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Poland's summer of economic discontent

There's breathing space on Poland's beaches, but that's a bad thing.

Prime Minister Donald Tusk is pushing a cautious reform package, which at the moment consists of little more than raising the value added tax by one point to 23 percent and ramping up the sale of state assets next year.

Coming from a government which recently won the presidency and controls all of Poland’s most important posts, the timidity of the reforms is exasperating economists, who worry that Poland is missing a chance to get its fiscal house in order while it is still in a relatively strong position, and investors are still fairly confident that they are making a sensible bet by putting their money into the country.

Krzysztof Rybinski, a former deputy governor of the central bank, points out that despite the government’s rhetoric of slashing the bureaucracy that stifles Polish business, the number of civil servants has actually grown by about 100,000 over the last five years, and the cost of paying them absorbs all of Tusk’s planed tax increase.

“The increase in the VAT will not be enough,” said Rybinski, who predicts that the government will also have to increase income tax rates and dramatically slash spending in order to keep the budget deficit under control in the next few years.

The danger for Poland if it does too little over the next year or two is that it will start to fall behind more ambitious countries like the three Baltic states and eurozone countries like Greece and Spain, which may have endured worse recessions last year, but which have learned the lesson of loose budgets and are undertaking deep reforms.

“Foreign investors could at some moment decide to limit their purchases of Polish bonds and shares,” Rybinski said.

Tusk, normally favorably viewed by market analysts, recently lashed out at what he called “pseudo-expertises” that attacked his government’s cautious approaches to fiscal reforms, but if the government does not get its spending under control, Andrzejewski could find next year’s beach even emptier, no matter how steamy the weather.