Poland has been significantly affected by Russia’s war of aggression against Ukraine. Output levels declined from 2022 to mid-2023 as inflation surged, driven by high energy and food prices. The financial system has remained stable. While the economy has been recovering since mid-2023 as inflation declined, inflationary pressure from the relatively robust labour market suggests that monetary policy should remain sufficiently restrictive to ensure that inflation durably returns to target. Substantial fiscal policy measures to support the economy together with permanent increases to social, health and defence spending have widened the budget deficit. Fiscal consolidation is needed to moderate inflationary pressures and to ensure the public finances are on a prudent path. Raising tax revenues by increasing property and environmental taxes and streamlining preferential consumption tax rates and exemptions should be on the policy agenda. Family benefits should be better targeted. In the longer term, given limited private retirement savings, the ageing population poses a risk to public finances. Aligning the statutory retirement age for women in line with that for men and linking the retirement age to improvements in life expectancy would help to manage pension costs.
OECD Economic Surveys: Poland 2025
Abstract
The Polish economy is recovering from the energy shock and high inflation. Prior to the pandemic, real GDP was growing significantly above the OECD average and growth was particularly strong, at 4.5%, in 2019. The pandemic hit Poland hard, but the economy had already recovered to pre-pandemic levels by the start of 2021 and real GDP expanded by a further 10.2% in the year to Q1 2022. However, since the start of Russia’s war of aggression against Ukraine in February 2022, growth has been dragged down by higher uncertainty, and high European energy and food prices. Trade with Ukraine has increased sharply in both directions, although it impacted Polish agricultural markets, and demand has increased for logistics services, defence equipment, vehicle repair and other areas. Real GDP declined significantly over 2022, driven by high inflation and weak consumption growth. The fall in output was greater than in other Central and Eastern European countries, particularly due to weak investment and a large unwinding of inventories (Figure 1.1). This was partly offset by growth in exports, while imports fell. The economy has been recovering since the beginning of 2023 and has attained early 2022 output levels in 2024, but it has lagged behind the OECD average. Despite more recent strength in growth, the recovery has been gradual and a significant output gap remains.
Source: OECD Analytical database; and Eurostat.
The war in Ukraine led to higher inflation and weakened domestic demand
Poland’s inflation shock was substantial, similar to neighbouring countries but higher than in most OECD countries. Food and energy prices, already higher than before the pandemic, sharply increased following Russia’s invasion of Ukraine, exacerbated by a depreciation in the exchange rate, and pushed up headline inflation to its highest levels since the mid-1990s (Figure 1.2). Policy measures, which reduced value added tax (VAT) on basic food products and capped energy prices, were substantial and lowered headline inflation by approximately 4 percentage points. Headline inflation peaked at 18.4% by February 2023. Higher energy prices have also indirectly affected the cost of goods and services. Companies have managed to pass these costs through and, in many industries, boost their profit margins (Gradzewicz, 2024). This contributed to push up core inflation to 12.3% by March 2023.
Inflation has declined, but it has risen again more recently and is above target. Many of the external shocks that have pushed up inflation are unwinding. Energy and food price growth have moderated, while the exchange rate has appreciated and is back to pre-pandemic levels (Figure 1.2). Together with an easing in global supply chain tensions, Polish producer prices have continued to fall in 2024. By March 2024, headline inflation had fallen to 2%, reaching briefly the central bank’s target. However, as VAT on basic food products was reintroduced in April and energy support measures were gradually withdrawn from the summer onwards, inflation rose back up to 4.7% in December. Core inflation had also declined over the first half of 2024, but it rose again in the second half of the year and was 4% in December. Services’ inflation remains elevated as wage growth has continued to be relatively strong over the year, although some of that has been absorbed by companies through reduced profit margins.
Note: The inflation target is defined as 2.5% with a symmetric band for deviations of +/-1 percentage point in the medium term.
Source: OECD Consumer Price Indices database; and National Bank of Poland.
Wage growth rose strongly after the war in Ukraine started, driven by high inflation, and has been around 13% since 2023 (Figure 1.3, A). The national minimum wage has risen and contributed to aggregate wage growth as the government raised it by 16% in January 2023 and by around 20% in 2024 (Figure 1.3, B). A further increase of 8.5% has been proposed for 2025. Relative to most OECD countries, national minimum wages account for a higher share of median wages and a higher proportion of workers earn lower wages. Together with 20% pay rises for public sector workers and 30% for teachers, public sector wage growth has outpaced private sector wage growth. In the economy as a whole, nominal wage growth initially lagged inflation but since mid-2023 it was higher, leading to positive real wage growth. This real wage growth broadly matched productivity growth in the beginning, but it has since grown faster. Consequently, this is making Polish workers more expensive relative to other countries and has reduced the Polish economy’s cost-competitiveness, although this follows a period prior to the pandemic when productivity rose faster than real wages. There is uncertainty about to what extent strong wage growth might persist and pass through to inflation. However, firms are planning to reduce the pace of pay increases over the coming year and there are signs that employment has started to soften (NBP, 2024a; 2024c). Union coverage is relatively low in Poland and private sector wages are likely to adjust to market conditions.
