Drive through any village in Poland, and the changes over the last 20 years are striking – proper roads with no potholes, sidewalks stretching into the distance along country lanes, and repainted government offices.

But efforts to continue modernising the countryside are likely to fall afoul of tighter local budget rules and the depletion of EU structural funds flowing into the country.

The Congress of Rural Communes tells Monday’s Rzeczpospolita newspaper that investment plans for this year come for rural communes only to about 6bn zlotys ($1.9bn), down sharply from last year’s 11bn zlotys.

The trend can be seen across local governments in Poland – which in recent years have undergone an investment boom thanks to the €67bn in structural funds that Poland is getting in the 2007-2013 EU budget cycle and because of a rush of infrastructure projects tied to this June’s European football championships.

In order to get the EU funds, local governments have to put up some of the project financing themselves – often as little as 15 per cent. But taken across the country, those numbers quickly add up. The regional development ministry estimates that local governments will have to kick in about 26bn zlotys from 2007-2013 to get EU structural funds.

In 2005, all of Poland’s local governments spent 17.8bn zlotys on investments, while by 2010 that had soared to 43.2bn zlotys. That spending has meant a rapid increase in debt – the overall debt of all local governments has jumped from 41bn zlotys in 2009 to about 61bn zlotys by the end of last year.

However, the central government is putting a squeeze on local governments – part of a drive to ensure that public debt does not cross 55 per cent of Gross Domestic Product – if the threshold is passed, the law requires painful spending cuts.

Under new rules, no local government can spend more on servicing its debt than its three-year average operational surplus.

Jakub Borowski, chief economist with Kredyt Bank, tells Rzeczpospolita that more cautious spending by local governments probably lopped about 0.1 per cent off Poland’s GDP growth last year – barely noticeable when overall growth came to 4.3 per cent.

But the effect is likely to increase.

The government is working on budget legislation that aims to limit the overall local government deficit to 10.5bn zlotys this year, compared to about 15bn zlotys last year, while by next year they are supposed to be running budget surpluses. The goal is to limit the general public sector deficit (which includes local governments) to 2.9 per cent of GDP by this year – down from an expected 5.1 per cent in 2011.

Local governments are grumbling – warning that the debt limit will stop them from making much needed investments and could cause them to lose EU structural funds during the next budget cycle – probably the last time Poland can count on a generous dollop of aid from Brussels.

Sticking to legal and constitutional budget limits also prevents the economy from relying less on consumption and more on investment, warns Mert Yildiz, emerging market economist with Renaissance Capital.

“I’m against debt caps,” he says. “If you’re an undeveloped country you have to borrow.”

Looks like hopes for new swimming pools, sewerage plants and better roads are going to have to be shelved.

Related reading:
Poland: building stadiums, not returns, beyondbrics
Poland: 2012 football dreams crumble; so do the roads, beyondbrics
Poland to China: pay up, now [corrected], beyondbrics
Poland and Ukraine: miles to go, beyondbrics

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