Volume 11 Number 3

Summer 2002

Constitutional Watch
     A country-by-country update on constitutional politics in Eastern Europe and the ex-USSR

Poland - Poland's struggle with its faltering economy continues. Starting in the fall, Minister of Finance Marek Belka proposed a number of packages to deal with the economy, which had been posting both low growth and increasing government deficits. The minister's proposals included a program called "Business-Development-Work," to improve the economy; the "Belka Doctrine," according to which budget expenditures were not to exceed 1 percent of the inflation rate; and new taxes, dubbed "Belka's Tax," which imposed a 20 percent withholding tax on interest income from bank accounts and certificates of deposit, and a 2 percent withholding tax on funds transferred abroad.

Opposition MPs claimed the new tax amendments (Act of November 21, 2001, amending the Personal Income Tax Act) were unconstitutional. The Constitutional Tribunal heard the case (reference K 47/01) and issued its ruling on May 22. The Tribunal found the tax on capital gains and interest income to be constitutional. It stated that paying taxes is required by law and the executive has the right to enforce such law. The Tribunal held that the new tax did not violate the principle of the protection of ownership rights, as embodied in Art. 64 of the Constitution ("1. Everyone shall have the right to ownership, other property rights, and the right of succession. 2. Everyone, on an equal basis, shall receive legal protection regarding ownership, other property rights, and the right of succession. 3. The right of ownership may only be limited by means of a statute and only to the extent that it does not violate the substance of such right"). However, the Tribunal found that the tax on funds transferred abroad was unconstitutional because its ambiguous structure and wording admitted of different interpretations, thus violating the principle of the citizens' trust in the state. Among the unclear provisions were those stating who is supposed to pay the tax, which specific transfers are taxed, and who enforces the collection of the tax.

Since the beginning of his tenure, the market-oriented Belka has struggled to accomplish his twin goals of restraining public spending and restoring economic growth; his plans anticipated a return to a 5 percent growth rate by 2004. He has also been a fairly moderate voice in the struggle between the Monetary Policy Council (MPC) and the national bank, on one side, and the government, on the other. The government, led by Prime Minister Leszek Miller, claims that the MPC has kept interest rates too high, preventing growth.

The situation worsened this spring, creating open tensions between Belka and Miller. In an attempt to counter the MPC, members of the Polish People's Party (PPP) and the Labor Union (LU) proposed three new amendments to the laws overseeing the operations of the national bank and MPC. One amendment called for increasing the number of MPC members from 10 to 16 people. This was widely seen as an attack on the MPC's independence, since it would allow currently ruling politicians to stack the board with pliant or like-minded candidates. Belka supported the MPC, while Miller's party, the Democratic Left Alliance (DLA), announced that it would support the amendment in the Sejm, parliament's lower house. President Aleksander Kwasniewski stepped in to mediate, and the result was the formation of a new committee, charged with the responsibility of coordinating the work of the Ministry of Finance with that of the MPC.

In early July, Belka lost the struggle over the deficit. In its projected budget for 2003, the government set the deficit at 43 billion zlotys ($10.75 billion). Belka had wanted to keep the deficit below 40 billion zlotys ($10 billion), arguing that a higher deficit would increase the MPC's reluctance to lower interest rates. The controversy led to a government shake-up when, on July 2, Belka abruptly resigned. Belka said his reasons "were personal in character" and "after these eight months in office, my energy potential had burnt out." He said he intended to return to teaching economics at a university. Observers, however, thought his move was caused by the bad economic situation and his own worsening relationship with Prime Minister Miller. Two vice ministers of finance, Andrzej Raczko and Jacek Bartkiewicz, resigned as well.

On July 5, Belka was replaced by Grzegorz Kolodko, former vice prime minister and minister of finance (1994-97) in Wlodzimierz Cimoszewicz's government. The appointment was characterized as a sop to the increasingly restive left-wingers in the coalition government, and the markets reacted nervously. Almost immediately, Kolodko put forth a new plan for economic growth, aimed at strengthening the Polish economy. The new plan includes tax incentives for small businesses, such as allowing entrepreneurs a tax holiday during their second year of business if they maintain a consistent number of employees. The plan also includes corporate debt relief. Companies with large debts will be eligible having a portion of the money they owe the state forgiven through tax breaks on past-due taxes. However, companies that accept this help would be required to pay a fee to the government equal to 15 percent of the outstanding principal. Finally, the plan would allow banks to list bad loans as deductible expenses if they continue their banking relationship with the failing companies.

Critics of Kolodko's plan question whether the longer-term benefits gained will actually outweigh the immediate loss of revenue to the government. In the case of entrepreneurs, some are unsure which would be the greater expense: taxes or paid but idle employees. In the case of corporate debt relief, some have questioned whether a 15 percent fee might be too restrictive. Lastly, in the case of banks, some are uncertain that banks would want lower taxes if it would mean keeping bad loans on the books, as well as maintaining the risky exposure those loans represent. Kolodko claims that with a stronger foundation, the MCP will be able to ease interest rates and narrow the budget deficit. After four rate cuts this year, the benchmark rate stands at 8.5 percent. With lower rates and lower unemployment, Kolodko predicts growth of 5 to 7 percent during the next few years. On July 26, the Sejm gave preliminary approval to the plan.

Meanwhile, the economy was starting to show signs of recovery. In April, imports of investment-related goods began to pick up, and, in June, industrial sales rose 2.2 percent, which is double what economists had predicted. Inflation in May was measured at 1.9 percent, down from 3 percent in April; it stood at 1.5 percent in July, a record low. For the past three months, unemployment has been decreasing. It fell from a high of 18.1 percent in February and March to 17.8 and 17.2 percent in April and May, respectively, though it increased slightly to 17.3 percent in July. Employment in Poland is not evenly distributed. The Warmia and Mazury districts (northeastern Poland) show 27.8 percent unemployed, while the Mazowsze region (Warsaw and surroundings) sees a low of 13.2 percent.

As the October local elections approach, the usual electioneering is occurring throughout Poland, and there has been a great deal of jockeying in the Sejm and Senate. The latest hot political issue concerns the system of allocating seats in parliamentary elections and in the representative bodies of local governments. Last fall, just before the parliamentary elections, the more proportional Saint Lague voting system had been put into place through an amendment to the electoral law. This had the effect of reducing the number of seats allotted for DLA. Despite its clear win on election day, DLA did not emerge with a clear majority in parliament. In mid-June 2002, while debating other amendments to the electoral law, the Sejm refused to introduce the d'Hondt system, which favors stronger parties. DLA then called on its members in the Senate to amend the electoral legislation, which they did soon thereafter.

Subsequently, two groups of parliamentarians asked the Constitutional Tribunal to rule on the constitutionality of the law as amended. On June 24, the Tribunal held that the Senate could not amend the law as it did, since the Sejm had not even voted to consider the proposed amending legislation. Indeed, although Senate members may propose legislation, Arts. 119 and 120 of the Constitution clearly state that the lower house must first debate amendments or legislation before they go to the upper house for approval. According to Art. 121, only after a vote in the Sejm, can the Senate approve or reject legislation or amendments. The lower house can then overrule a Senate vote by an absolute majority.

Therefore, the Senate's amendment violated constitutional procedure by skipping, as required, the three readings in the Sejm. In response, DLA and Self-Defense (SD) banded together in the lower house and struck a deal to adopt the d'Hondt system for counting seats in parliamentary and local government elections. In return for its support, SD won a provision that parties whose financial records are not approved by the state can still receive funds from the state. The new bill is likely to be signed by President Kwasniewski, who favors large parties and the political consolidation they bring.

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