Source: OECD Analytical database; and OECD Earnings database.
Household consumption is slowly growing again. Consumer spending had significantly weakened due to a spike in uncertainty at the start of 2022 and the unexpected rise in inflation that pulled down consumer confidence. Negative real wage growth contributed to an annual fall of 2.4% in real private consumption by mid-2023 (Figure 1.4, A). This was reflected in much weaker activity in wholesale and retail trade. The extent of the decline was mitigated by several factors. A large inflow of Ukrainian refugees and the help provided to them boosted consumption levels. Moreover, income growth among poorer households was relatively robust, partly supported by increases in minimum wage and policies that limited energy and food price inflation (Figure 1.4, B). Households also ran down savings accumulated during the pandemic to smooth consumption. As real wages started rising again in mid-2023, private consumption started recovering. Purchases of durable goods bounced back, signalling growing confidence. However, having run down their savings since 2022, households have become increasingly cautious. In 2024, only a fraction of the record increases in real wages translated into higher consumption. Surveys suggest a desire by households to rebuild savings (NBP, 2024a).
Note: In Panel B, there is no reported survey data on income in the 10th decile.
Source: OECD Analytical database; and Eurostat, National Bank of Poland and Statistics Poland.
Total gross fixed capital formation expanded by 2.1% over 2022 and rose by 10% in 2023, (Figure 1.5 A). This was driven by public investment and EU funds. High uncertainty, lower business confidence and higher costs of capital have led to weaker private investment growth. Housing and commercial real estate investment has significantly contracted. Some companies have been reluctant to invest given the proximity of the war and due to uncertainty around the stability of domestic regulations and EU funds (Kasek and Benecki, 2024). On the other hand, Poland remains attractive to foreign investors and FDI increased strongly between 2021 and 2023, boosted by the development of chip and battery parts production. Public investment surged as projects funded under the previous EU financial framework were completed. However, investment growth was more sluggish in 2024 as new EU funds were disbursed slowly, partly due to delays in implementing the Recovery and Resilience Plan. The slowdown is likely to be temporary as inflows of EU funds pick up in 2025 (Figure 1.5, B). It is unclear, though, to what extent investment will accelerate as a tight labour market makes it difficult to find workers.
Note: Data in Panel B are approximate.
Source: OECD Analytical database; and National Bank of Poland, Ministry of European and Regional Development.
The labour market has been relatively resilient so far. While Poland’s economy has grown, the working age population has been steadily decreasing since 2010. However, growing labour demand drove up the employment rate and pushed up the labour market participation rate. Despite the sharp slowdown in activity since 2022 and an influx of Ukrainian workers, employment levels have been broadly unchanged. The labour market has remained tight, which drives up hiring and firing costs and may partly explain why some firms hoarded labour during the downturn. The unemployment rate has been at record lows just under 3% in recent years, while the number of vacancies relative to those unemployed was around 20% in the first three quarters of 2024, similar to before the pandemic (Figure 1.6). Workers are more difficult to find in information and communications technology (ICT), construction, and transportation and storage, but are more easily found in industry and administrative and support services.
Migration has helped address labour shortages. It has been playing an increasing role in the economy as the share of migrants has risen six-fold since 2015 to 1 million registered foreign workers by the end of July 2024. These workers are mostly from Ukraine and Belarus. Since the start in the war in Ukraine, many Ukrainian men working in Poland left their jobs in agriculture, construction and manufacturing to return to Ukraine. At the same time, around a million Ukrainians, mostly women and children, came to Poland. They integrated quickly and almost 70% of adults found work by mid-2024, mostly in services. On balance, this raised labour supply by 2% and alleviated pressure on wage growth. Further migrant inflows could occur this winter if conditions in Ukraine deteriorate. Nevertheless, migration has historically played a smaller role in the Polish labour market than in most other OECD countries, but may need to play a greater role to address specific skills shortages and as the population ages.
Note: In Panel B data for 2024 represents an average of the first three quarters of the year.
Source: OECD Analytical database; and Statistics Poland.
Trade has supported economic growth, despite a deteriorating external environment. Poland suffered a 3.6% decline in its terms of trade over 2022 due to exchange rate depreciation and higher prices for imported fuel and food. Imports rose strongly on the back of higher energy and food prices in 2022, although weaker consumption also weighed on import volumes. As global supply tensions eased, the unwinding of previously built-up inventories reduced import demand over 2023. At the same time, exports have been relatively resilient, growing faster than GDP and imports. However, competitiveness has declined as unit labour costs have increased by over 30%, rising relative to the OECD and neighbouring countries The current account has been in surplus since the start of 2023 but has fallen into a deficit of 0.3% of GDP in the second quarter of 2024. An appreciation of zloty since mid-2023 and slowdown in European trade partners, notably Germany, is weighing on manufacturing and exports. The current account surplus was limited by a negative primary income balance, which reflects foreign FDI profits. External imbalances are relatively low. Poland’s net international investment position relative to GDP was a moderate -32% in mid-2024, while total foreign debt declined and stood at 50% at the start of 2024, the lowest level since 2007.
Source: OECD Analytical Database.
