The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of Poland 2006 published on 28 June 2006.
Public finances are not yet in a sustainable condition: the current level of the general government deficit is too high, and the government’s plans as described in its Convergence Programme are not very ambitious. General government debt is not excessively high (at the end of 2005 it was about 48% of GDP, according to national definitions), but it is increasing. The government should work towards a declining target for the debt-to-GDP ratio. The constitution contains strong debt-limitation provisions, with mild constraints on policy kicking in when the share reaches 50% and a ratio over 60% requiring severe restraint. The force of these constraints was somewhat diminished by data revisions and methodological changes which recently reduced the official measure of the ratio. According to the January 2006 update of the convergence programme, the general government deficit – 4.7% of GDP in 2005, on the most appropriate definition (and recorded as 4.4% in recent revised data) – is planned to fall only to 3.7% by 2008; more progress than this should be feasible on the reasonable assumption of annual real growth averaging 4 to 5%.
However, revised national figures present a different picture, since the deficit was only 2.5% of GDP (and debt about 43%) in 2005. The gap is due to differences in the accounting treatment of contributions to open pension funds (OFE), after a major reform in 1999, which significantly improved public finances by both recognising implicit pension liabilities and taking steps to reduce them. But the reform would worsen the published deficit figure without a special temporary dispensation which, in the context of EU fiscal surveillance, treats contributions to OFE as government revenue. The dispensation expires in 2007. Therefore, despite the official deficit of 2.5% in 2005 and plans to cut it in the future, the EU Commission considers that Poland will have an excessive budget deficit, of nearly 4% of GDP, in 2007. The frustration for Poland is that few other EU countries have made such a pension reform, and, if they did, most would show deficits larger than Poland’s. Yet the higher figure is a more realistic assessment of its budget deficit.
Nevertheless, underlying economic growth is likely to provide sufficient revenue for some combination of faster deficit reduction, moderate but well-targeted increases in growth-enhancing public spending and tax cuts over time. The government should identify clear expenditure priorities within a multi-year planning framework that includes limits on overall spending. Tax measures should be financed by paring low-priority spending, rather than slowing the pace of deficit reduction. While the aforementioned pension reform improved the long-term fiscal position substantially, the gains have already been eroded by a concession to the miners. This was a step back which should not be repeated.
A large part of public spending is on social transfers, which are expensive, poorly targeted and have negative incentive effects on labour market behaviour, discussed further below. They have also proved politically difficult to change and, in the current fragile context for reform, may be even harder to amend. Nevertheless, spending on social transfers should be reduced to make room for other priorities, such as health and long-term care, child care and education, and active labour market measures.
Sources of public social expenditures
Percentage of total public social expenditure, 2003
1. Revisions to the data have reclassified a large part of what was previously classified as expenditure on disability to that on old age.
Source: OECD, 2006 (forthcoming), Social expenditure database 1980-2003.
Sufficient spending restraint would permit reductions in overall taxation without compromising deficit reduction efforts. This Survey does not offer any detailed suggestions for such reform, but three principles should be followed, for both social security and general taxes: the tax system should be simplified to increase transparency and reduce administration costs for both taxpayers and collectors; the tax base should be as broad as possible – i.e. special provisions and exemptions for particular groups should be curtailed – to keep tax rates low; and every effort should be made to whittle down the tax wedge, especially for low income-earners, so as to reduce disincentives to taking up employment.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of the Poland 2006 is available from:
For further information please contact the Poland Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Paul O'Brien and Stéphanie Jamet under the supervision of Peter Jarrett.