent
slippages on the revenue side. 
The Polish authorities
have been working on the permanent expenditure rule, which seems to be
fulfilling most of the conditions set by the Directive 2011/85/EU. However, a
mechanism ensuring an effective and timely monitoring of compliance with the
rule, based on reliable and independent analysis carried out by independent
bodies or bodies endowed with functional autonomy vis-à-vis the fiscal
authorities seems to be missing. Moreover, the consequences in the event of
non-compliance with the rule (and ideally, correction mechanisms) are not
spelled out in the draft law. In general, many weaknesses of the fiscal
framework remain, in particular discrepancy between the national standards and
ESA as well as the vulnerability of fiscal rules to frequent changes which
risks undermining their credibility and effectiveness.

5.                      
proposed new adjustment path

Overall, based on
Commission 2013 autumn Forecast Poland is forecast to miss the nominal deficit
target as well as the recommended structural effort for 2013. 
Under ESA95, the
excessive deficit it corrected in 2014, although not in a sustainable manner.
According to the Commission 2013 autumn forecast, the deficit is well below 3%
of GDP in the current forecast (as a result of a sizeable one off (+8.5% of
GDP) from the pension reform). On a no-policy change basis the deficit is
forecast at 3.3% of GDP in 2015 and the correction of the excessive deficit is
not sustained. Based on the current forecast and ESA95 additional measures of
at least 0.5% of GDP would be needed to bring the deficit below the 3% of GDP
Treaty reference value to ensure a sustainable correction of the deficit beyond
the 2014 deadline.
However, under ESA2010
which will be introduced in autumn 2014 not all elements contained in the
pension reform will be counted as deficit reducing, in particular the one-off
asset transfer (8.5% of GDP in 2014) as well as the gradual asset transfer
("suwak", 0.3% of GDP in 2014 and 0.4% in 2015) will no longer count.
Therefore in autumn 2014 the deficit under ESA2010 will no longer be below 3%
of GDP, but is expected to stand at 4.2% of GDP for 2014 and 3.9% of GDP in
2015. 
Since the Council will
decide on an abrogation based on the EDP figures assessed by EUROSTAT in spring
2015 under ESA2010, additional measures are to be required to compensate for
those elements of the pension reform, which will not reduce the deficit any
longer under ESA2010. 
As the assessment of the
correction of the excessive deficit will be taken under ESA2010 regime, it is
necessary to anticipate its entry into force and consider the level of the
deficit net of asset transfers related to the pension reform. However, in order
to reduce the deficit below the 3% of GDP threshold by 2014 i.e. in line with
the current deadline, and consistent with ESA-2010 rules, the required additional
structural effort, on top of the measures already included in the Commission
2013 autumn forecast (which under ESA2010 would yield an improvement in
structural deficit of 0.6% of GDP in 2014), would amount to at least 1.6% of
GDP[10].
Such a yearly effort would be much higher than requested in the Council
Recommendation of 7 July 2009 (1¼ % of GDP) and in the one of 21 June 2013
(1.3% 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. If a correction had to be done in 2014, it would also result in
sizeable output costs. In view of the above and in line with the flexibility
foreseen in the Stability and Growth Pact, setting a deadline of 2015 to
correct the excessive deficit is warranted. 
Correcting the excessive
deficit by 2015 would be commensurate with intermediate headline deficit
targets of 3.9% of GDP for 2014 (excluding the effect of the pension reform not
valid under ESA 2010) and 2.8% of GDP for 2015 (see Table 5 and Table 6).
Improvements in the structural budget balance implied by these targets are at
1% of GDP in 2014 and 1.2% of GDP in 2015, taking into account the measures
included in the Commission 2013 autumn forecast yielding an improvement in
structural balance under ESA2010 of 0.6% of GDP in 2014 and 0.2% of GDP in 2015.
The baseline scenario
(see Table 5) is an updated version of the Commission 2013 autumn forecast
taking into account the change in the statistical classification of pension
funds' asset transfer due to introduction of ESA-2010 statistical system. A
strict implementation of adopted savings, adoption and implementation of
announced and budgeted savings measures, as well as additional measures of
about 0.4% of GDP in 2014 and 1% of GDP in 2015 are needed to correct the
excessive deficit by 2015. 
Table 5: Forecast of key
macroeconomic and budgetary variables under the baseline scenario 
Table 6: Forecast of key
macroeconomic and budgetary variables under the EDP scenario 
At the current juncture
of the economic cycle with growth significantly below potential, it is
important to reduce negative impact of consolidation measures on growth.
Moreover, uncertainty surrounding the impact of the measures taken requires
close monitoring and further corrective action. Furthermore, and in line with the
June 2013 Council recommendation (i) improving the quality of public finances,
in particular through minimising cuts in growth-enhancing investments, a
careful review of expenditures and their efficiency; (ii) better tax compliance
and an increase in the efficiency of tax administration and (iii) making the
framework of public finances more binding and transparent, including through
adjusting the definitions used in national accounting to ESA [95] standards and
ensuring sufficiently broad coverage, improving intra-annual monitoring of
budget execution and ensuring an effective and timely monitoring of compliance
with the permanent expenditure rule, based on reliable and independent analysis
carried out by independent bodies or bodies endowed with functional autonomy
vis-à-vis the fiscal authorities could underpin the consolidation efforts
further.