Monetary policy has contributed to lower inflation
Monetary policy has been tightened in response to higher inflation. Having already lifted interest rates from 0.1% in October 2021, the National Bank of Poland continued raising the reference rate from 2.25% in January 2022 to 6.75% by September 2022, substantially increasing the cost of credit for households and firms. This had led to a contraction in borrowing, while boosting deposits in banks (Figure 1.8). Higher interest rates contributed to a slowing of growth and a widening of the output gap, exerting downward pressure on inflation. Consequently, headline inflation more than halved between February and September 2023 while core inflation declined by a third. Inflation expectations have remained anchored. Falling inflation allowed the central bank to decrease interest rates by 1 percentage point in the autumn of 2023, but interest rates have remained unchanged since then due to concerns about inflation persistence.
Going forward, monetary policy should maintain its restrictive stance. There is scope to gradually lower interest rates further as inflationary pressures ease durably. An earlier appreciation of the exchange rate is exerting downward inflationary pressure. Polish producer prices indicate goods inflation is likely to be subdued. However, services inflation remains elevated and is driven by strong wage growth and a robust labour market. The spare capacity in the economy should help moderate wage growth. Nonetheless, there is uncertainty around this disinflation process and the timing of inflation stabilising around the target. In this context, monetary policy should remain sufficiently restrictive but ease gradually towards a more neutral stance as data confirm that inflationary pressures are dissipating and spare capacity in the economy is diminishing. Fiscal consolidation will help reduce inflationary pressure and support monetary policy easing.
Note: Panel A represents transactional changes. The Other category covers credit card loans, loans to individual entrepreneurs and individual farmers as well as other receivables.
Source: National Bank of Poland.
The economy should continue to recover as inflation falls towards the target
The economy should continue to recover as inflation eases. While output has recovered to pre-war levels at the start of 2024, there is still a significant degree of spare capacity, which is expected to fade as the economy grows. Headline inflation is projected to eventually return to target, but the planned withdrawal of energy support measures at the end of 2025 will slow its decline. Consequently, headline inflation should average around 5% over 2025 and decline to 3.9% over 2026, but is expected to reach the upper range of the inflation target by the second half of 2026. Core inflation should broadly decline as pressure from the labour market eases and wage growth slows. The recovery will be driven by domestic demand. Private consumption should grow, boosted by higher incomes and gradually decreasing interest rates. After a slowdown in investment growth in 2024, the disbursement of new EU funds should lead to a strong pick up in investment activity in 2025. Real GDP is projected to grow by 2.8% in 2024, 3.4% in 2025 and 3% in 2026 (Table 1.1).
1. Contributions to changes in real GDP, actual amount in the first column.
2. Consumer price index excluding food and energy.
Source: OECD Economic Outlook 116 database.
The new government elected in 2023 has set out a range of reforms (Box 1.1). The government’s fiscal plan, outlined in a medium-term strategy consistent with the revised EU fiscal rules, envisages a small narrowing of the deficit in 2025 as the economy recovers and temporary support measures are gradually phased out. The pace of fiscal consolidation is then expected to increase substantially from 2026 to 2028. Monetary policy is projected to gradually ease as interest rates decrease to a more neutral stance by the end of 2026 conditional on a durable decline in inflationary pressures.
A coalition of the Civic Coalition, the Third Way and the Left has been in government since December 2023. The key policy priorities include:
Improving the economic environment through a more predictable tax and regulatory framework, unblocking and expediting the disbursement of EU Recovery and Resilience funding, and reducing the tax burden for smaller businesses.
Strengthening science and higher education through restoring university autonomy, raising funding for R&D and improving public-private cooperation to boost innovation. Raising spending on education, introducing healthier nutrition in schools and reforming the curriculum to develop skills relevant for new technologies, improving problem-solving and social skills, and boosting knowledge of foreign languages.
Reforming the judiciary through ‘depoliticisation’ of key appointments and shortening the length and cost of proceedings. Strengthening the public sector by raising remuneration, and by professionalising the civil service. Improving governance through higher transparency, boosting efforts to fight corruption and improving corporate governance of state bodies and publicly owned companies.
Strengthening women’s rights by expanding support for couples wishing to conceive, and pregnant women. Policy will boost support for women returning to work after maternity, including expanding the nurseries network, and will aim to improve gender pay gaps and equal treatment in the labour market.
Expanding social support by increasing benefits for families, people with disabilities, carers and by construction of municipal and social housing and support for renovation.
Improving the quality and accessibility of the healthcare system by raising spending on healthcare, reducing hospital debt, strengthening the role of primary care and expanding mental healthcare services.
Accelerating efforts to address climate change through boosting the use of renewable energy, developing nuclear energy, and modernising and expanding the energy grid. Policies will continue to aim for affordable energy prices for households and firms based on market competition. A just and fair transition is planned for employees in the energy sector.
Expanding the efficiency and accessibility of public transport through restoring bus connections, developing the rail network, and facilitating travel across different public transport providers.
Bolstering national defence through cooperation with the EU and NATO and investing in more equipment while raising the army’s efficiency.
Source: Umowa Koalicyjna (2023).
