Poland must make stabilising its public finances the centrepiece of sweeping reforms the European Union's biggest newcomer needs to continue catching up with its wealthier peers, the OECD said in a report on Tuesday.
The Organisation for Economic Co-operation and Development said that despite big strides Poland made on its way to the EU, a drop in employment since 1998 showed the former communist country had to step up efforts to improve productivity, create jobs and raise income levels.
"Unless the pace of improvement picks up, Poland's convergence with the rest of the OECD is likely to be disappointingly slow," the Paris-based rich nations club said.
While the organisation advocated labour market reforms, improvements in investment conditions and rural restructuring, their success hinged on the ability to contain budget spending and rising public debt.
"Restoring public finances to a sustainable path represents a key element to any reform strategy," it said.
"Unless policies change, the OECD estimates that even 50 years from now, Poland will not have achieved OECD income levels," it said.
Poland has pledged to squeeze its budget deficit to below the EU limit of three percent of gross domestic product in 2007 from 5.7 percent expected this year as part of its plan to adopt the euro by the end of the decade. But doubts remain whether the weak minority government will be able to implement required spending cuts.
The OECD said that even with the programme in place most of the savings would come into effect in 2005 and 2006 threatening to push public debt above 60 percent of GDP and more savings were needed right now.
The OECD said past interest rate cuts had helped the Polish economy recover and reiterated its forecast growth would exceed 4.5 percent this year, with rising domestic demand and investment complementing strong exports.
But the report, completed in mid-May, before Poland's central bank raised rates by half a point, said too lax fiscal policy required higher real interest rates than desired.
"Tighter fiscal policy by providing a more stable macroeconomic environment and allowing interest rates to fall, should make investment more affordable, thereby speeding up capital accumulation and contributing to increasing the rate of growth of potential output," it said.
Noting that only a little more than one in two Poles of working age were employed and the unemployed rate stood at an EU record of 19 percent, the OECD recommended increasing incentives to take up work and reducing financial burdens for employers.
Turning to privatisation the OECD said Poland's strategy should centre on overall benefits of sell-offs rather than revenues and said it should move more boldly to reduce its stakes in firms where it has retained controlled after past sales.