Polish deficit may contract

Poland has promised the European Commission it will reduce the general government deficit to below 3 percent of GDP next year from 7.9 percent at the end of 2010, though many economists have expressed scepticism that this can be done.

"I would not be surprised if the deficit hit 2.6 percent at the end of next year," Rostowski told the Dziennik daily. The government's current target is 2.9 percent.

"It is just as likely as the European Commission's forecast of 3.6 percent," he said, describing the EU executive's estimate as "too pessimistic".

The Commission has predicted Poland's deficit will ease to 5.8 percent this year, slightly above the government's target of 5.6 percent.

The government's draft 2012 budget awaiting parliamentary approval envisages a central deficit of 35 billion zlotys, down from a targeted 40.2 billion this year. Government officials say this year's figure could now fall to 35.7 billion zlotys.

The central budget shortfall is a narrower measure than the geenral government gap monitored by the European Union and does not include spending by local governments or state agencies.

The European Union's largest ex-communist economy grew by 4.4 percent year-on-year in the first quarter of 2011, helped by robust domestic demand. It is expected to expand by 4.2 percent overall this year and by 4.1 percent next year.

Higher tax receipts generated by this strong growth, along with measures already taken such as a cap on spending growth and reform of the pension system, will put strong downward pressure on the deficit, Rostowski said.

He reiterated his view that Poland can eliminate the general government budget deficit completely by 2015.

Economists and rating agencies say Poland needs to step up its fiscal consolidation after an election due in October that Prime Minister Donald Tusk's centrist Civic Platform (PO) is tipped to win and Rostowski suggested this would happen.

"The next parliament will be a time of structural reforms. We will begin this in 2012.

We have to invest in strengthening our institutions and structures to ensure a continuation of economic growth," he said.

Rostowski gave no details, though he said even PO's small coalition partner the Peasants' Party, which is strong in the countryside, accepted the need for reform of farmers' generous pension arrangements.

Copyright Reuters, 2011