The outlook is clouded by a number of uncertainties. It is unclear to what extent inflation will be persistent. Continued high wage growth accompanied by strong national minimum wage increases could pose an upside risk to inflation and a downside risk to growth. Such a scenario would warrant interest rates to be higher for longer. Faster-than-expected absorption of EU funds could boost investment, but short timeframes and labour shortages could also hinder its implementation. Geopolitical risks remain elevated. Further trade disruptions could increase inflation and lower growth, while fiscal consolidation could take a toll on growth. An escalation of the war in Ukraine or a broadening of the conflict could lead to disruption, higher uncertainty and currency depreciation, pushing inflation up and growth down (Table 1.2).
Prior to the pandemic, household borrowing was growing in line with GDP and continued rising through the pandemic as interest rates fell to record lows. However, as interest rates on mortgages have roughly doubled relative to the pre-pandemic period, new mortgage lending has declined. Even though most mortgages have floating rates, households have managed to adjust to higher borrowing costs. Having initially contracted, consumer credit resumed growing under more stringent lending conditions. Household lending as a share of GDP fell from about a third of GDP to a quarter, lower than in many OECD countries. At the same time, the rate of non-performing loans has slightly declined (Figure 1.9, A). This is partly due to low leverage among borrowing households, but high nominal wage growth and low unemployment rates have also helped. Payment holidays, which were introduced in 2022 and allow borrowers to smooth their payments, have been extended until the end of 2024, although they became a subject to income criteria. Overall, households pose limited credit risk to banks’ balance sheets.
Housing market activity has eased. The rise in interest rates has depressed both housing demand and supply. Transactions have declined, while the number of new building permits and housing investment have contracted. This has led to a fall in real residential prices between 2022 and mid-2023, although they have recovered since (Figure 1.9, B). Real rental prices remained broadly stable, except in Warsaw where they rose as a result of immigration from Ukraine. The ‘2% Safe Mortgage’ subsidy programme provided reduced borrowing rates to first-time borrowers and temporarily boosted mortgages and transactions in the second half of 2023. Housing market activity continued recovering in 2024 although growth in new mortgages applications slowed as the programme ended. The current government is no longer considering expanding subsided loans for new homes by lowering the interest rate from 2% to 0% for younger buyers, while other mechanisms to support the housing market are being developed. Any new demand-side policies risk raising housing prices further given a relatively fixed supply of housing.
Note: CEE stands for Central and Eastern Europe which corresponds to the average of Czechia, Hungary and the Slovak Republic. EA stands for Euro area.
Source: IMF Financial Soundness Statistics; and OECD Housing prices database.
The market for commercial real estate is undergoing significant changes but has been broadly resilient. Demand for office and retail space has been decreasing due to growth in teleworking and e-commerce, while demand for warehouses has risen. This has been mostly matched by supply as vacancy rates have been steady and rents have increased. So far, the rate of non-performing loans has been stable. Banks’ exposure to commercial real estate is relatively low as it makes up 16% all corporate loans. Other institutions, such as investment funds and insurance companies, also have limited exposure (NBP, 2024b).
Corporate credit risk remains low. Demand for credit among firms has decreased over the past two years, partly as a result of higher uncertainty and interest rates, while the unwinding of accumulated inventories has contributed to lower demand for financing working capital. Loans for investment have continued to grow, but companies are well placed to finance investment out of retained profits. Subsidies, loans and grants during the pandemic boosted corporate deposits. Corporate leverage is among the lowest in the EU. Consequently, non-performing loans have been relatively stable, although loans to entrepreneurs have experienced more distress. Given banks’ limited exposure to firms, credit risk remains low. The availability of bank funding should help support the expected acceleration in investment.
Climate-related risks are a challenge for the economy and, to a lesser extent, the financial system. Banks and insurance companies are directly exposed through the value of collateral assets that may be affected by a changing climate and/or climate policies. Estimates suggest that around half of all corporate loans are in climate-sensitive sectors, similar to the EU average. Exposure to companies operating directly under the EU ETS accounts for just over 10%. The carbon intensity of the corporate loan portfolio has remained broadly constant since 2014 but there is significant variation in intensities among banks (Figure 1.10). While corporate loans make up a minority of banks’ assets, banks are also indirectly exposed as the transition to net zero might affect the incomes of corporate and household borrowers. Better data is needed to identify climate risks more accurately in the financial system. EU regulatory efforts to increase environmental data reporting by financial institutions and large enterprises will help. Once implemented on a national level, Poland should conduct climate stress tests for banks, insurers as well as for relevant state-owned companies such as the state development bank and state-owned energy companies.
Note: In Panel A, figures are a share of the banks’ portfolio of outstanding corporate loans. 2024 corresponds to the first semester.
Source: National Bank of Poland.
