Destabilization of Polish Public Finance Instead of Reforms

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In the end of September 2015 Civil Development Forum (FOR) organized press conference to inform about the 5th anniversary of the public debt clock located in the city center of Warsaw. In Poland, public expenditures have significantly exceeded revenues for many years. This, in turn, led to higher public debt. At the same time, none of the parties in power has conducted a comprehensive reform of the public finance in the last 10 years. Meanwhile, the pre-election campaign is dominated by costly promises instead of reforms necessary to lower the deficit and public debt.

So far the bad situation of the Polish public finance was largely masked by relatively rapid economic growth. However, without pro-market reforms, long-term economic growth rate in Poland will slow down and the Polish economy will be more vulnerable to crisis.

European Commission data shows that in 2015 Poland will have the sixth highest structural deficit among the EU countries. This means that irrespective of the current macroeconomic situation, Polish government spends much more than it collects in revenues. When FOR installed the public debt clock in 2010, Poland had the third highest structural deficit (after Greece and Ireland). Even though some improvements took place since then, we are still behind our neighbors like Germany or the Czech Republic. In both these countries the situation of public finance worsened after the outbreak of the global economic crisis. However, deficits were much smaller than in Poland and thanks to the consistent economic policy Germany eliminated the structural deficit in 2013.

We estimate that almost half of the improvement in the fiscal balance since 2010 has been a result of hiding the part of the official debt in ZUS (state-run first pillar of the pension system). Limiting the role of the private pension funds and nationalization of over 50% of their assets have not changed aggregated government liabilities. Official and implicit public debt will have to be repaid and financed from the future taxes.

For years there has been no comprehensive reform plan of the public finance in Poland. Jerzy Hausner’s plan from 2004 was the last attempt of reform but it was not fully implemented. Both Law and Justice (PiS) and Civic Platform (PO) parties, when they were in opposition, supported irresponsible fiscal policies. PO supported irresponsible tax cuts by PiS government which were not accompanied by proportional spending cuts. As a consequence the budget gap was increased by the 2.5% GDP. Although PiS voted against the nationalization of the pensions savings accumulated in the private funds they were even bigger enemy of the private pension pillar and proposed more radical solutions. They also did nothing to challenge the  PO-PSL coalition policy in the constitutional court.

Nevertheless, PO-PSL coalition introduced some essential reforms. In the face of the ageing of the society they increased the retirement age and reduced access pre-retirement benefits. PiS protested against both of these important reforms. PiS also voted against fiscal stabilizing rule and abstained from voting on lowering of excessive growth of local governments’ expenditures.

Neither PO nor PiS in their election programs propose any serious fiscal reforms. On the contrary, their policies will lead to higher public expenditures and deficits. Costs of PiS electoral promises in 2016-2019 (next parliament term) exceed 52 billion euro. PO promises are more conservative but they are still higher than 12 billion euro in the next 4 years. PSL and Zjednoczona Lewica (left-wing) also want to increase public expenditures and the role of public sector in the economy. Only Nowoczesna proposals are fiscally neutral and in the long-term, thanks to the announced liquidation of pension privileges, may improve Poland’s fiscal position.

Problems of the public finance negatively influence the rate of growth of the Polish economy and increase the risk of the fiscal crisis. New research (Chudik et al., 2015) shows that public debt of around 50% – 60% of GDP have negative consequences on growth. This effect disappears when the public debt is falling down (it does not happen in Poland). Moreover, permanent problems in the public finance increase the risk of the crisis which on average can lower GDP by 8% (Furceli and Zdzienicka 2011) and in extreme cases, like in Greece, even by 25%.

In this situation, lack of fiscal reforms and further destabilization of public finance is a serious threat for the Polish economy. Voters should be aware of it on October 25thand compare fiscal consequences of the political parties’ promises.