EU to press Poland for faster deficit cuts-draft

BRUSSELS, Nov 15 (Reuters) - The European Commission will urge Poland's new government next week to cut the budget deficit faster, refusing to end a disciplinary procedure that has irked Warsaw, a document from the European Union executive showed.

The Commission's draft recommendation, obtained by Reuters on Thursday, acknowledged that Poland would be able to reduce its deficit below the European Union's cap of 3 percent of gross domestic product this year from 3.8 percent in 2006.

But the correction is not regarded as sustainable and next year's fiscal shortfall is forecast to widen to 3.2 percent of GDP, so the Commission cannot recommend ending the EU's excessive deficit procedure, the document said.

"Looking ahead, the durable correction of the excessive deficit, without which the excessive deficit procedure cannot be abrogated, is, on current information, vulnerable to important risks," said the paper, due to be published on Nov. 20.

The Commission draft urges Poland's new government led be the pro-business Civic Platform party, victor of an Oct. 21 parliamentary election, to present promptly an updated deficit reduction programme.

"The achievement of the deficit targets beyond 2007 crucially hinges upon timely specification and implementation of the deficit-decreasing measures by a new parliament and government," the paper said.

SPENDING TO GROW

The Commission said no more severe steps are needed in the discipline procedure for now since Poland looks set to put its shortfall below the required cap this year.

The EU's 27 finance ministers are expected to approve the Commission recommendation in December.

Brussels monitors member states' deficits under the Stability and Growth Pact, intended to underpin the euro.

Poland, which joined the EU is 2004, is not yet in the euro zone, so the EU cannot fine it for exceeding the deficit ceiling persistently. But it could freeze part of the bloc's huge regional development aid in an extreme case.

The Commission said Poland's 2007 deficit fell thanks only to much faster-than-expected economic growth, seen at 6.5 percent this year, which boosted tax revenues, while state spending actually increased.

Growth is expected to slow to 5.6 percent next year and spending will increase due to tax cuts and social security measures ordered by the outgoing government of conservative Prime Minister Jaroslaw Kaczynski.

In particular, a planned further cut in contributions to a disability fund will have a budgetary cost equivalent to more than one percentage point of GDP.

Income tax relief related to the number of children in a family is expected to cost a further 0.5 percentage points.

The restoration of annual indexation of pensions and disability benefits linked to wage growth as well as inflation will cost about 0.4 percentage points in 2008, the paper said.

Increases in excise duty for cigarettes and higher value added tax on some services required by the EU will boost revenue by about 0.2 percentage points of GDP.

A senior Civic Platform official has said the new government of Prime Minister Donald Tusk would aim to limit the deficit to ensure it meets euro adoption criteria. A candidate country must keep its deficit below 3 percent of GDP.

(Editing by Paul Taylor)
Source: By Marcin Grajewski,