Cee money is polands fiscal chastity belt as tight as it seems

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* Finance minister has trumpeted Poland's fiscal prudence* Ministry says new rule strengthens discipline* But economists say creating room for stimulating growth is priorityBy Marcin GoettigWARSAW, Oct 21 After five relatively prosperous years, Finance Minister Jacek Rostowski has finally been put to the test over the past 12 months and economists increasingly doubt whether he is as committed to Poland's fiscal straightjacket as he says. Rostowski took over in Warsaw in 2007 with a reputation as one of the authors of Poland's 1990s neo-liberal shock therapy and he has trumpeted his commitment to the institutional framework built up by his predecessors. Actual policies, however, seem to have been more about supporting growth than piously observing the rules and local economists say a new set of fiscal safeguards will give the minister more room to stimulate growth, despite claims that the aim is to strengthen fiscal discipline. Poland's budget laws have long included three thresholds for public debt, at 50, 55 and 60 percent of gross domestic product, past which increasingly stringent spending controls kick in. These were put in place to deter excessive borrowing but Rostowski's solution to the latest headache was to get parliament to do away with the first of them to allow him to revise the 2013 deficit up and keep spending. He is now set to follow that up by tweaking the broader scheme of the thresholds following a new pension reform. With the economy increasingly looking back on track, most of this looks to have been a reasonable call and, indeed, the government can point to its success in keeping growth going throughout a period of crisis and recession across Europe.

On the whole, many local economists support Rostowski, pointing to Polish public debt that is well below the European Union average and the need for investment, even if most say they trust the ministry less on policy than previously."The priority has been keeping the economy afloat, not sticking to a strict budget discipline," says Piotr Bujak, chief economist at Nordea Bank Polska."Changes to the fiscal rules may have somewhat weakened the credibility of Poland's institutional fiscal framework, but were sensible and surely not irresponsible. You cannot have healthy public finances without growth."Yet somewhere in the background is the danger that if growth proves weaker than hoped for, budgets going forward will be shakier and more exposed to the hefty overshoots last seen more than a decade ago.

NEW RULE Planned changes to the pension system will shift assets back from private funds to the state, in effect pushing down public debt and Rostowski promised earlier this year to reduce the thresholds in response. But when people looked at the small print, it appeared less clear-cut. The ministry later explained that the two thresholds currently in place, at 55 and 60 percent would actually remain unchanged, but two new lower ones would be added to a new spending rule, at 43 and 48 percent, respectively. Breaching of the new thresholds would lead to downward corrections in planned spending, a much milder sanction than a necessity to balance the budget or a ban on new borrowing, as the current thresholds would demand.

Some economists felt the information coming from the finance ministry should have been more transparent from the beginning."This has misled me and it lowers the credibility of assurances coming from the ministry of finance," said Marcin Mrowiec, chief economist of Unicredit's Pekao SA. Rostowski rejects such interpretations, saying that he was always speaking about lowering of the thresholds in the new spending rule that was being prepared at the time."Keeping the two thresholds in place and adding two new ones and introducing the fiscal rule strengthens budget discipline," the finance ministry said in a statement sent to Reuters. It is not the first time Rostowski has put pragmatism before fiscal dogma. When he became finance minister in 2007, there was no significant divergence between public debt as measured under European standards, and Polish accounting methods. As debt rose, the ministry shifted part of public borrowing into a special fund at the state bank BGK. Under Poland's methodology, it was not counted as public debt. This year debt measured by European standards is expected to reach 58 percent of GDP, over 3 percentage points more than under local standards. The new rule will tie public spending to average economic growth to prevent any build-up of debt and has been endorsed by the International Monetary Fund. But at the end of the day it gives the government more space to spend at a time when it is under increasing political pressure ahead of elections in 2015."These changes might not improve Poland's fiscal prospects and debt reduction as strongly as the previous solution did, but they are aimed at generating room for fiscal stimulus," said Grzegorz Maliszewski, chief economist at Bank Millennium.