Narodowy Bank Polski

Opinion of the Monetary Policy council on the Project af the Act on the state Budget for 2002
03.10.2001


GENERAL COMMENTS
  1. The basic weakness of the presented project of the Act on the State Budget for 2002 is the lack of the public finance recovery plan. This project is mainly based on temporary solutions that, in addition, are doubtful from the legal point of view (e.g. import tax, border duty). The solid systemic changes are not proposed. As a result, the project provides for a considerable increase of economic deficit in 2001 and 2002 as compared to previous years and Guidelines to the project of the state budget for 2002. The deficit increase leads to the increase of public debt and poses a threat of being trapped in the indebtedness.
  2. The Monetary Policy Council emphasizes that after a huge expansion of the state budget expenses this year (by 20.2%) the project of the Act provides for their increase in 2002 by the next PLN 15.6 billion, i.e. by 8.6% in nominal terms (2.9% in real terms). The expenses of the whole public finance sector are to increase by 0.5% in real terms (as compared to the increase by 8.9% in real terms in 2001).
  3. A necessary condition to avoid the crisis of the state finance and to accelerate a solid economic growth are thorough systemic reforms in those sectors of the economy where they have been blocked so far or have been too slow and in public finance. The submitted project of the budget does not provide for these issues.
  4. According to the Monetary Policy Council, the economic deficit in 2002 should be clearly lower than in 2001 in order to enable gathering more resources for financing investments in enterprises. This effort will require the preparation and quick introduction of a transparent plan of permanent reduction of expenses of the public finance sector (especially in the social area).
  5. As far as the revenues are concerned, the efforts should be focused on sorting out and simplifying the tax system and not the temporary efforts that without giving a permanent solution of the public finance imbalance problem would adversely affect the development of the economy and international reliability of Poland. Without simplifying taxes, and especially value-added tax and personal income tax, it is difficult to count on the increase of their collecting.
  6. The project of the Act does not contain the projection of the state budget for 2003 and 2004 what makes it a lot more difficult to assess the budget for 2002. Therefore, it can be expected that the budget project in its present version will lead to the increase of the threat of the public finance crisis.
  7. The public finance condition not only depends on reforms that are directly related to budget revenues and expenses but also the systemic changes in the economy that by strengthening the competitiveness of enterprises and the ability of the economy to increase employment will indirectly strengthen the state finance. It is mainly related to the liberalization of labor law and derivative regulations, an effective completion of privatization and the reduction of monopolization in such areas as fuel market or telecommunications.
MACROECONOMIC GUIDELINES OF THE BUDGET
  1. The Monetary Policy Council does not question the presented projections on the economic growth pace and the level of inflation; they are convergent with the projections of the National Bank of Poland. However, in case of a further worsening of the economic situation worldwide, the development pace of Poland's economy may be smaller. It should be also emphasized that the forecasts of the National Bank of Poland do not consider the results of the import tax.
PUBLIC FINANCE IN 2001 AND 2002
  1. Guidelines to the project of the state budget for 2002 prepared by the Ministry of Finance in August this year indicated that a potential deficit of the state budget in 2002 could reach the level of PLN 88.2 billion, i.e. 11% of GDP. In this document, the necessity to introduce a whole pack of public finance reforms was indicated. Their objective was the permanent reduction of the economic deficit and a basic change of the structure of the public finance sector expenses. It was forecasted, among other things, that due to the introduction of the proposed changes, the economic deficit would be reduced from 3.5% this year to 2.8% in 2002.
  2. The forecasted accomplishment of the state budget in 2001 indicates the lack of reasons to state that it is the beginning of the public finance sector reform. Considering the projected accomplishment of the amended Act on the State Budget for 2001, it is forecasted that the economic deficit will be increased as a result of the increase of indebtedness of local self-government units and earmarked funds and of the decrease of transfers to Open Pension Funds the total amount of which is assessed at 0.8% of GDP. In this connection, the projected accomplishment of the state budget deficit is being achieved at the cost of the increase of the economic deficit from 3.5% to 4.3% of GDP.
