Poland: A Successful Transition to Budget Sustainability?

In this paper we evaluate the sustainability of the current fiscal policy regime in Poland, which has been in place for almost 10 years since the start of the economic reform process. We use the intertemporal budget constraint (IBC) as a framework, and evaluate the sustainability of current policies. Consistency of fiscal policy with the IBC is evaluated using unit root and cointegration tests. In contrast to much previous research on fiscal sustainability in western economies, we explicitly take account of the possible role of seignorage from money creation as a source of government revenue. Sustainability tests are conducted excluding and then including seignorage. We find firm evidence that Polish fiscal policy is sustainable, and that the fiscal regime is "expenditure-led", adjusting tax revenues to the planned levels of government expenditures. This would appear to bode well for Poland's prospective entry to the EU and possible subsequent consideration of membership of the monetary union.