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Poland — IMF Issues Concluding Statement of the 2009 Article IV Consultation, by Mike Godfrey, Tax-News.com, Washington
Friday, June 26, 2009

The IMF has issued a mission-concluding statement in respect of its Article IV consultation with Poland. It stated: 'Fiscal policy faces a difficult challenge of balancing short-term cyclical and medium-term sustainability considerations. On the one hand, allowing the deficit to reach 6% of GDP in 2009 would imply a deep fiscal adjustment in the coming years in order to reach the medium-term target. On the other hand, taking what would amount to pro-cyclical measures in order to slash the deficit would exacerbate the economic slowdown.' To help maintain the balance between the short and medium term, the IMF recommended two confidence boosting measures: firstly a revised timetable for adopting the Euro and secondly an overhauling of the fiscal policy framework.

In 2008, a discretionary relaxation enacted before the crisis, one-off spending increases, and revenue shortfalls led to a general government deficit of almost 4% of GDP, above the budget target and the Maastricht limit. The 2009 budget contained additional expenditure increases, based on what are proving to be optimistic growth assumptions. The IMF expected the deficit to reach 6% of GDP in 2009. Moreover, due to the pre-crisis structural fiscal relaxation, the IMF expected it to remain high even as the economy recovers, unless the authorities took corrective actions. The IMF thought permanent measures yielding at least 3% of GDP would be needed in the coming years to meet the medium-term target of a structural deficit of 1% of GDP.

The IMF could support an increase in the general government deficit to about 5.5% of GDP in 2009, implying a need for extra discretionary measures to take 0.5% off the expected deficit. On the assumption that a recovery would slowly get underway, the IMF wanted permanent reductions, amounting to about 1% of GDP annually for a three year period, to bring it in line, belatedly, with targets agreed with the EU. However the IMF was prepared to see such adjustment delayed or significantly modified, if the economy did not begin to recover as assumed. The IMF wanted to see the 2010 budget based on cautious GDP projections to prevent a repeat of 2009, when what proved to be unrealistic assumptions led to the approval of large expenditure increases.

The IMF recommended establishing multi-year binding commitments on medium-term expenditure ceilings, which presently have little bearing on annual targets. This would, in their view, strengthen confidence by providing safeguards against pro-cyclical policies, not least during good years. If a significant upward revision of the deficit limit for 2009 goes hand-in-hand with a fiscal framework overhauled in this way, the IMF believed that markets would not be unsettled by a higher financing need in the short run, suggesting that the impact on the interest rate on government securities would be limited. Moreover, such policy should also reassure European partners that Poland was committed to achieving its medium-term targets even if it allowed automatic stabilizers to work in the short-run, opined the IMF.

The IMF also recommended spending reforms to achieve durable medium-term adjustment. This was because statutory expenditures constituted a large proportion of the budget. It suggested options in the area of social spending, where recent increases had led to additional fiscal costs, namely better targeting of child allowances against personal income tax, disability contributions, and pension indexation.

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