  3. The project of the Act on the State Budget for 2002 forecasts that with the increase of expenses up to PLN 197 billion (i.e. by 8.6% in nominal terms, by 2.9% in real terms) and revenues up to PLN 157 billion (i.e. by 9.4% in nominal terms, by 3.7% in real terms) the state budget deficit will reach the level of PLN 40 billion, i.e. by PLN 4.2 billion more than it was proposed in Guidelines to the project of the state budget for 2002. At the same time, the economic deficit of the public finance sector will rise to the level 4.3% of GDP in 2001 and 4.5% of GDP in 2002. The presented projected accomplishment of the budget in 2001 and the project for 2002 indicate that the basic efforts to recover public finance will not be made. The Monetary Policy Council indicated many times (also in the Opinion to the project of the Act on the State Budget for 2001) the necessity of systematic achieving of the public finance balance. A permanent reduction of the economic deficit is necessary from the point of view of a further reconstruction of the economic balance, acceleration of the economic growth and the reduction of unemployment, and the forthcoming integration with the European Union.
  4. So considerable increase of the deficit in 2001 and 2002 reverses the insofar tendency in the reduction of the relationship between public debt and GDP that within the period 1989-2000 was successfully decreased to 40.9%. This relationship will increase to 44.2% in 2001 and 45.8% of GDP by the end of 2002. Maintaining of a high deficit and the increase of public debt lead, through the increase of the cost of its service, to stiffening of the structure of budget expenses and pose a threat of being trapped in the indebtedness.
  5. From the point of view of permanent reduction of budget deficit within next years, a basic importance is given to the way of reducing a potential deficit for 2002 from PLN 88 billion to PLN 40 billion projected in the Act. This number was achieved as a result of the increase of revenues by PLN 18 billion and the reduction of expenses by PLN 30.6 billion. It should be noted, however, that the "reduction" of expenses at the amount of approximately PLN 12 billion is an effect of the suspension of the carryout of new regulations.
  6. A considerable part of the further reduction of expenses as compared to their projected level in the so-called passive version of the budget for 2002 (according to the Guidelines) results from maintaining and increasing the indebtedness of the public finance sector. For example, it relates to a smaller by PLN 2.2 billion than it was forecasted in the Guidelines allocation for the establishment of the Demographic Reserve Fund, the suspension of the repayment of debt to Open Pension Funds at the amount of PLN 3.3 billion, or worsening of the earmarked funds earnings by PLN 2.7 billion (according to the financial plan of ZUS, the liabilities of the Social Security Fund are to increase in 2001 and 2002 by PLN 6.1 billion and reach the level of PLN 18.9 billion at the end of next year). Such actions destabilize the reformed pension system and result in the increase of the state budget liabilities within next years.
  7. In effect, a real reduction of expenses as compared to the so-called passive version ends up at the amount of about PLN 10 billion.
  8. Justified is the proposal to abandon the mechanism of automatic indexing of wages and some social benefits. However, basic systemic changes that permanently reduce expenses, and especially their largest categories, are not proposed.
  9. The increase of revenues at the amount of PLN 18 billion consists, inter alia, of revenues from the introduction of import tax at the amount of PLN 11.5 billion and the border duty at the amount of PLN 1.2 billion. In this connection, the achievement of revenues at the amount of PLN 12.7 billion is also temporary and it postpones the necessity to reduce the budget deficit by such amount within next years.
  10. The introduction of import tax that would increase the state budget revenues only within the period of one year has been assumed in the project. At the same time, this tax would adversely affect the international image of the country. With the lack of international institutions acceptance for its introduction there should be considered retortions in foreign trade what would adversely affect exports. The introduction of import tax can also make difficult the negotiations with the European Union. Additionally, it would worsen conditions for enterprises and decrease income tax revenues. This tax would also lead to the increase of inflation and the economic growth pace slowdown.
  11. The project of the Act also provides for the increase of revenues as a result of better tax collecting, including PLN 1.2 billion due to the increase of the collecting of VAT, PLN 0.6 billion due to bigger excise tax revenues as a result of the reduction of contraband, PLN 0.15 and 0.18 billion due to the increase of the current collection of income tax from legal and natural persons, respectively. The total increase of tax revenues due to their better collecting is planned at the level of PLN 2.13 billion. However, the project of the budget does not contain any particular actions that would increase tax collecting, and especially the proposals that would simplify the tax system.
  12. Summarizing, it should be stated that the presented project of the Act does not tackle the issue of the necessary public finance reform. Basically, the reduction of the state budget deficit in 2002 to the level of PLN 40 billion is achieved by a temporary reduction of expenses and a temporary increase of revenues. The projected level of the economic deficit and the way of its accomplishing in terms of both expenses and revenues is not, in the Council's opinion, the right answer to the threat in a form of a public finance crisis. The accomplishment of such a budget increases and postpones the public finance sector problems for the year 2003 and consecutive years. Thus, the project of the budget for 2002 is not a basis for the introduction of the economy to a path of a faster economic growth in the nearest years.

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