The Polish post-election economic landscape

Polish pavilion on Expo 2015, Milan. (picture: expo.gov.pl)

The time for rallies has ended and the time for decisions has arrived, although what would be the most needed is a period of solid debate involving the best experts.

The Polish economy is in a good shape, but it can be even better. Discussions free from the pre-election bickering and fairy-tales are necessary in order to confront the promises made in order to pander to voters with the realities and threats that Poles face.

A fundamental issue is public finances. Before the elections there was very little concern about this. Almost everyone spoke of extra spendings, but when challenged about the consequences of potential overspending, they dismissed them with announcements of plans to increase state revenues.

Estimates of the pre-election promises financed from the budget and other public coffers vary depending on the point of view and political persuasions. In extreme terms, after calculating the possible increase in the amount of income free of tax to PLN8,000, PLN500 per each second and subsequent child, and particularly the return of the previous retirement age, the costs of these social endeavours could be closer to PLN100bn per year than PLN50bn.

The size of next year’s budget deficit, which was set by the previous government at PLN54.6bn, could put this inevitable lack of accuracy in the calculations into perspective. In nominal terms, it would be the largest deficit for over a quarter of a century, although there would still be a chance to keep its relative size slightly below the EU limit of 3 per cent of GDP. Enlarging this already recklessly large budget deficit would not be a sign of a common sense, rationality and care for the fundamental order of things.

Since the president is obliged to sign the budget law 4 months after it is presented to parliament by the government, which must take place every year by September 30th at the latest, such a far-going and unadventurous change (i.e. requiring elementary consideration) to the central budget is not possible now. This is also because the tax laws with effect from the next year must be announced in the Journal of Laws by November 30th at the latest. An exception to this rule is VAT and excise tax, but the main pre-election promises boiled down to a reduction, and not an increase, in the tax burden of the overwhelming majority of citizens.

However, if we were to assume that a majority in the parliament managed to meet the constitutional deadlines, simply increasing spending by what was promised in the election campaign would be out of the question, because the new government will certainly not want to show itself to be irresponsible, knowing full well that in a short time it is also not possible to achieve the (rashly) promised increase in efficiency and effectiveness of tax collection. A reduction of tax loopholes is possible, but this would require carefully considered legal solutions and better equipment, organisation and mobilisation of the tax collecting apparatus, and this will not happen overnight.

The conclusion from this is that 2016 will not see turbulent changes in public finances in any direction. In the more distant future, well-considered and far-reaching changes would be, of course, very necessary. From the point of view of the young and middle generations of Poles, the most important thing is the imminent balance of the expenditure and revenue sides of public finances, because Poles soon forget about “gifts” of financial deficits, in other words spending without cover, but the state’s debts will burden them for endless years into the future. The starting point should be a prudent spending review with the aim of rationalising expenditure, but also satisfying the sense of social justice. What the chances of fulfilling such a demand are is a completely different issue.

Pensions

The payment to the Social Insurance Institution (ZUS), which has been budgeted for 2015 and is a necessary condition for the payment of pensions, amounts to PLN42bn. This is the amount after reducing the transfers to the Open Pension Funds to symbolic sizes. The net budget payment to the Agricultural Social Insurance Fund (KRUS), i.e. after deducting paid contributions, amounts to approx. PLN15bn this year. The total costs of supporting the pension system from the budget is well over PLN55bn this year.

The party that won the election has announced a return to the previous retirement ages of 60 for women and 65 for men. The annual cost of reverting to the status quo ante has been estimated at PLN40bn, therefore the budget payments to ZUS and KRUS would reach PLN100bn per year at the beginning, i.e. one third of the present budget revenue. It is not clear whether there will be a continuation of the so-called creative accounting in the form of “loans” from the budget to ZUS. In the period 2013-2015 these “loans” amounted to approx. PLN25bn.

The annual cost of the return to the previous retirement age, amounting to approximately PLN40bn, should be confronted with the planned budget deficit amounting to PLN54.6bn in 2016. The only thing that remains is to postpone the kernel of this promise indefinitely and do some retouching, e.g. to the principles of retirement for those with the most strenuous jobs and lives. In the coming years the majority of society would welcome the liquidation of at least some of the retirement privileges of miners, farmers, the judiciary and the police and army, even if it were connected with an increase in gross salaries, mainly for the uniformed services.

