Economic surveys and country surveillance

Economic Survey of Poland 2010: Ensuring a balanced recovery after the global downturn

 

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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Poland published on 8 April 2010.

 

Contents

Strong relative performance throughout the crisis

Despite a severe slowdown, Poland was less affected by the global recession than other OECD countries, especially in Eastern Europe. Indeed, it is expected to have recorded the best real growth outcome in the OECD in 2009 (at 1.7%), before recovering steadily towards 3% growth in 2011. Resilient final demand and the solidity of the financial system helped to contain the contagion of the economic crisis, which hit some other countries in the region so harshly. At the outset the economy had been suffering from significant excess demand, which has been eliminated by the slowdown, but external imbalances were not so large as to threaten stability.


Incipient capital outflows based on reduced appetite for the heightened risks nevertheless triggered a significant depreciation of the zloty, which cushioned the downturn, but also contributed to the postponement of euro adoption. The prominent role played by foreign owned banks may have protected the financial system, while still limited financial development explains the low penetration of the complex financial products that were at the core of the global crisis. In this context, the flexible credit line agreed with the IMF in April 2009 helped to restore capital market confidence. The real trade balance improved as a result of the exchange rate depreciation: domestic producers became more competitive in both home and foreign markets, and import volumes fell more abruptly than exports, despite relatively robust private consumption. Domestic demand was supported by fortunate pre crisis cuts in taxes and social contributions, and infrastructure investments related to EU funds and the 2012 European football championships. The labour market adjusted quickly through a rapid slowdown in real wages after hefty increases in 2008, thus limiting employment cutbacks.


Proportionate policy response given an already weakened fiscal position

As the downturn led to prospects of excess supply, the central bank (NBP) swiftly cut official rates by 250 basis points. Unconventional measures were also adopted to ensure liquidity in the domestic interbank market. Maturities for NBP repurchase agreement operations were extended, the range of accepted collateral broadened, and swap lines were negotiated with other European central banks. While excessive borrowing in foreign currency had been actively discouraged already in 2006, the Polish Financial Supervision Authority convinced financial firms to retain their 2008 profits in order to strengthen their capital base and reinforced the supervision of both banks’ balance sheets and their funding links with foreign parents. Guarantees for individual deposits were also raised to reassure depositors, and some other measures were introduced to strengthen the stability and maintain the liquidity of the domestic financial system. On the fiscal side, beyond the partly uncompensated tax cuts implemented since 2006 and the impact of automatic stabilisers, an anti crisis plan worth about 0.7% of GDP was implemented, including such measures as co financing of front loaded investments related to EU funds, allowing firms to temporarily accelerate the depreciation of certain assets and facilitating the tax deductibility of R&D spending.


EU transfers will have increasing macroeconomic impacts

Poland has become the largest beneficiary of EU cohesion policy in absolute terms. Over 2009 15 EU transfers will represent an average of 3.3% of GDP per year (including Common Agricultural Policy transfers). They provide a unique opportunity to modernise the economy, but absorbing them efficiently and managing the macroeconomic repercussions will be a challenge. While various leakages will dampen the demand effect, these transfers are expected to raise real growth by an average of 0.5 to 1.5 percentage points per year. Unless there is available slack, this will generate inflationary pressure, especially if this period coincides with euro-adoption prospects that might raise investors’ confidence, leading to a real exchange rate appreciation, a shift in activity in favour of the non tradable sectors and an enlarged trade deficit.
In this context, the authorities will have to strive to maintain a balanced growth path. Structural policies to accompany EU transfers should focus on ensuring a smooth labour  and product market reaction to the stimulus. Due to co financing rules, EU funds tend to boost national budgetary expenditure and could induce a pro cyclical fiscal stance, in turn requiring an offsetting fiscal tightening. Macro policies should be based on precise assumptions related to the EU transfers path, and the risks of overheating should be carefully monitored.


The withdrawal of monetary stimulus should begin soon if fiscal policy is not tightened significantly in the immediate future

As Poland has successfully avoided a major negative output gap, and given the projected pick-up in growth, the 3.50% level of the main official interest rate implies an accommodative stance going forward. In principle, it would be best if fiscal policy were tightened decisively without delay. Should such a consolidation not be forthcoming, however, it would fall to monetary policy to tighten at an early stage, with the exact pace depending on economic prospects and forthcoming data. Moreover, the continuity of monetary policy should be enhanced by introducing overlapping terms to the appointments of Monetary Policy Council (MPC) members, as recommended in previous Surveys.


Implementing a credible fiscal consolidation is the main challenge

The authorities did not use the exceptional 2003 08 expansion to improve the fiscal position in a sustainable way, resulting in the need to use privatisation receipts in the recent period of lower stock prices so as to meet fiscal targets. Indeed, the measures taken in 2007 09 to reduce the tax wedge across the board are welcome, since they tend to boost employment, though the tax wedge remains larger than the OECD average and progressivity remains relatively low. However, as they were not totally financed in the budget, they resulted in a pro cyclical fiscal expansion between mid 2007 and mid 2008, with the underlying general government balance deteriorating by around two percentage points of GDP.


