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Communication 9/2017: Costly announcements of Civic Platform (PO)

Communication 9/2017: Costly announcements of Civic Platform (PO)

Grzegorz Schetyna, the leader of the Civic Platform party (PO), while justifying the motion of no confidence against the PiS government in the Parliament on 7 April 2017, presented the main program objectives of his own party. In addition to important constitutional declarations (respect for the Constitution, departure from the centralization of the state towards greater autonomy of local governments), in his speech, he announced a potentially costly increase in the scale of the 500+ program and introduction of thirteenth pensions.

Political system issues

The limitation of executive power, the tripartite division of powers, and respect for independent institutions are key elements that distinguish democracies of the West from authoritarian states. The idea of ​​limiting executive power was inspired by both the authors of the US Constitution and the authors of similar acts in Western Europe.  This limitation and the independence of institutions that guard it, enshrined in the basic laws of these countries, are intended to safeguard the freedom of the citizen and the stability of the law.   This is important not only from the point of view of the individual freedom of citizens, including economic freedom but also for long-term economic growth. Where an entrepreneur is confident that the authorities of a country are acting in accordance with the Constitution and any disputes are resolved by independent courts, he is not afraid to invest and develop his business. Populist governments, such as in Latin America and Asia, are contrary to the idea of ​​limited executive power, its tripartite division, and respect for institutional independence. In these countries the government, referring to the results of the elections, assumes that it can do whatever it wants, leaving citizens unprotected from abuse of power. It is impossible to talk about an effective protection of the rights of citizens in a situation when the disputes on the line of citizen-government are settled by the government-controlled courts.

Grzegorz Schetyna rightly promised to restore the role of the constitution and independence of institutions such as the Constitutional Court, the prosecutor's office and the National Council of the Judiciary. It should be borne in mind that in the past, the PO and PSL's (Polish Peoples’ Party) actions on the Constitutional Court judges also violated law, but at a scale incomparably smaller than the moves of PiS, that incapacitated this institution, crucial to the protection of the Constitution and the individual freedom.

Decentralization of the state

Another important factor that forms an institutional order for long-term growth are local authorities. Decentralization plays an important role not only in the United States and Europe but also in developing countries such as Argentina, Brazil, China, India, Colombia and South Africa. Making decisions closer to citizens allows for better informed public policy, and the citizens themselves (except for pathological cases) are able to control authorities better. World Bank praises the reforms of local self-governments in Poland, which made them similar to those in countries with high levels of development and recommends further decentralization. This would help to increase their effectiveness and the involvement of citizens.

In this context, one should positively evaluate the willingness, declared by Grzegorz Schetyna, to ​​move away from the government's ongoing centralization of public authority and empower local governments instead. One of the concrete solutions is to transfer the voivodeship's competence to voivodship marshals and liquidate voivodeship offices. We welcome support for local government and decentralization of state management. Their implementation will allow for more efficient management and will help to decouple local governments from central politicians. A relative increase of the political weight of local governments will also contribute to the development of civil society. In this matter we should follow the example of  Switzerland or Scandinavian countries, leaders in global decentralization (Worldwide Indicators on Localization and Decentralization). For comparison, in the ranking of decentralization, Poland ranks 14th but only 70th in the category of political decentralization.

Grzegorz Schetyna has also announced that local governments will receive part of VAT revenues. This would require that some form of regional VAT is introduced, as a substitute or as an addition to the current centralized tax formula. Such solution is very rarely used in other countries and is considered relatively inefficient. Examples of its use are India, Brazil and some provinces of Canada. The introduction of such a solution will complicate the tax system and will also make its enforcement more difficult. It should be recalled that the so-called VAT Gap, a measure of VAT collection rate, in Poland was almost 25% of VTTL (VAT Total Tax Liability) in Poland, which is one of the weakest results in the European Union. In addition, the introduction of such a solution would impede the unification of the VAT system within the EU. For this reason, we consider further complications of taxes to be unnecessary and potentially damaging.

Public finances

According to the research of FOR and other institutions such as the European Commission and OECD, the situation of public finances in Poland is bad. The main problem is a persistent high structural deficit, which is only temporarily masked by the collapse of investment spending and the cyclical increase in tax revenue. The good performance of tax revenues in the first quarter of this year is partly due to one-off factors - the transfer of VAT refunds from January 2017 to December 2016 and the changeover from quarterly to monthly settlements; it can not be the basis for a further, sustained increase in public spending.

Against this background, it is necessary to raise the question how PO intends to finance Grzegorz Schetyna's promises: the extension of the 500+ program to all children and introduction of thirteenth pensions. Both proposals can be very costly - covering all children with the 500+ program would increase the cost of this program by PLN 18 billion, and the payment of thirteen pensions - only for people receiving pensions from ZUS - would cost almost PLN 10 billion a year. Introducing both initiatives would increase the public finance deficit by nearly PLN 30 billion (1.5% of GDP), to 4% - 4.5%, which is distinctly above the EU 3% threshold. Such a sharp increase in the deficit would accelerate the growth of public debt, which already raises dangerously fast.

Communication in Polish aviliable here.

You are welcome to contact our experts:

Aleksander Łaszek - Chief Economist at FOR

Rafał Trzeciakowski - Economist at FOR

Jan Toczyński - Economist at FOR

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