Poland's Public Finance Convergence with the Euro Area

Abstract

The situation of Poland's public finances has been improving. Helped by solid economic growth in 2011, Poland has reduced its budget deficit in line with the Commission's recommendations. However, contrary to earlier forecasts, in 2012 it was still well above the ceiling of 3% of GDP. As a result, the excessive deficit procedure was extended by two years, by 2014. The deficit should be further reduced to reach, in 2015, the level of 1% of GDP in terms of structural deficit. The slowdown of the economy in 2012 and probably in 2013 will not make this task easy. Public debt has risen steadily over the past few years but in recent times, the level has still been well below the 60% of GDP ceiling. The national reform program and the convergence program were adopted by Poland's Council of Ministers on 25 April 2012. The convergence program outlined in an integrated manner the fiscal consolidation efforts, the key structural reforms and the reforms that underpin macroeconomic stabilization. In the medium- to long-term, Poland is faced with a number of challenges. A very low labor force participation rate, in particular of women, and the poor quality of vocational training and education are major concerns given an ageing population. The low level of public and private R&D spending, weak links between science and industry and poor innovation performance call for improvements. Apart from the program of national reforms, crucial for future sustained economic growth and good performance of public finances, an additional factor stimulating activities towards fiscal improvement should be Poland's participation in strengthened economic governance architecture recently introduced in the EU. Euro adoption remains an important goal of the Polish government. The uncertain situation in the euro zone has, however, postponed adoption of a clear timetable of joining the euro zone. The government decided that an additional condition to join the euro zone, apart from meeting the nominal convergence criteria (and legal conditions not discussed here), is stabilization of the euro area situation.