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Polish tax shake-up cosmetic

The tax package is essentially revenue-neutral and aimed at reducing by one-seventh the tax wedge, the difference between take- home pay and employment costs that is partly responsible for the 16.5 per cent unemployment rate, the highest in the European Union.

The aim is to recoup the money by eliminating loopholes, such as those that allow artists and scientists to deduct half their income from their tax bills.

Zyta Gilowska, finance minister, said the package was intended to prepare the country for tax cuts in 2009.

Analysts called her project "cosmetic" and said it did nothing to reduce the ratio of tax to gross domestic product, or Poland's very high level of social spending.

Ryszard Petru, chief economist at Bank BPH, said: "There is a danger of an explosion of spending."

The government faces widespread demands for higher spending, many of them prompted by last year's electoral promise to help those who have not prospered from the transition to a market economy.

Doctors and nurses are on strike over demands for a 30 per cent pay rise and a 100 per cent increase next year.

Coal miners staged a two-hour warning strike on Monday and are planning to protest in Warsaw later this month.

They want a 223m zloty ($72m, 56m, 39m) share of the 1.2bn zlotys that state-owned coal mines earned last year, despite the fact that it was only the second year of profits in the last 15 years and the coal mines have run up losses of more than 33bn zlotys.

"It's a trap into which the government has fallen - these promises were needed to win the elections but they are unrealistic to carry out," said Bohdan Wyznikiewicz, an economist with the Gdansk Institute for Market Economics.

The government's populist allies, particularly the left-leaning Self-Defence party, also want more spending.

Ms Gilowska said recently there was no money in the budget for increases in social spending suggested by Anna Kalata, Self-Defence labour and social policy minister.

But the finance minister has proposed few spending cuts. And analysts say a plan to cut spending on government wages by 10 per cent is unrealistic.

Kazimierz Marcinkiewicz, the prime minister, insists the government will stick to its promise of running a deficit no larger than 30bn zlotys. He can probably do that this year and raise spending, because of unexpectedly strong growth.

But although the finance ministry says 5.5 per cent GDP growth is possible this year, expansion is forecast to slow to 4.5 per cent next year.

"We have good economic foundations and there will be no crisis this year," said Mr Petru. "The danger will come when the budget is prepared for next year."