The fights between Mr Tusk and Mr Kaczyński could result in a higher budget deficit



Conflicts of Prime Minister Donald Tusk and President Lech Kaczyński have become more pronounced in the last few weeks. Tusk’s plans to lower the budget deficit without raising taxes have met the objections of the President. The recently published batches of economic data show mixed picture. Polish industrial orders dropped by 9.7 per cent in June compared to the previous month and were down 28.2 per cent compared to last year. Unemployment fell – contrary to expectations – from 10.8% to 10.7% and retail sales were up 0.9% compared to the same period last year; corporate employment fell 1.9 percent in June year-on-year. Also, corporate wages fell in real terms in June, as the 2% growth is below the 3.5% inflation rate. The budget deficit is also set to be higher than the government expectation of 4.6%, with the European Commission expecting a 6.6% deficit in 2009 and 7.3% in 2010.



Analysis and forecast (↑ increasing risk)



The crisis prompts the government to find ways to plug the holes in the budget, but Donald Tusk is reluctant to do so with tax hikes. These measures would most certainly hurt his own, his party’s and his government’s popularity, and he wants to hold on to this for as long as possible to have the best chance to win next year’s presidential election. The incumbent president knows this well, and he is also doing everything he can to assure his winning a second term.


As a solution to the rising budget deficit Tusk came up with the idea that state owned companies should pay dividends so that the budget gap would be narrowed. This plan was met with a surprisingly stiff resistance not only from the President but from the supervisory board as well. They feared for the bank’s capacity to lend with such a large payout. In the end a compromise was worked out, but the government’s strongarming left a bitter taste in the supervisory board, which sacked PKO BP’s CEO who was a supporter of the government in the dividend issue.


A similar notion was put forward by Tusk concerning the profits of the National Bank of Poland (NBP). Tusk would like the NBP to pay its profit (around 3 bn EUR) into the central budget. The leader of the bank (appointed by Kaczinsky) stated that the profits will be transferred into the intervention fund just like last year. President Kaczyński’s office deemed the government’s idea unconstitutional and – exceptionally – all the major economists agree with the President.


Bringing the budget under control has a chance to succeed this year, but filling up the deficit with one-time revenues is certainly not a long term strategy and trying to milk the NBP for revenues can be interpreted as a sign of desperation. There is a growing consensus among economic actors that raising taxes will be inevitable, but the possibility of their implementation remains in doubt. President Kaczyński has already made statements indicating that he will veto any government attempt at tax hikes or to curb public spending, which seems to support the European Commission’s prediction of a much higher deficit in 2010.


The recently announced PLN 36.7 billion privatisation program was met with criticism, because it is seen as if Poland is selling off its last national reserves. The biggest part of the initiative, the selling of 41% stake in Europe’s No.2 copper producer KGHM is already coming under fire casting shadow on chances of a successful deal, as the unions of KGHM have already threatened with large-scale strikes to prevent the sale.




Source: Public Opinion Research Center (CBOS)




Source: Central Statistical Office




Source: Central Statistical Office