The government has no plans for a savings budget

The Government has submitted a draft 2013 budget to the Sejm. With the economic growth planned for 2.2%, revenue is to increase by 2.4% in nominal terms and expenditure by 1.9%, excluding the European funds. Analysis of the figures shows that the Government counts more on the increase in tax revenue rather than on expenditure savings.
The government has no plans for a savings budget

(Drawn up by DG/CC BY

A few days earlier, France and Spain revealed their draft 2013 budgets. France opted for raising taxes on corporations and on the richest citizens, with negligible expenditure cuts. Spain cuts expenditure a bit more than it raises taxes. Nonetheless, it introduces new expenditure items. For example, the Spanish have reintroduced Christmas bonuses and started a programme of subsidizing new car purchases  when the owner turns a used car in.

Handling comparative difficulties

The Polish government states the revenue increase in comparison to the expected execution in 2012 and the increase in expenditure in comparison to the 2012 Budget Act. The only mention of the expected expenditure execution is that it will be lower than that set out in the Act. How much lower? I have not found such information. From the data on the expected State budget deficit, I can only deduce that the expenditure will be lower by about PLN 4.6 billion. If so, the planned growth of State budget expenditure next year would not be 1.9% but 3.3% and will be faster than the increase in revenue, even taking inflation into account. This explains why it is currently envisaged that the State budget deficit would be higher in 2013 (PLN 35.6 billion) than in 2012 (PLN 31.7 billion).

By reading the draft budget, we also learn that revenue from taxes would increase by 5.1%. Some tax reliefs will be abolished, tax thresholds will remain frozen, taxation rules for limited joint-stock companies will be modified to their detriment. Therefore, this time the government again places greater emphasis on taxes rather than on limiting expenditure. Anyway, when expenditure grows, can we at all talk about savings?

There is nothing particular about the faster increase in expenditure rather than in revenue. First, let us take a look at the years 2008-2011, still applying a fairly old-fashioned approach, namely the nominal approach. Of course, other indicators are more popular, such as comparing the size of redistribution with the GDP or deduction of inflation to show that, for example, the Government is frugal or very lavish, depending on the situation.

However, the nominal approach has the advantage that in the context of low inflation it shows the actual behaviour of the government. The more so that low inflation must not necessarily result in higher revenue, as exampled in Poland by the year 2012, when the revenue from a key tax, the VAT, will probably be only slightly higher than in 2011, despite a GDP growth of 2.5% and inflation at the level of 3%.

Eurostat data show that in the years 2008-2011 expenditure of the public sector in Poland increased by more than 20.7% and that of the State budget — by about 19.4%. The revenue increase was lower by 16.5% and 17.3%, respectively, hence the constantly and rapidly growing public debt. Even if we take, although reluctantly, inflation into account, the situation is similar. The expenditure growth outpaced the revenue growth and was clearly positive. Actual expenditure increased by almost 10% and revenue by 5.5% in the entire sector.

By way of comparison, in France the situation was similar: expenditure increased at a faster pace than revenue. In Spain, expenditure also increased in nominal terms, while revenue of the public finance sector declined dramatically. In Germany, the growth rate of expenditure also exceeds the growth rate of revenue, but the difference is the smallest.

(Drawn up by DG/CC BY

(Drawn up by DG/CC BY

No savings at all

What would the situation be in Poland next year? The published draft budget shows that the revenue of the public finance sector is to increase from PLN 657.8 billion to PLN 691 billion (by 33.2 billion), or by 4.9%, i.e. more than inflation, of course. On the other hand, in the state budget alone revenue is to exceed the current year figure by about PLN 6.9 billion, which does not cover for inflation. However, this year the NBP paid PLN 8 billion and PLN 400 million are earmarked for next year. Should it pay to the state budget as much as in recent years, the revenue increase will outpace inflation.

Now, let us take a look at expenditure. In the public finance sector, expenditure is to increase by PLN 30.5 billion as compared to the anticipated execution in 2012, and expenditure of the State budget is to increase by PLN 6.2 billion as compared to the Budget Act and by almost PLN 11 billion if we take into account our assumptions on the anticipated budget execution.

