RPT-FACTBOX-Key political risks to watch in Poland

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By Gareth Jones

WARSAW, Sept 1 (Reuters) - Poland's centrist, pro-business ruling party Civic Platform (PO) is trying to avoid or at least defer painful economic reforms in the hope of increasing its parliamentary majority in an election scheduled for next autumn.

Opinion polls suggest Prime Minister Donald Tusk's party is well placed to become the first in Poland since the fall of communism in 1989 to win a second consecutive four-year term.

However, a bulging budget deficit and rising public debt have forced Tusk to announce a hike in the value-added tax (VAT) by one percentage point and to rein in state spending, measures that could cut into PO support and bolster its rivals.

PO's Bronislaw Komorowski won this summer's presidential election but his main rival Jaroslaw Kaczynski, leader of the right-wing main opposition party Law and Justice (PiS), did better than expected, raising the political price of reforms.

Following are the key political risks facing Poland.

REINING IN DEFICIT, DEBT

Poland's public debt remains well below western European levels, but the government is anxious to prevent it topping 55 percent of gross domestic product (GDP) as this would by law trigger painful spending cuts likely to hurt support for PO.

Tusk's government recently approved a long-term financing plan that includes a cap on discretionary spending and further privatisations to help plug the hole in public finances. The planned rise in VAT from 2011 -- to 23 percent for many items -- is meant to be temporary but opposition parties have vowed to fight the move. Tusk is also considering levying a tax on banks but not as an alternative to the VAT hike, as PiS proposed.

Tusk has ruled out "radical" measures to slash spending and raise other taxes. Liberal critics accuse the government of timidity, noting the plan does not tackle such issues as generous pension rules for farmers or hiking the retirement age.

Tusk hopes economic growth -- seen at 3.0-3.5 percent this year, up from 1.8 percent in 2009 when Poland was the only country in the 27-strong EU to avoid recession -- will help narrow a general government deficit envisaged at 6.9 percent of GDP this year.

But the scale of the recovery will hinge on still-uncertain growth prospects for the euro zone, Poland's main trade partner.

What to watch:

-- Can the government reach its ambitious target of 25 billion zlotys ($8.47 billion) in revenues from privatisations this year? It has raised about 13 billion so far. Markets would welcome success as it would help curb the deficit.

-- Social tensions. Teachers and others are demanding salary hikes and may stage protests. Poland also faces EU pressure to start phasing out subsidies to coal mines, which may trigger miners' protests. Poland still relies on heavily polluting coal for more than 90 percent of its electricity.

COUNTDOWN TO PARLIAMENTARY POLL

President Komorowski is expected to work smoothly with the government and not to veto its laws, unlike his predecessor Lech Kaczynski, who died, along with scores of other top officials, in a plane crash in Smolensk, western Russia, on April 10.

PiS leader Jaroslaw Kaczynski, twin brother of the late president, won more votes than expected in the election after toning down his nationalist rhetoric, but is viewed as having tilted back to the right since Komorowski's victory.

Latest opinion polls show PO retaining its strong lead, with up to 48 percent of the vote, against around 25 to 35 percent for PiS. The Democratic Left Alliance (SLD), whose candidate also outperformed expectations in the presidential election, has around 9 percent support.

The polls show Tusk's junior coalition partner, the Peasant's Party (PSL), failing to breach the 5 percent threshold required to enter parliament in next year's election.

What to watch:

-- A wooden cross erected in front of the presidential palace to honour victims of the April plane crash has become a rallying point for right-wing Catholic backers of the Kaczynski twins. The authorities want it moved to a nearby church but supporters want it to stay put. Will Komorowski and Tusk be able to defuse the row without allowing PiS to claim a moral victory?

-- Local elections likely on November 21. A good result for the opposition could further temper Tusk's appetite for reforms.

-- A cautious rapprochement between PO and the opposition leftists. The SLD, which shares PO's ambition to take Poland into the euro, is a possible future coalition partner.

-- An ongoing investigation into the causes of the Smolensk crash may unearth facts embarrassing for both PO as well as PiS.

EURO HOPES

Poland's fiscal challenges and the euro zone's woes have pushed back Tusk's membership drive at least until 2015.

Though joining the euro zone remains an official strategic objective for Warsaw, some in Poland have cooled to the idea as the free-floating zloty's sharp fall during the financial crisis played a key role in helping Poland to escape recession.

The lack of political consensus in parliament is also an obstacle. PO needs to win, alone or with allies, a two-thirds majority in the new parliament in order to amend the constitution to pave the way for eventual euro adoption.

PiS, which is sceptical on the euro, has been blocking any amendment in this parliament. A strong PO win next year would be welcomed by markets as a signal for fresh reforms and for clearing the way to eventual euro adoption.

What to watch:

-- Will Komorowski's win in the presidential election, along with the recent appointment of the pro-euro Marek Belka as central bank governor, embolden the government to start preparing the zloty for entry into the pre-euro ERM-2 mechanism?

THE BEAR NEXT DOOR

Warsaw and its communist-era overlord Moscow have said the April crash in Russia should serve as a catalyst for an improvement in long-frosty relations.

This week, in a sign of the warmer climate, Russian Foreign Minister Sergei Lavrov will address Polish ambassadors in Warsaw on Moscow's view of international affairs.

However, Moscow has criticised Poland's decision to go ahead with the temporary deployment of a U.S. Patriot missile battery near to the Russian exclave of Kaliningrad, saying it harms regional trust. Warsaw says the deployment, designed to upgrade its air defences, poses no possible threat to Russia.

Poland wants NATO to admit ex-Soviet republics such as Georgia and Ukraine and has also signalled its readiness to take part in U.S. President Barack Obama's revamped missile defence plans, which Moscow views with deep distrust. Poland also wants the EU to reduce its dependence on Russian gas.

What to watch:

-- Will Poland finally sign a new gas deal that envisages imports of Russian gas totalling 10 billion cubic metres per year until 2037? Some in the government are reluctant to make such a long-term commitment given hopes that Poland may prove to have large reserves of shale gas on its territory. The first shale test drillings have already started.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Writing by Gareth Jones, Editing by Sonya Hepinstall)