Long-standing legal risks from disputes around foreign-currency loans remain significant, although progress has been made on their resolution. These loans, mainly denominated in Swiss francs, were granted before 2012 as large interest differentials and a favourable exchange rate trend until 2008 made them more attractive than borrowing in domestic currency. The appreciation of the franc vis-à-vis the zloty since 2008 led to markedly higher payments and a significant increase in the value of outstanding loans in zloty. Borrowers began challenging banks based on consumer protection grounds. By mid-2024, 110 000 loans had been settled out-of-court, while 165 000 cases are pending in courts (NBP, 2024d). The value of these loans has declined over time accounting for 6% of banks’ mortgage portfolios in August 2024, with some banks affected more than others (NBP, 2024b; 2024d). Recent Court of Justice of the European Union rulings have been favourable to borrowers, making resolution more costly for banks. Although most of the loans have been written off at a significant loss to banks, there are still 80 000 borrowers with loans denominated in Swiss francs who have not settled or gone to court. On-going provisioning and recognition of losses is likely to continue to be a claim on banks’ resources for the coming years, but this remains manageable. Nonetheless, uncertainty regarding legal risks will continue for some time as national courts work through the cases.
The financial system has remained stable. In Poland, finance is mostly intermediated through the banking system. Roughly 40% of the banking system is foreign owned. Around half of banks’ assets consist of loans to households and firms while roughly a quarter are invested in public debt such as government bonds. Profits rose strongly since 2022 and were historically high in the year to August 2024. Earnings growth was helped by higher interest rates, which boosts net interest margins, and broadly stable default rates, but this was partly offset by rising employee wages and higher legal risk provisions. The return on assets rose above 1% by the middle of 2024. The return on equity has more than doubled over 2022-2023 to 12%, but it is still below neighbouring Central and Eastern European countries (Figure 1.11, A). Banks are well capitalised and liquid (Figure 1.11, B). Recent stress tests suggest they could withstand large losses (NBP, 2024b; 2024d).
Source: IMF Financial Soundness Indicators.
Fiscal policy has supported the economy during the COVID-19 pandemic and the energy crisis. Substantial energy support, expansion of social benefits, and lowering of consumption taxes on food, combined with increased spending on defence, have led to a considerable deterioration of the public finances. Most of the cost-of-living crisis measures were untargeted and could have been provided in a less costly and more efficient way. Moreover, these supports were extended several times over the period of 2022-24, and again into September 2025. In 2023, public finances deteriorated to a deficit of 5.3% of GDP, almost two percentage points larger than the year before, and the debt-to-GDP ratio stood at 49.7% (EU Maastricht definition). For 2024, the authorities project a deficit of 5.8% on the back of 20% growth in public sector wages, further increases in social benefits, as well as rising defence and healthcare spending. The debt-to-GDP ratio is expected to have increased to 54.6% (EU Maastricht definition).
With current tax and spending settings, the debt-to-GDP ratio would surpass 60% of GDP in 2026 (EU Maastricht definition). As a result of the significant structural budget deficit, rising interest rate costs and in the absence of any fiscal consolidation, the debt ratio will continue to rise in the coming years. Implementing planned fiscal consolidation in line with the EU and domestic rules and managing costs of the current pension system would broadly stabilise the debt below the 60% of GDP EU benchmark in the medium term but it requires a significant fiscal effort of close to 3% of GDP in total (Figure 1.12, blue line). An illustrative example of tax and spending measures to achieve this consolidation, based on recommendations in this and past Survey, is set out in Box 1.2 (Table 1.4).
In the long term, major pressure for the public finances will come from population ageing. As discussed below, the cost of the current public pension system is projected to increase by more than 0.5% of GDP over the next five years as the population ages (European Commission, 2024b). However, in the long term, this assumes a continued reduction in the value of public pensions to a replacement rate of around 40%, while private pension savings remain weak, creating a risk of future pressure on pension spending. The illustrative scenario in Figure 1.12 (red line) assumes a counterfactual where the replacement rate remains at around the current level of 60%. In that case, the government debt ratio would rise significantly in the absence of policy action. Government debt dynamics would be supported by structural reforms that raise the level of GDP. The third scenario in Figure 1.12 (green line) assumes higher GDP growth resulting from an implementation of structural reforms recommended in this and previous Survey: a gradual unification and an increase of the pension age, decreasing competition-hindering product market regulation, and advancing digitalisation (Table 1.3). These illustrative scenarios of debt developments assume that growth will be modestly reduced by the cost of the climate transition, but do not include potential fiscal costs and positive effects that mitigation and decarbonisation policies can have (Guillemete and Chateau, 2023).
Note: The illustrative scenarios include effects of the low-carbon energy transition for Poland. Consolidation scenario assumes an improvement in the primary fiscal balance by 0.94 % of GDP per year to lower headline deficit below EU 3% of GDP benchmark during 2026-28, as announced by the government in November 2024.
Source: OECD calculations based on OECD Economic Outlook database and OECD Long-Term Model.
Table 1.3 broadly illustrates the growth impact of some key structural reforms proposed in this and the previous Survey. Such estimates are based on cross-country estimates from OECD research and provide an illustrative sense of the potential impact as they are associated with considerable uncertainties.
Note: Illustrative estimates based on historical relationships between reforms and growth in OECD countries. Policies to increase digitalisation among companies were covered in the in-depth chapter of 2023 Economic Survey.
Source: OECD calculations based on the OECD Long-term Model.
