Big sweeping under the carpet
Wieslawa Lewandowska talks to Dr. Zbigniew Kuzmiuk about the public debt, mechanisms of creative accounting, financial pillow and Hungarian solutions.
Wieslawa Lewandowska: – Recently the Polish media have informed about the great joy of our Prime Minister: Here we have the most intelligent building in the entire Belgium… A month before Poland takes over the EU presidency we are rejoicing like babies!
Dr. Zbigniew Kuzmiuk: – I can understand that one can try to build the national pride this way but it is a road to nowhere. On the basis of my experiences in the European Parliament I can say that the MEPs from the old EU countries look at this kind of behaviour of the new EU members with some embarrassment, to use subtle words… They could be astonished that Poland, which is the biggest beneficiary of the EU funds in the years 2007-2013, can afford such luxurious buildings and splendid behaviour.
– Do you think that because of the Polish presidency we have our Polish ‘pawn to show off?’
– Yes, I do. In my opinion this building, taken over from the Belgian post office, could have been renovated much cheaper (it actually cost as much as 100 million zloty). Why is our presidency to be more expensive that the ones of the richer countries, e.g., than the Swedish presidency? Poland wants to spend half a billion zloty to organise it…
– Exactly for what?
– For hosting people, accommodation, receptions, presents… And when we look at the Hungarian residency we can see how extremely humble it is…
– Haven’t the Hungarians got such a building?
– No, they have not. And they are not spending money on impressive receptions; they are not giving nonsensical presents to allegedly promote their country… I was observing the Czech presidency carefully and it was quite humble. The same can be said about the rich countries, e.g., Germany or Sweden. I think that our ideas will not be received well…
– The more that the Polish finances are cracking and poverty begins squeaking… The budget for 2012 was constructed hastily and as the government said it was because of the Polish presidency beginning on 1 July. Did we need to hurry?
– The election campaign is given as the second justification. In my opinion both reasons are not rational justifications. The government has the obligation to present a project of the budget till 30 September and the bill concerning public finances describes in detail the binding procedure with its important element to be reviewed by the members of the three auxiliary committees, i.e., by the organisation of employers and representatives of employees – the trade unions. Both environments have protested against that hurry since they had only a few days to present their opinions. It means that this acceleration was needed for the election campaign.
– It seems that in this situation a delay concerning the proposal to ‘tighten one’s belt’ would be more beneficial…
– However, this extraordinary efficiency to prepare the budget can be admired, too, especially when it turns out that unexpectedly it is a ‘soft’ budget, exceptionally allegedly friendly to all. It is a typically election budget, completely not based on the reality.
– Will there be a ‘hard’ version of the budget, which will cut the expenses even in the most sensitive areas?
– Yes, there will. I think that when the Civic Platform (PO) wins the election it will present a ‘hard’ budget, which will not only have the soft freezing of salaries in the budget sphere but also their 10-15% decrease as well as some decrease in retirement allowances and probably a 25% increase in the VAT rate and many other unpopular decisions…
– …which may seem to be indispensible to fill the hole in the public finances?
– One cannot hide the truth, although the government is trying to do it before the elections, that our finances are in a miserable condition. If the public finance sector deficit was almost 8% of the GDP towards the end of 2008 we promised the European Commission to decrease it to the level of 3% till 2012, which means that within these two years we must find savings of 5% in GDP or find some extra income. And 1% of GDP means 15 billion zloty, so we need at least 75 billion zloty. It is a gigantic sum.
– Impossible to obtain?
– That’s right. If real actions are proposed to cover this sum that is lacking they would evoke social disturbances like nowadays in Spain. By the way, we have already seen some protests in Poland.
– What do you think about the way to liquidate the deficit used by Minister Rostowski?
– I must admit that his desperate taking over of the Open Retirement Fund (OFE) means, although it has evoked the liberal economists’ indignation, led to 1.3-1.4 % of GDP, i.e., ca. 20 billion zloty. The increase in VAT can give ca. 0.4% of GDP this year, i.e., ca. 5 billion zloty. Moreover, the minister introduced the so-called expense rule that says that expenses can grow up at the tempo of 1% more than the inflation, which can, according to the minister’s calculations, have a 1% decrease in GDP. But we can have fundamental doubts as far as these calculations are concerned.
– What doubts?
– Such a result can be obtained only when all budget expenses were limited in accordance with the rule. But as much as 70% of the budget expenses are the so-called firm expenses, not subject to any limits, e.g., costs of foreign debt service, education subvention, compensatory subvention for the units of territorial self-government, for the army. There cannot be any cuts in these areas.
– Where can we use this rule then?
– It can be used for expenses concerning salaries in the budget sphere (apart from the army), for investments although investment cuts can mean that we will not use all EU money… Therefore, the minister’s calculations that this rule will give several billion zloty savings are only in writing. And the experts of the European Commission have already pointed to this serious error stating that the lack of the realisation of the investments using the EU means will cause considerably smaller tax incomes. We have a vicious circle.
