Economic Policy of the Polish Government: More Consumption, Less Investment

A large family in Poland now receives an additional income comparable to an average salary. The result is a reduction in the scale of poverty but also dozens of thousands of people, mainly women, leaving work.

The government of Law and Justice (PiS), formed in the autumn of 2015 after Jarosław Kaczyński’s party won the election, found an improving economic situation. After the slowdown in 2012-2013, felt throughout the European Union, in 2014 growth accelerated and in 2015 reached 2.8 percent. During the election campaign, Kaczyński argued that the economic policy implemented under Donald Tusk’s government was not ambitious enough and that Poland was threatened with the “middle income trap”—a slowing of growth at the stage where GDP per capita is significantly lower than the European Union average.

Mateusz Morawiecki, who until December 2017 was deputy prime minister responsible for economic matters and now heads the government, presented a plan of accelerating economic growth and a significant increase in investment. He announced that the government would lend particular support to innovative projects, which would allow Polish companies to compete on developed global markets.

The PiS government treats economic indicators as an element of propaganda—highlighting those which put it in a favorable light.

This program, called “Responsible Development Strategy,” popularly referred to as the “Morawiecki Plan” and presented in its outline at the end of 2015, promised that new investment projects would be financed from domestic resources and the in ow of foreign investments would be reduced.

Independent economists pointed out that the announcements of the “Morawiecki Plan” were self-contradictory. Poland has a low savings rate, which in 2003-2015 amounted to an average of 19 percent of GDP (data from the European Commission). Raising the investment rate to 25 percent of the GDP, as announced by the government, would require a significant increase in the investment rate, especially with the reduced inflow of foreign capital. Meanwhile, other government plans provided for an increase in consumption, and thus a reduction of the savings rate in the economy. However, when analyzing the economic policy of the Polish government, you have to distinguish the announcements and the official program from real actions.

Subsequent laws are passed in record time and without public consultation. This does not give businesspeople enough time to prepare for the changes or an opportunity to comment upon the proposals.

Investments Are Falling

Instead of accelerating, as the government forecasted, in 2016 the economy clearly slowed down. The GDP growth was 2.9 percent and investment outlays dropped (in constant prices) by almost 8 percent. It was the largest fall in investments since a decade and the biggest in the European Union. The investment rate, that is the relation between investments and GDP, fell to 18 percent, the lowest level since 1996. The biggest fall was registered in the investments of enterprises, the sector which contributes the most to the increase of production capacity.

The fact that the entire economy maintained its growth was due to increasing consumption and good foreign trade balance. Under the “Morawiecki Plan” it was investments which were to serve as the engine of growth and modernization, so their decline should be alarming for the government. Still, the PiS government treats economic indicators as an element of propaganda—highlighting those which put it in a favorable light. The data for entire 2017 have not been published yet, but, after three quarters, investment outlays increased by 2.6 percent in relation to an analogous period from previous year, which means that in constant prices the growth was close to nil. Investments are still much lower than in the last year under the previous government. The whole economy was growing faster, at more than a 4 percent rate, but it again resulted from increasing the consumption.

The nationalization may accelerate, if the government seizes the assets of Open Pension Funds (OFE), which hold shares of many companies listed on the Warsaw Stock Exchange.

Laws without Public Consultation

The prevailing opinion among the economists is that companies are reducing their investments, because businesspeople are not certain where the government’s policy is headed and they fear that the changes in law will have a negative impact on their revenues.

Subsequent laws are passed in record time and without public consultation. This does not give businesspeople enough time to prepare for the changes or an opportunity to comment upon the proposals—they must reckon with the possibility that regulations regarding their business might change at any time. According to Grant Thornton’s estimate, the number of pages of enacted legislation in 2017 reached the level of 35,000 pages, break- ing the record from 2016 of 31,000 pages (compared to 18,000 which was the average in 2007-2015). The breathtaking rate of legislation is accompanied by a decline in the quality of the law-making process—the World Bank indicates that the process of consultation in Poland is the shortest of all countries in our region. Among the laws passed without consultation there were such crucial economic acts as the bank tax, the ban on land trade, the ban on trade in large stores every second Sunday, or changes in the judicial system.

Some acts—e.g. about wind farm investment from May 20, 2016—dramatically worsened the profitability of projects, exposing investors to losses. The ruling party has taken control over the Constitutional Tribunal, which means that it ceased to fulfil its role as a supervisor over the proper course of the legislative process.

Expansion of the State

The government pursues an active industrial policy, but it focuses almost exclusively on government-funded projects. State-owned enterprises are to implement ideas proposed in the “Morawiecki Plan,” such as the production of electric cars, drones, and high-speed railways. In the prime minister’s vision the state is to preside over the “fourth industrial revolution” in Poland.

