1 Dr Zofia Szpringer Research Bureau of the Chancellery of the Sejm Warsaw, March 2014 Recent developments in public finances in Poland In 2013, as compared with previous years, economic situation in Poland has deteriorated. The Polish economy weakened considerably in 2012 and the first half of 2013 as a result of weaker than expected economic growth in the EU, slow growth in key trading partners, confidence effects which weighed on private consumption and investment, and a decline in public investment. State budget revenues for 2013 could not be realized in the amount originally projected, while expenditures could not be significantly reduced. In order to face this situation, and avoid the risk of a recession, it was necessary to amend the state budget1 enabling higher deficit. Also, general government (GG) deficit predicted originally by the Polish authorities in the Convergence Programme (CP) for 2013 was finally revised from 3.5% of GDP to 4.8% of GDP. Although the implementation of the revised state budget was better than expected2, at the end of 2013 and later, many changes in existing laws were introduced. They were designed not only for increasing budget revenues and reducing budget expenditures to overcome the excessive deficit (Poland is from 2009 in excessive deficit procedure - EDP3), but also for reducing public debt, which approached the dangerous level set by national prudential procedures4. Of course, there were also 1 Such amendment was aimed at reducing budget revenues (on PLN 23.7 bn.) and budget expenditures (on PLN 7.7 bn). 2 See: http://www.mf.gov.pl/documents/764034/2835964/20140319_December_2013.pdf 3 On 7 July 2009, the Council decided, in accordance with Article 104(6) of the Treaty establishing the European Community, that an excessive deficit existed in Poland and issued a recommendation to correct this deficit by 2012 at the latest. Then, the Council revised its recommendations and shifted this deadline (firstly, by 2014 and then by 2015). Poland has not taken effective action in 2013 in response to the Council recommendation (it missed the general government deficit target for 2013 recommended by the Council and has also not adopted the required amount of consolidation measures). The headline target is likely to be met in 2014, due to a large extent to a one-off transfer of pension funds' assets, which does not guarantee a sustainable correction in the following years. 4 In 2010, the first prudential threshold of public debt as defined in Act on Public Finances (50% of GDP) has been exceeded. Further persistence of significant imbalances in public finances would risk breaching another prudential threshold (55% of GDP), which would imply powerful - and potentially pro-cyclical - tightening of fiscal policy. Therefore in 2010 began to implement a strong fiscal consolidation plan whereby General Government headline deficit declined in the period 2011-2012 by 4 percentage points compared with a deficit recorded in 2010, the average annual structural effort was revised up to 1.6% of GDP and exceeded recommended by the Ecofin Council, the fiscal effort (1 ¼% 2 changes of a different nature, aimed at stimulating economic growth (such as for example a deregulation of some professions, the Polish Investment Programme, National Road Construction Programme for 2011-2015, Programme "Flat for young", de minimis guarantee programme). Generally, changes of laws were aimed at strengthening the financial frameworks. So, in this information the most significant changes of those frameworks are presented, including also related action on the EDP, because such adjustments should promote economic growth in Poland in the coming years. As it seems, they should also facilitate future entry into the euro area, however, it cannot be ignored that there will be some factors, which may affect the public finances, such as local and parliamentary elections (in 2014 and 2015 respectively) as well as unstable international political situation (this aspect is not taken into account in the following information). In addition, it should be noted that European Commission is less optimistic, in projection of general government deficit for 2015, than Polish government, therefore it proposes to take additional measures in order to fully carry out the correction of the excessive deficit. *** Changes in Act on Public Finances and other acts5 were aimed at strengthening the fiscal framework, especially by: 1) introduction of permanent stabilizing expenditure rule (SER), 2) modifying regulations regarding the Multi-Annual State Financial Plan (MYFP), 3) improving intra-annual monitoring of budget execution6. The new stabilizing expenditure rule (formula of that rule and other details, see in the Annex) is setting the expenditure level and covers almost the whole general government sector, excluding only units which are not legally able to generate significant deficits7 and expenditures fully financed from the EU funds. Moreover, the of GDP) in 2010-2012. See: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/poland_en.htm 5 See: for example information on legislative process on government bill on the amendment of certain acts in connection with the implementation of the Budget Act (the Sejm paper No 1788), on government bill on change the Act on Public Finances and some other laws (the Sejm paper No 1789), on government bill amending the law on state forests (the Sejm paper No 2041). 