Thus, in practice, both the public finance sector and the State budget will spend more and more, only next year this increase will be financed by an increase in revenue. Therefore, talking about a savings budget requires a degree of imagination.

By the way, various State financial documents refer to a distinction between the condition of the public finance sector before and after consolidation. It does not seem purely coincidental, as e.g. public debt looks better after consolidation because mutual obligations within the public sector disappear (the same manoeuvre is also used in the US).

Hence, the majority of the aggregate data for the sector are expressed in consolidated terms.  Currently, the main difference results from offsetting loans to the Social Insurance Fund (FUS) from the budget as a result of consolidation. At the end of 2013, the amount of such loans will reach PLN 21 billion (total Social Insurance Fund liabilities amount to PLN 30 billion) and probably no one seriously believes that the Social Insurance Institution (ZUS) would return the money; it would be impossible as its multi-annual forecasts envisage a structural deficit.

Autumn strategy makes the spring strategy obsolete

Now, a few words about public debt and State Treasury debt. We can learn a lot about it from the public debt management strategy published last Friday, which accompanies the draft budget. First of all, let us emphasise that the strategy sends the April document – State Multiannual Financial Plan to the dustbin. The ambitious plans from spring to reduce the deficit are now obsolete due to the economic downturn in Europe and globally. Of course, it is true that the economic situation has deteriorated, but there is no need to revise plans. We may try to achieve the objective by other means. Yet that could be, as we see,  too exhausting.

New objectives are as follows: this year, public debt will increase according to the European Union standard (we are not interested here in the national standard) by PLN 35.7 billion, and next year by PLN 26.2 billion. Contrary to the opinions by commentators who claim it is not worth addressing long-term forecasts, the undersigned believes it is. The figures will probably not come true, but from the data we may draw inferences on the philosophy of public finance until 2016.

In the years 2014-2016, public debt is projected to initially increase by PLN 23.9 billion and then – attention, please – PLN 45.2 billion and PLN 49 billion. In the years 2014-2016, State Treasury debt would increase at an even faster pace: in the years 2015-2016 by more than PLN 50 billion a year, although – according to the macroeconomic assumptions – the zloty is to strengthen, which will reduce foreign debt.

Estimates for subsequent years show that local government debt is to stabilise in 2014, contrary to State Treasury debt. In the past, the so-called budget anchor from the time when Law and Justice was the ruling party was ridiculed. It was wrong, because the anchor had one important advantage: it was nominal. Applied consistently (back then, it amounted to PLN 30 billion), it would ensure stronger inhibition of the debt increase than what is proposed by the Government today.

Uncontrollable debt increase

It seems that by the end of this period fiscal debt would increase dynamically despite economic growth close to the potential, and it would prove the pro-cyclical nature of the financial policy. Obviously, comparing increasing public debt (which will increase to PLN 1,039 billion in 2016) with GDP looks more favourable in terms of the Strategy – the rate is to decline from over 56% in 2011 to 52.0% in 2016.

Is it real? It is difficult to say. For sure, the optimistic assumptions for economic growth increase by 3.5-4.0% in the years 2015-2016 and 2.2% next year would have to come true. For the time being, the forecasts from before several months are no longer  valid. Also, in the opinion of a majority of commentators, the latest forecast contained in the draft budget is overvalued as well. The growth may be lower than 2.2% (e.g. the latest HSBC forecast, from last week, envisages 2% and the October forecast of the Economic Council member, Jakub Borowski from Kredyt Bank, is 1.3%.)

The exchange rate is highly uncertain as well. The Government envisages an average of PLN 4.05 per EUR during the year. HSBC envisages even PLN 3.8 per EUR, while Jakub Borowski envisages PLN 4.30 at the end of 2012, as well as the same or even higher exchange rate in 2013. This shows how divergent the assessments are. Generally, the exchange rate of PLN 4.05 does not seem unrealistic, although reductions in interest rates expected to take place in the coming six months will reduce the interest rate parity and decrease the incentives to invest in the zloty.

