What can Poland learn from Portugal?

In Portugal, this advantageous period to come to grips with state expenditure was wasted, however. Portugal ran an expansionary fiscal policy and its deficit dropped below the 3% of GDP required by the Maastricht Treaty. This was driven by two factors: a higher-than expected rate of economic growth that boosted tax revenue and a strong reduction in interest rates linked to growing expectations that Portugal would qualify to join the euro zone. Eventually, Portugal fulfilled the fiscal criterion, but at the same time state expenditure rose in relation to GDP. Polish governments, like their Portuguese counterparts between 1995 and 1999, are reluctant to reduce excessive public finance deficits. According to the updated convergence programme from December 2006, the deficit should be reduced to 2.9% of GDP by 2009. This is projected to occur due to economic growth and without any reforms of state expenditure, meaning only due to cyclical factors. However, if the economy slows, the reduction process could be reversed. The programme is not ambitious, the structural deficit will be reduced at the slowest pace allowed by the Stability and Growth Pact, meaning 0.5% of GDP yearly (despite the fact that GDP is expected to rise 5% during that period). There are no plans for structural reforms of state expenditure, which could at least limit its growth. The government only plans to consolidate public finances. This consolidation is based on organizational changes (liquidation of some state agencies and funds, especially in district and voivodeship governments) and the introduction of task-performance budgets. This would save about 10 bn zloty (0.9% GDP from 2007) within two to three years. At the moment the implementation of even these reforms is endangered, because the amended bill on public finances is not yet through the first reading in the Sejm. In the meantime, the government has taken costly decisions this will raise expenditures in 2008 (i.e. change in retirement and disability pension valorization rules projected to cost about 5.7 bn zlotys, public wage increases projected to cost about 5 bn zlotys, prolongation of early pensions rules projected to cost about1 bn zlotys). Other decisions may contribute to a drop in budget revenues (reduction of disability pension premium which are projected to cost about15 bn zlotys in lost revenues). All of this calls to mind the Portuguese scenario.
The Polish government is currently running a lax fiscal policy which strengthens domestic demand and at the same time pushes GDP growth above its potential rate (maximal GDP growth rate not generating inflation). Every period of economic boom has to end and if the boom is boosted artificially, this ending could be exacerbated. In this context, expansionary fiscal policy could be partly blamed for cyclical fluctuations, as it was in Portugal. Recession caused the fiscal deficit to rise to 4.3% in 2001 from 2.9% of GDP in 2000. The government adopted some measures to keep the deficit at a maximum of 3% of GDP. From 2002 to 2004 these measures were based on single revenue. That strategy almost led to a financial crisis in 2005. At that time, the deficit rose to more than 6% of GDP. Only then was fiscal policy changed. Limitation of state expenditures became an important goal of the new strategy.
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