First Development Policy Loan

This is the first in a proposed series of two development policy loans supporting Poland’s goal of strengthening public finances. The proposed DPL program is central to the Bank’s engagement in the country in the area of public finance reform, as described in theCountry Partnership Strategy Progress Report (CPSPR) presented to the Board on June 7, 2011. The CPSPR highlights that the DPL program is expected to support Poland’s fiscal consolidation agenda, while strengthening fiscal institutions and improving the efficiency and sustainability of social spending. The programmatic DPL is structured around three pillars with the following development objectives: (i) consolidating public finances to ensure a steady decline of the fiscal deficit to stabilize and over the medium-term reduce public debt to maintain favorable access to financial markets; (ii) strengthening fiscal institutions through the introduction of fiscal rules to ingrain a prudent fiscal stance over the medium term; and (iii) advancing long-term fiscal reforms to secure the sustainability of social spending in view of Poland’s demographic challenge. The measures proposed to be supported under each pillarare as follows: Pillar 1 Consolidating Public Finances: Sizable fiscal consolidation is a key policy priority for 2012. Buildingon the progress made in 2011, a further reduction in the fiscal deficit is crucial to adhere to Poland’s commitment under the Excessive Deficit Procedure, to stay clear of the 55 percent of GDP national public debt limit, and to protect priority spending. Pillar 2 Strengthening Fiscal Institutions: Through the introduction of fiscal rules, the Government aims to ensure that once the fiscal deficit has come down after the initial consolidation process, it remains at prudent levels over the business cycle. The Government plans to introduce controls on local government finances in the form of an annual aggregate deficit ceiling. In addition, a new national level fiscal rule would limit the growth of national government expenditures to a rate not exceeding the trend growth rate of GDP. These rules would safeguard against the re-emergence of excessive structural budget deficits in the medium and long term. Pillar 3Advancing Long-Term Fiscal Reforms: Strengthening public finances also requires Poland to initiate structural reforms across various sectors. These reforms are focused on helping to secure the sustainability of pension transfers and public health care services, while improving the coverage and generosity of social assistance for the most vulnerable. In addition, introducing a regular income accounting for farmers will enable moving to a system of regular taxation of the agriculture sector based on income, including for the payment all social insurance contributions over the medium term. These policies aim to enhance Poland’s economic resilience in the face of adverse times. These policies also aim at protecting fiscal space for key growth-enhancing investments.