Last December, the government expected that during 2013 the exchange rate would decline from PLN 4.0 to 3.8 per EUR, not to mention forecasts from two years before, when it was thought that it would be, on average, PLN 3.55 per EUR.

Thus, the quality of the Ministry of Finance’s and the government’s forecasts is questionable. The same refers to the position of public sector finances. In the draft budget, the Government usually presents three pieces of information: the forecast for the coming year, the expected execution for the given year and the actual execution in the previous year. In the Table below, we have gathered the data from the last several years.

(Drawn up by DG/CC BY-NC-SA vasta)

(Drawn up by DG/CC BY-NC-SA vasta)

Firstly, in the past five years, the forecasts of revenue and expenditure of the public finance sector were regularly overstated.

Secondly, during the economic slowdown in 2009, the deficit simply exploded. However, during the recovery years 2010-2011, the deficit was roughly consistent with the projected deficit, and in 2011 – even lower.

The prudent conclusion is, therefore, as follows: the economic slowdown that we see today and  expect next year will most likely result in lower revenue and expenditure in relation to the projections and to the higher-then-forecast deficit of the public finance sector.

Getting back to the State budget. Apart from the projection on economic growth, the envisaged growth of tax revenue is questioned (nominal increases in 2013: CIT by 11.3%, PIT by 6.2%, VAT by 4%) so is the planned increase in fines, tickets and fees (from PLN 16.2 billion to PLN 20.2 billion, or by 24.3%).

Some allegations make no sense

The latter allegation makes no sense and results from failure on the part of analysts and journalists to comprehend that the planned revenue from trading greenhouse gas emissions (PLN 2.85 billion) and from the sale of 800 MHz band frequency (so-called digital dividend) for PLN 1.8 billion is included in this item. This more than explains such a dynamic increase.

What else is interesting in the budget? A lot of interesting information can be found in the annexes, which comprise financial plans of government agencies, budget economy institutions and various State legal persons. For example, I read with interest the structure of expenditure of several entities. The operating costs of the Agency for Restructuring and Modernisation of Agriculture, functioning on the PLN 2.3 billion subsidy, will exceed, probably for the first time, the costs of the task implementation next year. The operating costs of the Agency, which distributes subsidies for farmers, will amount to PLN 1.24 billion. These are mainly salaries. The costs of the task implementation will amount to PLN 1.11 billion (these are mainly subsidies to loans for investments in agricultural holdings).

The Agricultural Market Agency’s operating costs are not much lower (PLN 146 million) than the costs of its task implementation (PLN 220 million, these are mainly subsidies to milk consumption in schools). Surely, this results from the specific nature of agricultural agencies. Yet the fact is that the National Science Centre and the National Centre for Research and Development, also distributing billions of zlotys, but for science and technology, have their operating costs at the level of 4%.

Finally, it is worth noting that the transparency of budgetary documents still leaves much to be desired. Comparisons are difficult to make, especially in the longer term (also retrospectively, when one needs to refer to source documents from previous years) and above all forward. Public debt is estimated in a four-year perspective, but expenditure and revenue of the individual parts of the public finance sector are not.

Ten-year analyses, such as those in the US, which are an excellent verification tool for different budgetary and legislative ideas, are unavailable (such an analysis is in the pipeline but only in relation to certain new acts).

The notion of the primary deficit of the State Treasury and the public finance sector disappeared (such forecasts were provided still two years ago). It is obvious that next year such deficit will still exist, but whether it would exist in subsequent years – nobody knows (it seems that it would), and this is such a relevant notion  to the assessment of public finance stability.

Anyone who watched the presentation of the US or UK budgets knows it is possible to present it in a clear manner and is cognizant of the importance of the existence of independent or non-political institutions, such as the American Congress Budget Office (CBO) or the British Institute of Fiscal Studies, to the awareness of the public. The Bureau of Research of the Polish Sejm does not fulfil this function at all.

(Drawn up by DG/CC BY
(Drawn up by DG/CC BY
(Drawn up by DG/CC BY-NC-SA vasta)

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