As voters choose Poland’s next government today, a former finance minister has told Emerging Markets that reducing the size of the state should take priority over tax reform. Miroslaw Gronicki, who served under prime minister Marek Belka in 2004-05, said the basic elements of monetary and fiscal policy formulation were in the reliable hands of technocrats.
He urged the next administration to make a “major effort” to reverse the current government’s “ambivalent” relationship with private enterprise, at both the central and local levels.
The Law and Justice Party (PiS) of prime minister Jaroslaw Kaczynski was forced to call early elections, after its coalition with other right-wing groups collapsed last month. The PiS was running level with the main opposition Civic Platform (PO) in opinion polls until the past week, when the PO took a lead of more than ten percentage points – support for potential PO coalition partners is also rising.
“The actual value of assets owned by the state is still roughly 40% of GDP,” said Gronicki, who has been tipped for a possible return to front-bench politics if the PO forms the next government. “Selling some of these – cautiously of course – would help finance the budget deficit and pay down debt.”
He added that privatization would reduce the crowding-out of the private sector, as well as making more and cheaper funds available, since equity floats would become more liquid and investor confidence would rise.
Only then, explained Gronicki, should the government turn its attention to simplifying the tax system, which currently comprises two different rates for personal income tax and three for corporate tax. “If you cut taxes without changing spending, clearly you will be vulnerable to turns in the business cycle. That’s what’s been happening lately. The global economy is cooling, but they are cutting taxes while still having significant public sector funding needs.” Poland’s budget deficit is forecast at more than 3% in 2007 and 2008, despite economic growth of well over 6%.
Jakub Szulc, a member of the PO’s economics team, told Emerging Markets that, if elected, his party would “lower the share of fixed expenditures within our budget,” to bring the deficit below the Maastricht target of 3%. But he acknowledged that the exact timing for meeting this target “pretty much depends on the economic situation.”
“Lower economic activity [in the US and Eurozone] plus strengthening of the Polish zloty may influence our exports and, in the longer term, would also affect the profitability of Polish companies, thus lowering budget tax inflows,” Szulc said.
If elected, he said his party would prioritize “healing” public finances, removing “about 200 different taxes that in our opinion are redundant,” and reducing tax rates. He added that the legal and regulatory environment for economic activity also needed “cleaning”.
For in-depth analysis of Poland's prospects in 2008, please see "After the votes are counted".