Poland inches toward fiscal reforms at last

Poland's minority government and the main opposition party finally look as if they might bury the hatchet and reach a deal on austerity measures needed to avert a looming fiscal crisis after European Union entry.

Following weeks of bickering and posturing, both sides have started concrete negotiations in recent days and initial feedback suggests that, despite differences, there is a good chance Poland will finally bite the bullet of fiscal tightening.

"This is the first time Poland is anywhere near (serious budget reforms)," said Robert Beange, economist at Lehman Brothers in London.

Prime Minister Leszek Miller's social democrats (SLD) have shied from reforms over their two years in power but realise now that if no action is taken, public debt will breach constitutional safety limits, sparking a full-blown crisis.

Mr Miller threatened last week to trigger early general elections, normally not due before 2005, if reforms were blocked in parliament, a strong signal to his own backbenchers and independents they should fall into line.

"On our side it is going to be all hands on deck," Mr Miller told Reuters in an interview last week.

The SLD are 26 seats short of a parliamentary majority, and although they have in the past just scraped by with support from independents, Mr Miller has asked the centrist opposition, with 56 seats, for support to reduce the risk of failure.

Insiders say Mr Miller wants the centrists' backing so that his cabinet will not be held hostage by tiny special interest groups when discussing unpopular cutbacks in areas such as farmers' social security, pre-retirement pensions or disability benefits.

"We cannot be blackmailed by fringe deputies. That is why we want a working parliamentary majority for the plan," a senior government official said.

The centrist Civic Platform (PO), liberal descendants of the Solidarity movement, would generally prefer Mr Miller to fail because opinion polls show they would win the next election.

But their mantra of being the responsible, pro-state party and the fact that Mr Miller's reforms go a long way towards their own demands persuaded party leaders to tentatively offer their support.

PO leader Jan Rokita, who in the past ruled out cooperation with the ex-communist SLD, has used the recent slide in the zloty and the threat of a fiscal crisis just as Poland joins the EU to explain his party's readiness to back Mr Miller.

"We are talking to them to stop the weakening of the zloty," he said this week.

The Polish currency hit a record low of around 4.90 per euro on Friday, losing some three per cent in value this year due to market worries the reform could fail. It rebounded this week on signs that PO is seriously considering backing them.

Investors hope reforms will get more bite from PO demands for extra spending cuts on top of the $4.2 billion, or two per cent of gross domestic product, proposed by the government for the next four years.

In exchange for its backing, the PO wants the SLD to back its bill to save money by radically changing the way budgets are made, cut more spending on administration and introduce a flat 15 per cent rate of corporate, personal and value added tax.

Although the leftists will probably reject the flat tax, they agreed in principle to discuss lower taxes and the overall budget reform. The two parties sounded cautiously upbeat about prospects of a deal by early March.

"Things are turning for the better. We have set the ground rules and we will detail our legislative proposals by the end of February," SLD negotiator Wieslaw Kaczmarek told Reuters.

"I believe our talks have moved forward," said Zbigniew Chlebowski, his PO counterpart. "We have to start fiscal reforms immediately."