– But we have at least managed to fill a part of this big hole?
– The actions approved by the Parliament give altogether ca. 30 billion zloty and so we need to find some 45 billion zloty more. No idea how to do that by the end of 2012. The cuts of the local government budgets will be of no help; it can only give 6 billion at the most and the local governments, even those dominated by PO, have already opposed that idea…The income from VAT will do not give much. According to the theoretical calculations of the minister this income can have a ca. 25% increase within two years. The EU can see this illusoriness of our minister’s proposal and will certainly write its critical report concerning our programme of convergence soon but despite that Minister Rostowski is not going to do anything before the elections. Only if PO wins the elections it will propose very drastic solutions.
– Do you think we are dealing only with dummy movements?
– Yes, these movements of the minister led to a disorder of the budget and public finances sector… He shows a smaller deficit every year, but in fact it is only in the documents and not in reality.
– Which means?
– For example, the Social Insurance Fund does not receive proper subsidies, such that can be included in the budget deficit, and towards the end of the year it must borrow money from banks at a rather high interest rate, which the Supreme Chamber of Control (NIK) can accuse the minister of bad management. In order to avoid that the minister gives a loan (not a subsidy!) to the Social Insurance Institution from the state budget and such a loan is not counted in the debt… Thus there have been such budget loans of ca. 15 billion zloty, which actually should have been legal statutory budget subsidies, which must have, however, increased the deficit of the public finances sector to the level of at least 1 % of GDP…
– Is this the example of creative accounting which the opposition speaks about?
– Yes, it is and one can even say more strongly that it is a rather vulgar scam! And one can give many similar examples. The Demographic Reserve Fund, created in 2002, to be used only from the year 2020 when we have fewer productive age people and much more pensioners, is being liquidated to meet the current needs. The other objects of creative accounting are the Labour Fund and Guaranteed Employee Benefits Fund. Till 2012 these funds will have a 10 billion zloty decrease (7 billion from the Labour Fund and 3 billion from the other fund). This year four billion zloty has been taken off from the Labour Fund, which means that only one third of the last year’s sum remains to be used for active forms of struggling with unemployment.
– Why are these only virtual savings?
– If unemployment was 12% at the end of last year (now is 13%) these expenses should not be limited. Last year ca. 500,000 people (e.g., internships) benefited from the active forms of struggling with unemployment…Thus this cut decreases the budget hole for a short time and does not solve any real problems, on the contrary, problems are piling up to increase the budget deficit in the future.
– Is the situation similar as far as the National Road Fund is concerned?
– Its condition is even worse! Minister Rostowski smartly excluded the National Road Fund from the public finance sector and its debts do not influence the public finance deficit now. It is extremely important since the present debt of this fund amounts to ca. 30 billion zloty! According to the Polish definition this debt does not exist whereas according to the EU description this debt is a public debt by all means and the state will have to pay it some day… The introduction of the new road fees, the so-called eToll from 1 July will not help a lot because it will only cause a side effect – increased transport costs, which will affect the prices of goods soon, in autumn. We all will pay for that again.
– Can we say that so far all that can be done has been ‘swept under the carpet’? Have we swept a lot?
– Yes, we have. We can see a big sweeping under the carpet! For example, in the public health system the financial obligations amount to 10 billion zloty, which burden the public health units and exactly speaking, the foundational organs. These obligations are fulfilled partly and slowly and only those that are ‘required.’ But in fact, when we have the operation of creating companies replacing independent public health units (it will begin just after 1 July 2011) it means that someone will have to meet these debts at last. Although the bill states that the public-legal obligations will be fulfilled by the Minister of Health and covered from the financial reserve the debt is 10 billion zloty and the reserve is one billion, which means that someone else must cover nine billion…
– And if someone does not cover it?
– We will pay a lot for medical treatment. The worst thing is that there are defects in all other fields but they are hidden now, swept under the carpet…
– We need some good cleaning… To which extent can we face the threats several other EU countries have faced so far?
– The situation is really dangerous although it does not concern us directly since so far these have been trouble spots in the euro area and we are using our own currency and can say that ‘our cottage is on the periphery’… But if the markets react nervously to what is happening in Greece, Portugal and Spain and what has affected in some way even Italy and Belgium, if the EU and International Monetary Fund have to help some countries we will deal with an earthquake in the euro area, which will affect other currencies of the countries that are making their ways. And Poland is in an especially bad situation because of her big public debt – almost 800 billion zloty. Our yearly loan needs amount to 180 billion zloty. This is what the Minister of Finance must borrow to cover 35 billion zloty of the budget debt and also to roll the debts to be paid in a given year.
– We have a loop of debt – but not so much tightened yet?
