Wednesday, 9 February 2011

EU Demands Drastic Spending Cuts

The EU has called upon the Polish government to bring down its budget deficit from 7.9% of GDP to 3% within the next three years. This adds to the chorus of criticism, coming from a number of international financial institutions, complaining that Poland has not done enough to cut its public spending. If Poland were to carry out this measure it would undoubtedly lead to a very large wave of spending cuts and the raising of taxes in the country. The former Finance Minister, Mirosław Gronicki, has stated that such actions must hurt as it would be unable to carry out such measures without them being felt. He adds that these would not be possible without ‘radical reforms’.

For Poland to reduce its budget deficit in line with the demands of the EU it would have to find up to ZŁ100bn in savings. According to the calculations of the Daily Rzeczpospolita, then the decision of the government to regulate the growth of expenditures to 1% above inflation would bring ZŁ17.4bn in savings. Meanwhile the policy to reduce transfers to the private pension funds would save the budget ZŁ17bn and increased income from high economic growth (if it were to occur) would increase the government’s budget by between ZŁ12.5bn and ZŁ18bn. According to these calculations the government would still have to cut its budget deficit by around ZŁ50bn by 2014.

The proposals for these further savings, by Rzeczpospolita, include introducing measures such as again raising VAT to 25%; restricting investments in roads and motorways, freezing the pay of public sector workers and reducing the amount of public sector workers on full-time contracts by 5%, abolishing tax reliefs for families and the internet, changing the valorization of social beneifits and pensions and reducing benefits for funerals and newly born children.

It does not seem to have occurred to the authors of these proposals that this would both reduce investment in the economy and squeeze demand. This would undoubtedly lead to slowing economic growth, thus reducing the government’s income and increasing its social spendings. The government should cast an eye across the continent at countries such as Britain and Ireland, where public spending cuts have repressed economic growth and increased the budget deficit. Public spending – particularly through investments in the countrys infrastructure but also through maintaining the salaries of public sector workers – are essential for maintaining the country’s present positive economic growth. If savings are to be made they should be done through reversing the regressive income tax policies introduced by the last PiS government and increasing the rate of business tax in line with the European average.

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