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VAT rise will not solve underlying fiscal problems


2010-08-09

A rise in VAT is the simplest way of raising extra revenues for the budget. Although such a move is in line with current European trends (Poland is the 12th EU country to have approved a VAT rise since the crisis began), it is not a growth-stimulating measure (it dampens consumption at a time when consumer spending is crucial to putting the Polish economy back on a path of rapid growth; it also hurts business competitiveness). It is worth noting that although the size of the increase is not very big compared with other countries, Poland’s basic VAT rate is already one of the highest in the EU. Furthermore, despite its undisputed fiscal effectiveness, a rise of such modest size is merely a short-term solution that will fail to solve underlying fiscal problems. According to government estimates, it will raise only PLN 5-5.5bn (€1.25-1.4bn) in additional budget revenues next year (in 2011 the funding gap is to be closed partly thanks to high revenues from privatisation). Unless the economy accelerates sharply in the following years, the government will be forced to exercise the option of further VAT increases while being unable to avoid spending cuts as well. The rise in VAT will not be without its impact on prices, although its modest scale means the resulting acceleration in inflation in 2011 should be moderate.



Paweł Sionko
Construction Market Analyst, PMR

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