The fiscal impacts of these measures, together with consolidation measures, are presented in Table 1.4. These estimates do not account for indirect effects, such as those induced by the positive impact of the reforms on growth and, therefore, tax revenues. Additional effects are not included, such as efficiency savings that could be obtained by measures such as hospital network consolidation or improved management of public investment and state-owned enterprises.
Source: OECD calculations.
Balancing fiscal consolidation with increased spending needs
The deterioration of the underlying fiscal position in recent years is due to family and pension benefits that increased by over 2% of GDP compared to the pre-pandemic era, higher health and defence spending and tax reforms in 2019 and 2022, with a fiscal cost of around 0.6% of GDP (Figure 1.13). These were partly offset by other changes, such as non-indexation of income tax thresholds. OECD estimates of the structural position of the general government point to an underlying budget deficit of around 5 percentage points of GDP in 2024.
The 2025 budget assumes an improvement in the fiscal position by 0.25% of GDP, mainly from a withdrawal of energy and food-support measures. This implies little improvement in the underlying fiscal position, although is more restrictive when rising defence spending is included. The general government balance is expected to reach 5.8% of GDP (OECD, 2024d). Further extension of energy-price supports, spending pressures in the health sector and the cost of recent floods in southern parts of the country, which have been estimated at 0.1% of GDP, create upside risks to the 2025 deficit. Public sector wages are expected to increase by 5%, close to the projected inflation.
Note: ESA 2010 general government debt corresponds to ‘Maastricht debt’ definition. Panel D shows planned fiscal adjustment as announced in the Medium-term fiscal and structural plan published in November 2024.
Source: Republic of Poland (2024), OECD Economic Outlook 116 database.
Given the size of the underlying deficit, the risks of further inflationary pressures in a tight labour market, and future age-related spending pressures, tightening of the fiscal stance is appropriate. An ambitious medium-term fiscal consolidation plan was announced in the autumn of 2024. While there is little improvement in 2025 it foresees a consolidation of close to 1% of GDP annually in 2026-28 (Figure 1.13, Panel D). The cumulated 3-percent of GDP improvement over three years is likely to have a significant dampening effect on growth, although it could contribute to a more balanced macroeconomic policy mix, allowing monetary policy to lower rates while improving fiscal sustainability. The plans are ambitious and may be challenging to achieve in terms of required tax and spending adjustment. The government has indicated that it would involve a restraint on spending and taxes, relying on freezing income tax bands and slow nominal spending growth, but no further details have been provided on specific measures. Poland faces considerable spending pressures. Public healthcare spending is planned to rise to 7% of GDP by 2027, while further funding pressures in the health system that are not accounted for in the medium-term consolidation plan have emerged (Chapter 2). Political economy of the climate transition calls for more recycling of carbon pricing revenues and important investments are needed to accelerate the transition (Chapter 3). The expenditures on defence, that reached 4.3% of GDP last year, are expected to increase further.
Government revenue increases should consider property and environmental taxation. As part of a consolidation package and to finance spending commitments, there is scope to increase government revenues. Poland’s tax-to-GDP ratio of 35.2% is close to the OECD average of 34%, having increased by 6 percentage points from a decade ago. Poland raises the largest part of its tax revenue from social security contributions and consumption taxes, as do other middle-income OECD countries. Personal and corporate income taxes were below OECD average and property taxation plays a smaller role (Figure 1.14).
Source: OECD, Revenue Statistics 2024 database.
There is scope to increase tax revenues from immovable property. Given tax efficiency and equity considerations, the authorities should focus on bringing immovable property taxation in-line with OECD best practices. Currently, tax liability on property is based on the surface area of buildings (residential buildings PLN 1.15/m2, business building PLN 33.1/m2) and the land (different rates for different types of land exist, with the highest rate for land used for business purposes of PLN 1.34/m2). Business properties are taxed at 2% based on their initial value. While the revenues go to local municipalities, the central government sets the maximum rate. Poland should move towards a system of value-based property taxation, used in most OECD countries, that reflects more accurately land value and would be more progressive and efficient (OECD, 2022a). The current system is a poor proxy for taxpayers’ housing wealth and ability to pay, as it does not account for other property characteristics and its location, which is a key determinant of its value. Simulations of marginal effective taxation of housing investment illustrate that its taxation is low and in particular for debt-financed rented housing (Brys et al, 2022). Lifting the tax rate limits or setting only a country-wide minimum rate and allowing municipalities to go above it, would give municipalities larger revenue raising autonomy. Differentiating rates for secondary properties increases progressivity of the taxation. Such taxation could be phased in gradually and with deferral mechanisms. A flat amount of tax relief or a cap on tax liability for low-income low-wealth households can mitigate its impact for cash constrained households. Allowing for tax payments in instalments, third-party remittance or tax deferral can help address liquidity issues. Such measures have been used for instance in Canada or Denmark. Switching to value-based taxation would necessitate a regular update of property values, which has been facilitated with the development of digital technologies.
