May 12, 2015 / 10:14 AM / 2 years ago

Polish government pressed to hike spending to avoid poll defeat: sources

Poland's President Bronislaw Komorowski looks on at the Belvedere Palace in Warsaw, Poland May 12, 2015. REUTERS/Kacper Pempel

WARSAW (Reuters) - Senior figures in Poland’s ruling party, stung by a reverse for their ally in a presidential ballot, say they want the government to increase public spending to prevent defeat in this year’s parliamentary election.

The party sources said that without action, the government risked succumbing to the same disenchantment that pushed President Bronislaw Komorowski into a surprise second place in the first round of the vote for head of state on Sunday.

However, loosening the purse strings could cost the governing Civic Platform party its hard-won reputation with investors for fiscal prudence.

Polish assets fell on Monday and extended their losses on Tuesday, partly on market worries that the government would now be tempted to spend more to win back voters.

“The results of the first round of the election point to several issues, among them looking at the economy in a different way,” said a senior Civic Platform source.

The source said options included bringing forward a planned reduction in value added tax, or promising to unfreeze public sector spending from 2016, “which is particularly important to the millions of public sector workers”.

Asked by Reuters if it had any plans to increase spending, the Finance Ministry said it was reviewing family benefits later this year, but made no comment on any other possible measures.

The political fortunes of Komorowski, who faces a run-off against his conservative challenger on May 24, are closely intertwined with those of Civic Platform.

On Sunday evening, Prime Minister Ewa Kopacz joined about 150 supporters of Komorowski in a function room at the national stadium in Warsaw for what had been planned as a victory party.

The mood turned flat after it became clear the president had not won. A grim-faced Kopacz left after around 10 minutes.

ROOM FOR MANEUVER

“What happened on Sunday is a very big warning,” said a senior source close to the government.

“We have fast economic growth, that allows measures that benefit society, such as, among other things, introducing tax relief,” said the source, stressing though that any extra measures should not wreck the budget.

The main brake on increased spending is the European Union’s Excessive Deficit Procedure, a mechanism that requires governments with ballooning deficits to bring them back under the threshold of 3 percent of gross domestic product.

However, Finance Minister Mateusz Szczurek has said he is confident Brussels will allow Poland to exit the procedure in June. If that happens, it could give the government some more room for maneuver on spending.

The government has estimated that the deficit will come in at 2.7 percent this year.

Asked about fiscal policy, another ruling party source said: “We’re facing parliamentary elections. Obviously where possible we need to be more open to compromise” on questions of social spending.

Markets may not like any move away from fiscal prudence, but they also are view the opposition Law and Justice party, likely to take over if Civic Platform loses the parliamentary election, as populist and not business-friendly.

No date has been set for the election, but it will probably be held in October. A TNS Polska poll published on May 8 put Civic Platform on 34 percent and Law and Justice on 30 percent.

Additional reporting by Wiktor Szary and Marcin Goettig; Writing by Christian Lowe; Editing by Crispian Balmer

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