(Fixes typo in last sentence)
* Some 20 pct of investors hold back because of rule of law debate
* Polish pension reform reversal might take until start of 2018
* Higher tax-free allowance to be offset by tax system overhaul
By Jan Strupczewski
BRUSSELS, May 26 (Reuters) - A constitutional dispute between the new Polish government and the European Union is deterring some foreign investors, Deputy Prime Minister Mateusz Morawiecki said on Thursday.
Morawiecki, in charge of economic policy for the new, euro sceptic government, was answering a question on the fallout from a rare investigation by the European Commission into whether Polish government policies are threatening the rule of law.
“There is not much impact, but there is some impact. Maybe 20 percent of the potential investors who would have been investing are putting a question mark, asking what is going on, saying ‘I’ll wait for a final solution in that respect,'” Morawiecki told reporters.
The Commission is worried by the Polish government’s changes to the country’s constitutional court, which critics say undermine its ability to maintain democratic checks and balances. It is also looking into a tightening of government control over Polish state media.
But Morawiecki said investment decisions were more driven by Poland’s economic fundamentals and fiscal and monetary policy, as well as an economic slowdown in China and the euro zone and tensions with Russia over Ukraine.
He said he was not worried by the rise in Poland’s borrowing costs since the new government took power in October. The benchmark 10-year yield has risen to 3.07 percent from 2.58 percent in October.
“We do not see a lack of confidence of investors in Polish bonds,” Morawiecki said.
He said the zloty exchange rate, in a range of 4.2-4.5 to the euro, was “not too weak and not too strong” as it supported exports and did not undermine the confidence of investors.
Poland’s ruling Law and Justice party PiS won elections on promises of lowering the pension age, increasing the tax-free allowance, paying out child benefits and offering relief to Poles who took mortgages in Swiss francs and were then caught out by a sharp rise in the Swiss franc exchange rate.
This raised questions among economists if all the promises could be financed while sticking to the EU limit on budget deficit of 3 percent of GDP. Morawiecki said the government would not increase spending until it had higher revenues.
“Not until we are convinced that GDP growth is stimulating some additional tax collection and some specific actions taken by the finance ministry are successful, shall we increase our expenditures,” he said.
Morawiecki said the plan to reverse the previous government’s reform of raising the pension age to 67 would be cushioned by incentives, through higher pensions, to keep working longer. People would have to meet additional conditions to be able to retire at 60-65, as before.
He said this was unlikely to happen from the start of 2017, but maybe from July 2017 or January 2018.
He said the plan to increase the tax-free allowance was part of a much wider overhaul of taxation.
“Here we are thinking about a completely different system, a consolidated-type tax made up of ...social security and health insurance and personal income tax,” he said.
“Once we do this, the impact of the tax-free amount on the budget is going to be zero,” he added, stressing the tax overhaul was only in a planning stage but “quite likely.”
On the question of Swiss franc mortgages, Morawiecki said President Andrzej Duda would present a “balanced solution” in a few weeks. (Reporting by Jan Strupczewski; Editing by Mark Trevelyan)