Raising the rate or broadening the tax base of inheritance taxation could also be considered. Revenues from inheritance, estate and gift taxes are very low among most OECD countries and its revenues exceed 1% of total taxation only in Belgium, France, Japan and Korea (OECD, 2021). Poland applies progressive multiple tax rates based on the value of inheritance and the relation between the donor and the beneficiary. While in principle the tax rate for the spouse and children increases from 3% to 7% based on the value, in practice they can apply for a total exemption. The tax rate increases from 12 to 20% for non-related parties.
Introduction of a comprehensive motor vehicle tax based on emissions would raise revenue and support climate objectives (Chapter 3). Poland does not apply any annual tax on vehicle ownership at the national level, although its introduction for company cars has been scheduled for 2026, and should reflect the emissions content of vehicles. It will apply to around 10% of passenger cars and small vans. Purchase of a vehicle is subject to VAT and an excise duty that differentiates based on the engine size and value of the vehicle rather than being directly linked to emissions. When the purchase is among private persons a 2% tax on civil law transactions also applies. Heavy goods vehicles (over 3.5 tonnes) are taxed at the municipal level (OECD, 2022b). Annual taxes on vehicle ownership are widespread in OECD countries, and differentiate on the basis of polluting emissions, with the aim of incentivising the purchase of less polluting vehicles. The planned annual car tax should be extended to include all cars (Chapter 3).
VAT is imposed at the rate of 23%, but there is a wide range of preferential rates. VAT accounts for around 22% of overall taxation revenue and 8% of GDP. Two lower rates are applied widely: 5% for basic food stuffs, certain supplies for children (e.g. car seat), books and e-books and 8% for newspapers, magazines, supplies in agriculture, hotel accommodation, restaurant and catering services, as well as veterinary services. In addition to exemptions applied in most OECD countries, such as for postal services, medical care and cultural services, Poland excludes commercial renting or tenancy, supply of building land and land development (OECD, 2022a). During the pandemic, the VAT rate was reduced temporarily to zero for certain COVID-19-related medical products such as tests and vaccines, as in many other OECD countries. VAT rates for energy were lowered during the recent period of high energy prices and elevated inflation, and a zero VAT for basic food stuffs was applied from February 2022 until March 2024. While the VAT revenue ratio, a measure of the extent to which the VAT collects revenue on final consumption expenditure, is close to the OECD average, national estimates show that up to 15% more revenues could be collected, around 0.7% of GDP (Republic of Poland, 2024). Estimates of the redistributive effect of reduced VAT rates show a regressive impact in case of Poland (European Commission, 2024a). There is scope to reduce the number of goods and services subject to preferential rates to broaden the base and raise revenues. A relatively high general threshold (above PLN 200 000/EUR 47 000) could be also reviewed.
Earlier government plans to decrease effective rates of personal income tax and lower health contributions paid by the self-employed have been put on hold, which is welcome. A plan to double the basic income tax credit which currently stands at PLN 2 500/month (around a third of the average wage) would have a considerable fiscal cost of PLN 30-40 bn, over 1% of GDP. Linking the basic income tax allowance to developments in inflation would help to prevent future “bracket creep”, as done in several OECD countries such as Germany and the Netherlands (OECD, 2023a).
Reviewing existing tax expenditures could also help to yield new revenues. The latest available review of tax expenditures, published in 2018, identified the value of such expenditures at 5.6% of GDP with the lower VAT rate, exemption of family benefits from PIT and various CIT exemptions being the biggest items. The tax system has undergone considerable changes since (Ministry of Finance, 2018). Regular reporting and reviewing of tax expenditures as a part of the budgetary documentation can increase transparency of such policies and foster an assessment of and debate about their efficiency. The favourable tax treatment of agriculture incomes could also be re-examined.
Consolidation should focus on increasing the efficiency of expenditures
While revenues provide some scope to improve the public finances, specific public spending items could be better targeted to achieve their objectives and there is room to find savings more broadly. General government expenditure reached around 44% of GDP in 2022, which was above the OECD average but below regional peers. Recent years have seen a considerable increase in spending on social policies, such as family, healthcare, pensions and defence, while public investment has fluctuated but on average stood at around 4.3% of GDP over the past decade.
Given the low level of public capital and the productive nature of such investments, investment should be spared any consolidation effort, as currently planned. Around half of public investment goes to economic infrastructure such as roads, and a third to social infrastructure such as hospitals and schools (IMF, 2020). The country is one of the largest recipients of EU funds, with an expected annual average of almost 3.5% of GDP during 2021-29. These include large infrastructure projects such as road and rail network upgrades, as well as investments to enhance the green transition such as offshore wind energy and thermal building renovations. However, to increase the efficiency of such investments the management framework needs to improve (IMF, 2022). Coordination between various levels of government and public bodies should be enhanced. If there is no financing from the state budget or EU funds, investments by sub-national governments do not require any formal discussion with the central government. Monitoring of investment plans of state-owned enterprises (SOEs) is limited and fragmented. Furthermore, project selection could be improved by building a single ‘pipeline’ of ready projects. Standard methods should be developed to estimate maintenance needs. Given the large number of public investors, a consolidated monitoring of the implementation status of major projects, submitted annually to the Parliament, could help with efficiency and timely delivery. Requiring systematic ex-post reviews of major investments could lead to improvements in project management in the future.