Subsequent attempts to cut spending and raise revenues through an ambitious privatisation programme have not been sufficient to contain the debt level decisively below the precautionary thresholds of 50% and 55% of GDP, which are meant to trigger correcting measures. Indeed, adding the effect of the slowdown to the deterioration of the structural position resulted in a general government deficit of over 7% of GDP in 2009. General government debt is projected by the OECD to reach 56.5% of GDP in 2010, threatening the constitution’s 60% of GDP debt limit in 2011 if no consolidation measures are undertaken. As a result, in order to get around that constraint the government recently debated whether to shift back part of the contribution to open pension funds into the social security’s first pillar. This would have reversed a significant part of the pension reform designed in 1999 and led to the replacement of explicit pension liabilities (government bonds purchased by pension funds) with implicit ones (notional accounts indexed on government bond yields). The recent shelving of that idea is welcome, given that it would have undermined the commitment to the reformed pension system and may have lessened incentives to lower the deficit down the road.


In late January 2010 the Prime Minister presented the Plan for the Development and Consolidation of Finances 2010 11, which remains to be approved by the government. Some of the foreseen consolidation measures are broadly in line with the recommendations included in this Survey: strengthening fiscal institutions; completing the pension reform; broadening tax bases; and generating substantial privatisation revenues. The plan is essentially a set of proposals (without any accompanying draft legislation, many of them being subject to further public debate) to contain the increase in the general government deficit and public debt and create conditions for meeting the long-term development objectives pursued by the authorities. Its success will depend on the degree of ambition shown in the implementing legislation, which is expected to be adopted by the end of 2010. The concomitant update of the Convergence Programme, which projects a reduction of the Maastricht deficit from 7.2% of GDP in 2009 to below 3% in 2012, without providing quantified concrete measures, is disappointing to the extent that the main part of the effort is back-loaded to 2012, threatening the overall credibility of the commitment to resolutely restore sound public finances.


Greater fiscal discipline is a pre-requisite to both internal and external balance. Ensuring sound public finances will require structural reforms. For example, Poland’s numerous farmers benefit from an overly generous special social security system, which provides inappropriate incentives to stay in the sector (at least officially) and weighs on public expenditure. Reforming this extensive safety net will be sensitive, however, and costly. With the long term objective of aligning it with the general scheme, subsidies should be gradually reduced by better linking contributions to incomes, while adopting complementary measures to develop transport and telecommunication infrastructure and enhance access to education in rural areas. Increasing employment rates at older ages, which are among the lowest in the OECD, would also greatly facilitate the management of fiscal policy. The tightening of access to early retirement achieved by the 2008 bridge pension reform is an important and welcome step; it is officially expected to save PLN 2 billion in 2009 and PLN 6 billion in 2010. Although the “50+ programme”, designed to raise older workers’ labour market participation, also goes in the right direction, the statutory retirement age for women should converge steadily with that for men, which should itself be indexed according to increasing life expectancy. Early retirement should also continue to be reduced. For example, while all pensions paid from the general scheme will become actuarially neutral from 2014, some special regimes applying to certain occupations, beyond farmers, such as miners, soldiers and police officers still encourage early retirement.


Cutting the structural deficit should also be achieved by broadening the tax base. In that regard, calculation and publication of the list of tax expenditures would be useful in identifying areas where savings could be made. The VAT treatment of certain professional services should be improved (such as by the requirement to use cash registers as envisaged in the consolidation plan) in order to enhance tax collection, while the option of choosing to pay a lump sum income tax without keeping accounting books should be restricted in order to link tax receipts more closely to earnings. Farmers should also be made liable for the income tax rather than the lump sum agriculture tax. These measures should be accompanied by better administrative enforcement. Moreover, receipts can be raised in less distortionary ways such as by reforming property taxes and introducing a carbon tax.


On the spending side, although Poland has managed to reduce the inflow of disabled pensioners by tightening eligibility criteria, a re evaluation of the large stock of benefit recipients with permanent eligibility built up under earlier lenient criteria could generate additional savings. Moreover, cutting the wage bill and increasing public administration efficiency by linking career development to performance more systematically would also help to restore fiscal sustainability. All these measures would help Poland meet the Maastricht deficit and debt criteria, which must be satisfied for successful adoption of the euro.


The crisis has curbed previously growing imbalances

1. Quartely data
2. Year-on-year growth rates, monthly data
3. As a percentage of GDP, quaterly data, four-quarter moving average
Source: National Bank of Poland (2009), OED, OECD, Economic Outlook Database.

 

How to obtain this publication

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations

The complete edition of the Economic Survey of Poland is available from:

 

Additional information

For further information please contact the Poland Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Hervé Boulhol and Rafal Kierzenkowski under the supervision of  Peter Jarrett. Research assistance was provided by Patrizio Sicari.

 

 

 

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