Amount of income exempt from tax and child allowances

There are already at least several versions of the announced PLN500 allowance, with each successive version being more modest than the last. Therefore it is not worth bothering with detailed calculations until a draft law appears. In the form signalled just after the elections, the annual cost would have been approx. PLN20bn, a burden that the taxpayer will not be able to bear. Since none of the small allowances have any influence on fertility rates, and payment of several thousand PLN on offspring is out of the question, a sensible compromise with an electorate expecting the fulfilment of promises would be to grant the allowances only to low-income families, particularly to those with no income due to real unemployment.

The Constitutional Tribunal has ruled on the amount of income exempt from tax, and this is now the strongest formal argument in favour of raising it. Contrary to the position of the outgoing government, this is also justified on the grounds of merit (e.g. the hassle with the collection of income tax from the lowest earners, who are then immediately returned similar amounts in the form of various benefits) as well as due to considerations of social sensitivity. The first possible date to introduce the changes is 2017, so there is time to make the exact calculations about the health of the state coffers.

There will be no loud opposition if the amount is raised roughly in line with economic reality and combined with (moderate) changes on the revenue side through taxation of people in the top percentile of income distribution. The effect of higher, but not exorbitant, tax rates would be negligible, but it would ease the pain of all taxpayers caused by the need to find a source of financing yet another large budget expense. A rational and welcome move would be to liquidate the huge tax and social insurance privileges enjoyed by a whole range of managers who are de facto employees, but who officially “run” their own “businesses” and earn between tens of thousands of PLN and several hundred thousand PLN per month, while in relation to these amounts, their net tax and social insurance contributions are symbolic.

The issue of energy prices

The supply of energy at reasonable prices is a key challenge in the coming years and decades. The outgoing government brushed this issue under the carpet, justifying it with arguments of negotiations and disputes over EU energy and climate policy. Therefore there is an excess of fuss and excitement over this vital issue, but a lack of orientation and knowledge.

In this situation, a correct step forward would be to prepare a “White Paper” on energy for Poland. Something like that would require the diligent effort of a multitude of experts representing all the important trends of views. Therefore it will take a dozen or so months for such a document. If by some miracle there was recognition of the need for such a “White Paper”, it would be worth sparing no time, because the problems that need to be defined, explained and solved are extremely important and numerous.

We will know the external framework conditions in December, after the world climate summit in Paris. Poland will have to face up establishing the role of renewable energy, which is backed by a very strong lobby of industrialists and ecologists, but which should not introduce impetuously and voluntarily. Renewable energy in its present form requires huge subsidies, and in the previous paragraphs we have already mentioned how Poland can hardly afford to pay subsidies. Secondly, in the case of renewable energy, Poland is only a recipient of foreign solutions, which to a large extent still belong to the category of advanced prototypes, so it is worth waiting for more advanced and efficient technologies (just as our banks did, to their advantage).

The issue of introducing nuclear energy in Poland needs to be settled. This causes controversy and arouses emotions, but it should finally be weighed up and a decision should be taken as to whether it is worth committing our modest resources to such an investment.

In the coming decades, the main source of power will remain conventional sources based on both types of coal and to a symbolic extent, natural gas. Here too, there are important decisions to be made on the issue of domestic coal production, which is struggling to compete with foreign coal mined from opencast mines. This imbalance will increase along with the increase in supply, e.g. in connection with the real and potentially even more intensive restriction of coal consumption by the richest countries and along with the modernisation of Chinese coal power, which to a large extent is prehistoric.

We don’t know exactly whether Poland wants to build huge new opencast lignite mines at the expense of the environment, including a lowering of the groundwater, or whether we should focus on more calorific hard coal. There are many questions, so an appeal to the new government for a credible “White Paper on Energy for Poland” is worth raising.

Banks and investment

A healthy banking system with a sensible and accommodating central bank at the head was the key to the Polish economic success of the last quarter of a century. The winning party has labelled the banking sector as greedy. It announces, therefore, that the banks should be put straight and that penalty taxes are the best method to achieve this.