6.                      
Summary

In 2013, Poland will miss the nominal target and the structural effort, whereas for 2014 the targets
specified in the Council recommendation of June 2013 are forecast to be met[11], although
the nominal deficit only as a result of a one-off measure. Also, under a
no-policy-change assumption, the correction of the excessive deficit forecast
for 2014 seems not sustainable on the basis of the Commission projection for
2015 as the deficit is set to reach 3.3% of GDP.
Since the Council will
decide on an abrogation based on the EDP figures assessed by EUROSTAT in spring
2015 under ESA2010, additional measures are required to compensate for those
elements of the pension reform, which will not reduce the deficit any longer
under ESA2010. 
Under ESA 2010 the
headline deficit is forecast to reach 4.2% of GDP in 2014 and 3.9% of GDP in
2015.Correcting the excessive deficit under the new rules would require a
fiscal effort well beyond what has been recommended for by Poland in previous
recommendations and would have negative effects on output, while at the same
time the fiscal risk is lower compared to the time when Poland entered EDP in
2009. Overall, setting up a deadline of 2015 seems to be appropriate. 
Granting one more year
for the correction of excessive deficit implies the headline deficit targets of
3.9% of GDP in 2014 (net of pension asset transfer) and 2.8% of GDP in 2015.
The underlying improvements in the structural budget balance implied by these
targets are 1% of GDP in 2014 and 1.2% of GDP in 2015. This implies a need of
additional measures of 0.4% of GDP in 2014 and 1% of GDP in 2015, on top of
those already included in the autumn forecast and the report on the effective
action. 

Annex. EDP related tables

Table
A1. Baseline scenario underlying the June 2013 EDP recommendation
Table A2. EDP scenario underlying the
June 2013 EDP recommendation
Table A3. Current estimates of the
macroeconomic and fiscal developments
Table A4: Adjustment of apparent
structural effort for the revision in potential growth – details of calculation
Table A5: Adjustment of apparent
structural effort for the unexpected revenue windfalls/ shortfalls – details of
calculation
[1]               For more details, please see the following section on
measures underpinning the report.
[2]               The change in the contribution of domestic demand to
real GDP growth (deterioration by 0.3 pp.) in the Commission macroeconomic
forecast between the spring 2013 vintage and the autumn 2013 vintage cannot
explain the full shortfall in current revenues of 0.6% of GDP.
[3]               Under ESA-2010, which comes into force in September
2014, this one-off transfer would not count as revenue anymore.
[4]               I.e., unlike the lower debt servicing costs in 2013
contained in the 2013 budget amendment, they are treated as a discretionary
measure. This is due to the fact that the lower debt servicing costs in 2014
are a direct result of the planned pension reform, i.e. of factors controlled
by the government.
[5]               Under ESA-2010, which comes into force in September
2014, this transfer would no longer count as revenue.
[6]               Under ESA-2010 this impact would no longer include
"suwak", and amount to 0.48% in 2014 and 0.27% in 2015.
[7]               Excluding this one-off asset transfer, the general
government balance is set to reach a deficit of 3.9% of GDP, including the
effects of "suwak".
[8]               On the expenditure side, except for a limited number
of exogenously driven expenditure changes (notably changes in unemployment
benefits due to a change in the number of unemployed and changes in interest
expenditure related to fluctuations in interest and exchange rates), and to the
extent that expenditures are not driven by inflation surprises, most items of
public expenditure can be considered as being largely under the control of the
government. 
[9]               Under the statistical regime currently in force, i.e.
ESA-95.
[10]             Assuming no additional fiscal effort in 2013.
[11]             Under rules currently in force, i.e. ESA-95.