6 See: Fiscal governance in Poland – 2013 update, in: Fiscal frameworks in the European Union: Commission services country factsheets for the Autumn 2013 Peer Review. Occasional Papers 168 , December 2013. 7 This applies to Independent Public Health Care Institutions, state funds (other than Social Security Fund, Agricultural Social Insurance Fund, Labour Fund, Demographic Reserve Fund), Polish Academy of Sciences and its organizational units, budget institutions, state and local government cultural institutions, state film institutions, state or local legal entities - Social Insurance and legal 3 correction mechanism foreseen by the rule is based on the result of the whole General Government sector. In this sense, the rule appears to be consistent with ESA958. However, it should be added that introducing the SER, as countercyclical fiscal policy response, required removing the provision of the Act on Public Finances according to which the draft budget for a given year cannot include a deficit higher than the deficit set for this year in the Multi-Annual State Financial Plan. Introduction of permanent stabilizing expenditure rule The SER sets a general level of expenditure of the public sector. The expected level of expenditure of local governments (and some other entities) is deducted from the overall expenditure level. The expected level of expenditure by this sub-sector will be forecast taking into account all the rules that apply to the local government units. The remaining part of the amount - the limit - would be binding on the rest of the public finances sector. It means that if local government expenditure is forecast to increase faster than the dynamics implied by SER for the whole public sector, then the rest of the GG sector would have to compensate for this dynamic by adjusting its spending level accordingly. Furthermore, if the GG deficit turns out to be excessively high due to the local government sub-sector, the deviations from medium-term objective (MTO) are accumulated and when the sum exceeds 6%, the correction component is added to the SER formula9. Additionally, in order to reinforce budgetary discipline of local governments, two other elements were adopted. Firstly, the government introduced a uniform type of long-term financial forecast for all local governments. Secondly, the right to monitor the situation of local governments will be conferred on Regional Financial Chambers and in the case of threat to the delivery of public persons referred to in art. 9 paragraph 14 of the Act on Public Finances, and local government budgetary entities, executive agencies. 8 However, the differences between the national rules and ESA-95 will remain. In particular, according the national definition of the public sector, thresholds (55% and 60% of GDP, until recently also 50%) shall be applied for the purposes of judging whether the sanctions for breaching public debt should be applied. At the end of 2012, public debt according to the national definition was nearly 3% of GDP lower than that based on ESA95 mainly because of the exclusion of the debt of the National Road Fund. 9 Originally the government planned to complement SER with a legally binding limit for the deficit of the local government sub-sector. However, it dropped this plan arguing in the 2013 update of the Convergence Programme that the current rules are sufficient to limit fiscal imbalances in this sub- sector. This is reflected in a continuing decrease in aggregate deficit of local governments over the recent years. From 2014 onwards local government units are subject to individual debt constraints reflecting their economic capacity to pay off liabilities. The new limit will depend on the ability of the unit to generate adequate surpluses in the current budget and income from the sale of property. 4 duties, they would require a preparation of a remedial programme by the local government in question. The Ministry of Finance will be responsible for monitoring and calculating the deviation from the rule. Such information will be probably presented in the report on the implementation of the budget act, which is presented to the Sejm and the Supreme Audit Office by 31 May of each year. Although, the Act on public finances does not foresee any particular independent monitoring of the compliance with the rule, it is worth to add that according to the Polish legal order, the Supreme Audit Office presents to the Sejm annual reports on the execution of the budget act and implementation of statutes and other legal regulations governing the budgetary process, which would include the SER.