There is a small grain of truth in the criticism of the banks, an example of which is the so-called deposit policies. Therefore, the banks are not entirely without blame for the deterioration of their image. It would be desirable, however, to weigh up the individual cases of real and alleged misdeeds and not “punish” the whole sector. A fight with the banks in Poland is not needed, because it will hurt the economy, but above all, because according to experts, there are no fundamental reservations about the functioning of Poland’s banking enterprises.

We don’t need an extension of the tasks of the central bank in Poland to include support for economic growth, because in our situation the most important thing is to maintain financial balance in the state. States and groups (the euro area) whose currencies are to a certain extent a substitute for gold and are subject to large-scale hoarding can indulge in “printing” money (although they shouldn’t). However, the Polish zloty isn’t the subject of foreign desire.

In 2014 capital expenditure amounted to PLN249bn. This amounted to almost PLN6,500 per capita, in other words not such a small amount. Investment is steadily growing. In comparison with 1995, capital expenditure has tripled in constant prices, and in comparison with 2010, by almost 80 per cent. However, one should admit here that in recent years investment growth has been weak. This is not related to a lack of finance, which on the contrary, is excessive (excess liquidity of banks and huge financial reserves in the corporate sector), but above all due to the uncertainty connected with the global situation (recently, for example, the slowdown in China), the European situation (the rather negative attitude towards the EU in many member states) and the domestic situation, which has been discussed in this text.

According to the pre-election announcements, the Law and Justice government is to “organise” PLN1.4 trillion for investment, in other words, only several hundred billion less than Poland’s annual GDP (in 2015 approx. PLN1.8 trillion). The conception lacks any concrete ideas or details, but it may be presumed that the amount of PLN1.4 trillion could arise by adding the capital expenditure expected in the coming years. If investment rose by 10 per cent per year in the next four years in relation to 2015, its total nominal value would amount to PLN1.3 trillion, in other words, not much less than the amount declared a week before the elections.

Therefore, to some extent it is legitimate to presume that there will be no large-scale artificial boosting of investment with the use of practically free loans. It is simply inconceivable to envisage that the scale of investment in Poland could be more than doubled (capital outlay in the period 2011-2014 amounted to almost PLN950bn). Therefore, there is a chance that there will not be a repetition of the reprehensible errors committed by numerous governments around the world, particularly the US government, which swung the real estate market in such a way that it caused the biggest financial crisis in 80 years, not only in the States, but also globally.

Law and justice

An example of the possibilities of Poland’s economy and the people who build it can be seen in the full reconstruction of Łazienkowski Bridge in only eight months. Experts claim that if it had been rebuilt at a “normal” tempo, it would have taken over three years, i.e. four times longer. This example illustrates the incredible importance of quality of legislation, legal infrastructure in the form of regulations as well as institutions and offices of the state, and finally, security of trade.

All these elements function in an unacceptable way, so there is plenty of room for improvement. The bastion that cannot be touched is the independence of the judiciary, while it cannot be equated – as often happens today – with a defence of incompetence. Professor Ewa Łętowska agreed with the diagnosis of a prominent lawyer and Law and Justice activist who said that the courts are arrogant, unjust, and that justice is unavailable for the weak and that in Poland one has to wrench it.

The pre-election promises of the party in power can be fulfilled only to a very small extent. The best, and in practice the only way, of safely and permanently increasing the financial possibilities of the country today is to achieve high economic growth. This can be ensured for a long time by tidying up the legal regulations through a systematic review and modification of their content, which would prevent opposing or Aesopian interpretations, and as a result of a desired weakening of the legislative verve which leads to a proliferation of ill-considered laws.

The problem is that very few understand the invigorating relationship between a well-written and relatively concise law and the efficient settlement of disputes on the one hand, and economic prosperity on the other. The process advocated would last a very long time, so balanced action in these fields should begin almost immediately.

The economy is not for itself, it is not for the owners, nor is it for the state – it is for the people in general, because they create it and it is they who the economy serves. The last few years of governments were mainly marked by delaying tactics and nonfeasance. This period is proof of the soundness of Poland’s economy, which managed without the support of the legislature, the executive and the judiciary, although such support was advisable. This period of inactivity of the authorities was bad, but the over-activity declared by the victors before the elections would not only be bad, but even worse.

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