2019-04-04
FOR Communication 12/2019: Who is going to pay for Kaczyński’s Five?
The Law and Justice (PiS) party’s new election promises of, namely, the “Kaczyński Five”, will cost the Polish public finances PLN 40 billion per year . In addition, the Law and Justice (PiS) party passed a resolution on the increase in a number of expenditures for the following years, mainly on health care and the army. The implementation of the “Kaczyński Five”, similarly to the PiS election promises of 2015, will force the government to relatively reduce expenditures for other purposes, raise taxes, and increase the deficit.
- The implementation of election promises after 2015, despite the fact that the Law and Justice government withdrew from half of them, has forced the government to reduce other expenditures and increase taxes. The government has fulfilled two of the costliest promises: it has introduced the “Family 500+” programme and lowered the retirement age, while refraining from reducing VAT, currency conversion of loans originally contracted in Swiss francs, and increasing the tax free allowance to PLN 8,000 which was limited only to a narrow group of taxpayers with the lowest income. In 2015, the government had more leeway compared to now, thanks to the fastest economic growth the EU has seen in many years, which has also boosted our economy by making it easier to hide the costs of delivering on election promises:
- The Law and Justice (PiS) government reduced a number of expenditures in relation to the GDP. The public sector wage bill growth was particularly slow (2015-2018 by 13% compared to 18% in the private sector); the good mood of investors also helped to reduce the costs of servicing the public debt. Thanks to Professor Hausner’s reform, which tightened the criteria for granting disability benefits, expenditures on these benefits dropped, and the rules for the indexation of disability benefits and pensions made their growth slower than the increase in wages and related income from contributions. In terms of broad categories of expenditure, social transfers have been on the rise, with a decrease in spending on education and almost unchanged spending on health care (the adopted increase in health care expenditure in effect concerns only the upcoming years).
- As for income, rapid economic growth was conducive to a rapid increase in tax revenues and social security contributions. Tax revenue growth was faster than economic growth, which was a result of the good economic downturn and the cyclical decline of the grey economy, making the tax system more rigid and increasing taxes. The sustainability of the improvement in tax collection will only be verified by the next economic slowdown – VAT receipts grew faster than the economy in the past, even during good periods, but collapsed in times of strong slowdown. Apart from the new tax on bank loans (tax on financial institutions), which gives about PLN 4 billion annually, a similar increase in tax revenues results from the freezing of tax thresholds of the personal income tax (PIT).
- Despite a very good economic standing in 2018, Poland recorded a deficit in the public finance sector, which negatively distinguished us from other EU countries. According to the latest available comparable data, a surplus was expected in 2018 in 14 EU countries.
- The Law and Justice (PiS) government reduced a number of expenditures in relation to the GDP. The public sector wage bill growth was particularly slow (2015-2018 by 13% compared to 18% in the private sector); the good mood of investors also helped to reduce the costs of servicing the public debt. Thanks to Professor Hausner’s reform, which tightened the criteria for granting disability benefits, expenditures on these benefits dropped, and the rules for the indexation of disability benefits and pensions made their growth slower than the increase in wages and related income from contributions. In terms of broad categories of expenditure, social transfers have been on the rise, with a decrease in spending on education and almost unchanged spending on health care (the adopted increase in health care expenditure in effect concerns only the upcoming years).
- Due to slower economic growth and the exhaustion of a number of reserves, the government has less leeway than four years ago when implementing “Kaczyński’s Five”. We can now see the first attempts at probing who to encumber the cost of the new promises.
- As for expenditure, the government has already exhausted the scope for further expenditure restraint on a number of expenditure items without thorough reforms. Teachers’ protests show that further attempts to reduce salaries in the budget sector are becoming less and less realistic (last year the government, in its Multi-annual Financial Plan of the State, assumed further limitations of salaries in the budget sector until 2021). The increase in health care expenditure in relation to GDP was delayed by an accounting trick – the calculations used GDP from two years ago, as a result of which the actual health care expenditure in relation to GDP hardly changed between 2015 and 2019. However, in the following years, with slower economic growth and a proportion increasing in accordance with the law, it will not be possible to repeat a similar process. Currently, all ministries are looking for means of saving, and potential legal loopholes, e.g. the 13th pension for soldiers is to be financed through the Ministry of Defence’s budget, which means that it will be included in the statutory 2.1% of GDP allocated to the army.
- As for income, the search for opportunities for tax increases will continue. The changes will most likely affect not the rates themselves, but other, less visible, tax rules. The Polish tax system contains a number of exceptions and reliefs, the reduction of which may result in revenue growth. An example of such actions may be the discussions about the so-called “entrepreneur test” – tax rates would not change, but the possibility of application of the preferential 19%-personal income tax and flat-rate social security contributions would be limited. Also, in other areas of tax legislation, a similar trend towards an upward alignment with the tax burden can be expected.
- Prime Minister Mateusz Morawiecki has already announced that the implementation of the promises of the “Kaczyński Five” will result in an increase in the deficit and debt of the state budget.
- As for expenditure, the government has already exhausted the scope for further expenditure restraint on a number of expenditure items without thorough reforms. Teachers’ protests show that further attempts to reduce salaries in the budget sector are becoming less and less realistic (last year the government, in its Multi-annual Financial Plan of the State, assumed further limitations of salaries in the budget sector until 2021). The increase in health care expenditure in relation to GDP was delayed by an accounting trick – the calculations used GDP from two years ago, as a result of which the actual health care expenditure in relation to GDP hardly changed between 2015 and 2019. However, in the following years, with slower economic growth and a proportion increasing in accordance with the law, it will not be possible to repeat a similar process. Currently, all ministries are looking for means of saving, and potential legal loopholes, e.g. the 13th pension for soldiers is to be financed through the Ministry of Defence’s budget, which means that it will be included in the statutory 2.1% of GDP allocated to the army.
- Within 2-3 years, the introduction of the “Kaczyński Five” will mean an increase in the state debt deficit unless the government decides to plunder funds from the Open Pension Fund (OFE) or the Demographic Reserve Fund (FRD). Over the next few years, in order to avoid an explosion of public debt, the implementation of the “Kaczyński Five” will require an increase in taxes and a relative reduction in other expenditures. Uncertainty about who will be burdened with the taxes needed to finance these promises will hit investments, exacerbating the Polish economy’s long-term problems related to low investment rates.
Author:
Aleksander Łaszek PhD, Chief Economist
[email protected]a
