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Legal Eye: Early-warning system

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I recently bought an amulet for good profits at a temple in Japan. While no replacement for a financial plan, it makes me feel better just to look at it.

It seems to me that the market’s assessment of a company’s or a country’s ability to repay its debts is sometimes based on a similar reaction. Do you feel comfortable when looking at that country or company? For Greece and Ireland, the answer to that question is definitely negative these days. For Poland, well, I’ll let the economists speculate.

What Poland does have is an early warning system in its legislation to prevent against excessive public debt.

The constitution

Starting right at the top, the Polish constitution contains a prohibition on excessive national public debt. The government may not take out loans or grant guarantees in excess of three-fifths of Poland’s gross domestic product. This ratio is the same as the EU limit on public debt.

The Polish constitution defines a general principle. It does not, however, specify the consequences of excessive public debt.

The Public Finances Act

These consequences are listed in the Act on Public Finances. By May 31 of each year, the government must publish statistics for the prior year on the amount and ratio to the gross domestic product of, among other things, public debt. The government must take action when certain thresholds are crossed.

If the public debt exceeds 50 percent of gross domestic product, the required action is relatively gentle. In this case, the Council of Ministers may not adopt a new annual budget that has a larger budgetary deficit than that of the previous year’s budget.

When the public debt exceeds 55 percent, real cuts must be considered. The Act lists a full page of prohibitions, items to review and other fiscal disciplinary requirements. Among other things, the Council of Ministers must consider tax increases.

Some prohibitions relate to the budget, including a requirement to balance the budget or reduce the public debt ratio and an imposition of salary freezes for public employees.

Despite the level of debt, the government may continue investment projects, but with some limitations. Specifically exempted from these limitations, however, are road projects and flood relief. Even with a growing budget deficit, roadwork will continue, hopefully in time for the 2012 European soccer championship.

At 60 percent (which would exceed the constitutional limit), the Act requires crisis action. Among other things, the Council of Ministers must present an austerity program within a month, and local authorities will face budgetary freezes.

Investment projects, however, may continue, as permitted for the 55 percent threshold.

EU requirements

In addition to the limitation on the ratio of public debt to gross domestic product, the Treaty on the Functioning of the European Union requires that a country’s overall budget deficit not exceed three percent of its gross domestic product. Poland will be subject to this limitation from 2012. The recent VAT increase and the planned reduction in the amount of pension contributions sent to open pension funds are supposed to help thwart the threat of exceeding this number.

Source: Judith Gliniecki, Warsaw Business Journal, 7th March 2011

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