– I would not be such an optimist. We are really on movable sands if we must borrow 180 billion zloty at 5-6 and perhaps even bigger interest rate… Every unfavourable event in the euro zone will strike with double force, both in public finances and the private sector, including our household finances.
– How fast is our public debt growing?
– Alarmingly fast! At the end of 2007 when Donald Tusk took office the debt was 524 billion zloty. At the end of 2010 it was already 780 billion, and at the end of 2011 – I dare claim – it will be ca. 900 billion zloty. So we have over a 60% increase within three years. And it has happened in the period of a small, but still, economic growth.
– We still have an economic growth – the government of Prime Minister Tusk has avoided the worst by some miracle…
– Not some miracle but because he received a ‘finance pillow’ from the previous government…
– On which he could sleep peacefully?
– He slept but not completely peacefully. Although the Minister of Finance of the Law and Justice (PiS) government Zyta Gilowska did not expect any crisis that broke out towards 2008 it was the decrease in the retirement contribution and relief in income tax of citizens that led to 30-40 billion zloty to remain in tax-payers’ pockets. It was this ‘pillow’ in the form of postponed demand, which was realised in 2008 and 2009. We did not have a decrease in domestic demand, which affected even the richest countries. Today the government is boasting of the economic growth despite the crisis but does not say that it is due to the domestic demand ensured by the previous government.
– Walking across the crisis is not a merit of this government?
– One must admit that a good action of this government was not to decrease the budget expenses (although Rostowski had spoken about it: the budget deficit increased from the planned 27 billion to 53 billion zloty). The devaluation of our zloty in 2009 against the US dollar and the euro was also an important factor. It improved the attractiveness of our export and worsened the profitability of import (it was profitable to produce in Poland). The home demand and growth of the so-called netto export caused that in 2009 Poland was the only EU country that had an economic growth of 1.8 % of GDP.
– Let us assume that PO wins the elections. What’s next?
– We may hear in December that the budget should be modified a lot. Then we will get to know the real intentions of PO and with a wide support of the liberal Polish media and those economists who are criticising the government for bad financial activities and indolence. We will hear: ‘Only such drastic moves can save us.’
– What moves?
– The state will reach the so-called shallow pockets, and thus affecting most citizens.
– This is nothing new. Yet they are reaching first of all these pockets now!
– That’s right. For three years there has been no valorisation of salaries of employees in the budget sphere, which means that the real pay decreases constantly in accordance with the inflation, currently 4.5% on the average. When the government introduces another increase in VAT, to 25%, prices will go up, first of all food will become more expensive. For citizens having average salaries it will be very severe. If we add the high unemployment that concerns most often children of these families this picture will be darker…
– So we should feel sorry for those who will be the ruling party in Poland after the elections…
– Indeed, the situation in our country is that there are no good and very good solutions; there are only bad and very bad ones. In my opinion if PO wins the elections it will choose very bad solutions for people.
– Aren’t there any good solutions?
– The example of Hungary shows that there are some solutions, that one can act differently, of course if you have the support of the majority of the MPs. Prime Minister Viktor Orban is making courageous and unpopular social decisions but first of all, he focuses on those that really improve the financial situation of the state, without laying a heavy burden on the majority of the society. These decisions include the introduction of the bank tax.
– Here this idea of the opposition has not been approved by the government.
– And the reason might have been not only the fact that it was an idea of PiS… According to the preliminary calculations, the bank tax would give at least as much as the increase in VAT that has been introduced this year. However, our government was afraid of reaching these deepest pockets…
– Which of the Hungarian solutions can be boldly applied in Poland?
– If the government is not changed none of the Hungarian ideas seem to have some chances to be introduced… In Hungary the government introduced the three year turnover tax referring to large surface trade, telecommunication services and energy. It allowed for the budget space and giving up international help. It is accompanied by a decrease in income tax from legal entities to 10% from 2013 and also a decrease in PIT for families with children (for families with three kids this deduction is 17,000 zloty whereas in Poland it is only 3,400 zloty). It will lead to diminishing the twilight zone and an increase in income from taxes. Prime Minister Orban has evoked such moves that give extra income but at the same time are stimulating economy.
– But the EU does not like this independent thinking and activities of Prime Minister Orban…
– Yes, it does not because the ideas of the International Monetary Fund suggested to Greece, Portugal, Ireland are completely different. These include the increase in indirect taxes from private individuals, cuts in social expenses, which cause limitation of home demand and consequently – an economic collapse. Orban has showed that although Hungary is in the EU it can propose its own and better solutions. Of course, he has faced the obstruction of the European gremia although, obviously, they could not forbid him anything.
– And if PiS were to rule in autumn, what should…?
– The Hungarian solutions should be accepted. One should only ignore the criticism of the international establishment that, supported by the Polish media, could be crushing.