The government encourages foreign corporations to invest in Poland (e.g. the German Daimler AG invests 500 million euro in making engines in Jaworze, induced by tax cuts amounting to 18.7 million euro), and on the other hand, in an interview during the Davis Conference, Prime Minister Morawiecki said: “Our great worry is that economic development in the last 25 years has been based on dependence on the rest of the world.” The prime minister made an assurance that “we will not sell o the family silverware,” meaning that the government has completed the process of privatization, despite the fact the state sector is signi cantly larger than in the developed countries of Western Europe. State ownership dominates in energy industry, gas industry, coal mining, fuel industry, rail and air transport. The government has a majority share even in the Warsaw Stock Exchange.

For demographic reasons, Polish economy is increasingly burdened with a shortage of labor. This is one of the most important obstacles to investment and economic growth.

In 2016, the government went as far as liquidating the Ministry of the Treasury, previously responsible for privatization of state property. What is more, the government is slowly nationalizing previously privatized companies—calling it “Polonization” or “domestication.” The second largest commercial bank, Pekao SA, was repurchased from the Italian UniCredit group by the insurance company PZU SA, controlled by the Treasury.

According to a report by the Financial Supervision Authority, the state’s share in the banking sector after the “Polonization” of Pekao SA rose to 42-46 percent of the banking sector assets. Of all the countries in the region only Belarus, Ukraine, Russia, and Slovenia have a bigger government share in the banking sector.

Buyouts by Domestic Energy Companies

Towards the end of 2016, the government refused to allow two French energy companies (EdF and Engie) to sell their assets to other foreign investors, preferring buyouts by domestic energy companies under government control. In 2015, both these corporations jointly provided 14 percent of electricity production in the whole country. Pursuant to the act of July 24, 2016, on the control of certain investments, the Polish energy minister had the last word here, and as a result power and CHP plants owned by EdF were acquired by the largest Polish energy company PGE with a majority share of the Treasury, which after this purchase became the producer of almost 50 percent of electricity in the country.

The Połaniec power plant belonging to the French Engie corporation was taken over by the third-largest state energy company Enea.

The financial vehicle of the government is the Polish Development Fund, which invests in large projects and takes part in the takeover of private companies. The nationalization may accelerate, if the government seizes the assets of Open Pension Funds (OFE), which hold shares of many companies listed on the Warsaw Stock Exchange. The previous government took over half of these assets, but OFE still hold Treasury bonds. The current government has not yet decided what to do with OFE, but one of the ideas considered is taking over all of their assets.

Social Policy

Taking advantage of the good economic situation in the country and throughout Europe, the Polish government focused on social policy. Although part of the program presented during the election campaign in 2015 has not been implemented, two most spectacular promises have become law: an allowance for each second and subsequent child under the age of 18 of ve hundreds zloty per month (about 120 euro) and lowering the retirement age, increased by the previous government.

Child benefits granted regardless of the parents’ earnings mean a significant increase in the income of poorer families with many children. The allowances are untaxed. The average net wage in Poland is approximately 3000 zloty net, but most of the employees earn not more than 2000 zloty net. A large family in Poland now receives an additional income comparable to an average salary. The result is a reduction in the scale of poverty, but also dozens of thou- sands of people, mainly women, leaving work.

For demographic reasons, Polish economy is increasingly burdened with a shortage of labor. This is one of the most important obstacles to investment and economic growth.

The lowering of the retirement age has similar effects. The Polish pension system had been far from balanced anyway, and the quicker retirement of several hundred thousand people a year will now make the de cit even larger.

The budgetary consequences of the government’s social policy are also serious. Good economic situation, one-time government revenues (such as from the sale of licenses for telecommunications companies), new taxes and fees, and some tightening of the tax system allowed the government to maintain fiscal discipline in 2017, but Poland still had one of the largest public nances de cits in the European Union—around 2 percent of the GDP. A downturn, which must inevitably happen in a few years, will put Polish public nances in a di cult position. Although public debt is relatively low and amounts to about 55 percent of the GDP, it may exceed 60 percent within a short period, which would mean imposing the EU excessive de cit procedure on Poland, and that would imply mandatory cuts in government spending.

Witold Gadomski

is economic commentator for Gazeta Wyborcza. He specializes in economic matters. Earlier, he was the editor-in-chief of Cash weekly and of Nowa Europa daily. In the 1980s, he collaborated with opposition papers. At the beginning of the 1990s, he was a co-founder of the Liberal Democratic Congress party, headed by Donald Tusk. He is the author of the book “Leszek Balcerowicz”, and co-author of “Capitalism. Facts and illusions”.

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