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Poland grows but struggles with debt

Polish economy ends two strong years with mounting public debt problem.

Poland's public debt — that is debt accumulated by the central government as well as regional governments — is within a whisker of 55 percent of GDP. If that level is crossed, Polish law calls for painful spending cuts.

Paradoxically, part of the debt comes from the enormous flow of funds from the EU to Poland that are being used to upgrade Poland's ramshackle roads, railways and water infrastructure. The $87 billion pouring into Poland from 2007-2013 has to be partly matched by Polish spending, meaning the government often has to kick in from 15 to 50 percent of a project, with Brussels paying for the rest. As well, the Polish side often has to first spend the money, and then wait for the EU to refund its share, which worsens Poland's debt numbers.

As well, the reformed pension system has become increasingly expensive.

The budget deficit is also soaring, coming it at about 8 percent in 2010, although the government promises to reduce that to 3 percent of GDP by 2013.

“Poland's public finances are on an unsustainable trend,” warns a recent advisory from Fitch, the ratings agency.

In response, the government is promising to restrain spending and has undone some of its pension reforms, allowing more money to flow into the public part of the pension system and restricting the amount going to privately run pension funds.

But the government is proceeding cautiously on further-reaching economic reforms such as raising the retirement age to 67 from 65 and equalizing the retirement age of men and women — women currently retire five years earlier. The main reason is that parliamentary elections are due this fall, and the ruling Civic Platform party wants to win a second term in office — something no party has accomplished since the end of communism in 1989.

Government officials insist that more courageous reforms will begin next year, but the number of skeptics is growing.

“I really don't see this government's desire to undertake difficult reforms. We were fooled,” said Henryka Bochniarz, head of the Polish employers confederation.