High spending may expose Poland to painful fiscal adjustment

Poland's unwillingness to curb high spending leaves it exposed to a sharp fiscal adjustment if there is a deep slowdown in its main export market Europe, a Polish think tank said on Wednesday. The Civic Development Forum (FOR) led by ex-deputy premier Leszek Balcerowicz, a liberal economist and opponent of the ruling Law and Justice (PiS) party, said Poland's public debt could near a constitutional limit, which would force a painful adjustment.
"In the event of 1-2 years of sharp slowdown (abroad), Poland's public debt will come dangerously near the constitutional threshold of 60 percent," FOR said. This would force either a cut in spending, tax hikes, or a violation of the constitution, it said. Balcerowicz, the main author of the economic transition from communism to market economy, has criticised the PiS party for measures which have made firms more uncertain about the future and for increasing the role of the state in the economy.
The finance ministry expects public debt to rise to 51.7 percent of gross domestic product this year from 48.8 percent in 2015, according to local methodology. This still compares favourably with nearly 90 percent average level in the euro zone. FOR said Poland's rise in public debt from 2015 to 2017 will likely be among the highest in the EU.
Poland has a debt threshold of 60 percent written into the constitution, which if breached would trigger painful economic adjustment. The eurosceptic PiS party, in power since late 2015, has sharply raised public spending and reversed a hike in the retirement age, but managed to keep the deficit in check, partly thanks to a crackdown on tax evasion, which led to a jump in tax receipts.
Poland's economy grew by 4.7 percent in the third quarter, the fastest pace in more than five years, benefiting from robust consumption growth and a pick-up in investment after a prolonged slump. Unemployment fell to a record-low of 6.6 percent in October, the finance ministry has estimated, driving corporate wage growth up to about 7 percent year-on-year, its highest level in over five years.