Poland is among the biggest spenders on family policy in the OECD, following increases in recent years: The social benefit system was around 1.5% of GDP bigger in 2023 compared to situation before the pandemic, notably due to real term increases in spending on families and pensioners (Family 800+ programme, 13th and 14th pensions, etc). While family policy has been successful in reducing child poverty, the universal nature of the more recent benefits is costly and leaves many households with very different levels of income receiving the same relatively generous supports (Figure 1.15) (Table 1.5). This approach should be reviewed with the aim of ensuring the most effective help for families that need it most, while preserving incentives to work. Earlier studies show that only a fraction of the child benefit programme went to the poorest income quintile (Myck and Trzcinski, 2019; Magda et al, 2018). The adequacy of family and social assistance benefits is reviewed every three years, and such a review is currently on-going, which presents a good opportunity to explore options for better targeting transfers and whether certain benefits could be linked to inflation, limiting the need for future discretionary measures. Reducing transfers to higher income households would reduce the costs of providing support without undermining social objectives or work incentives.
2024
Source: OECD Tax and benefit model.
Note: Benefit amounts have been converted with market exchange rate on Nov 27, 2024.
Source: OECD Tax and Benefits model.
Further expenditure measures should be identified based on spending reviews. Although these have been in place since 2015, they played only a limited role so far in the budgetary process and have been used mainly for reallocation of resources (OECD, 2022). Spending reviews have been strengthened and linked to the budgetary process in 2023. During 2024-26 spending reviews of long-term care, programmes supporting people with disabilities, programmes for protection of cultural heritage and support for thermos-renovations, are planned. This is welcome and should be followed up by improvements in institutional capacities in the ministries. The experience of OECD countries shows that to be effective, spending reviews require strong political ownership and commitment, and should have clear objectives and scope, transparency and accountability for implementation in addition to being integrated in the budgetary process (Tryggvadottir, 2022). The National Audit Office (NIK) carries out regular audits of public spending that points to various areas for improvement.
State involvement in the economy remains widespread, including in companies where the need for full public ownership is not clear cut, such as a commercial bank, one of the largest insurance companies, fuel and energy companies, arms manufacturers as well as a copper and silver mining company. While shares of some of the SOEs are already traded on the Warsaw stock exchange, further sale of these assets should be considered in the current consolidation plan. Moreover, the governance of SOEs can be also improved, as discussed in Chapter 4.
Improving budgetary transparency and aligning the domestic with the EU fiscal framework
The Polish fiscal framework, based on a constitutional debt limit and an expenditure stabilisation rule, contributed to decreasing public debt prior to the pandemic. In the current budgetary situation, the expenditure rule requires at least an annual fiscal adjustment of 0.5% of GDP, unless the EU Council recommends a lower fiscal adjustment. Under the European fiscal rules, a net expenditure path over a four-to-seven-year adjustment period is required to ensure that the debt ratio does not rise in the medium term, taking into account ageing costs.
The Polish national debt and expenditure stabilisation rules have been aligned with the revised European fiscal framework last year (Lam et al, 2024). The authorities should adopt a stronger medium-term focus at the national level, for instance, by publishing long-term growth projections and extending the time horizon of the expenditure rule. To reduce risks stemming from potentially over-optimistic or under-pessimistic growth and inflation forecasts, that feed into the expenditure rule, Poland plans to implement the EU requirement for independent oversight of macroeconomic forecasts. The European and national frameworks differ in terms of items that are excluded. Communicating potential divergence to policymakers could be challenging, and setting up a fiscal council can help to improve the fiscal policy debate and strengthen accountability of the rules. Past use of off-budgetary funds, such as the funds managed by the BGK, the public development bank, undermined the transparency of the national fiscal framework.
The fiscal council should start functioning in 2026. Some oversight of fiscal policy has been carried out in the past by other bodies: the Supreme Audit Office carries out ex-post analysis and assessment of compliance with fiscal rules, the central bank’s Monetary Policy Council assesses the policy mix of the draft budget reporting to the Council of Ministers, and the Social Dialogue Council focuses on assumptions on wages and pensions. Nevertheless, these fragmented arrangements led to poor budget transparency and public finance management (Ministry of Finance, 2024; Ministry of Finance and the World Bank, 2024). The proposed legislation for an independent fiscal council is welcome. It would have a mandate to give an opinion on the official macroeconomic projections, compliance with the fiscal rules, the budgetary framework and ad hoc tasks as requested by the government. There would be a “comply or explain” principle for the government if did not follow the Council’s opinions on compliance with the rules. The Council would have the right to obtain information necessary to fulfil its tasks and could make public any refusal to provide such information. The Council would have 7 members: each would be required to be independent and appropriately qualified with each member appointed by a different political body or stakeholders subject to a recruitment process and could serve for up to a maximum of two consecutive 6-year terms. The Council would have a dedicated budget of around PLN 10 million (EUR 2.3 million). The initial term of the Council and political support will be important to establish its reputation and its contribution, including on long-term fiscal pressures.
Poland’s population is ageing as life expectancy increases and larger cohorts of the population, today’s 35–50-year-olds, reach retirement age. The old-age dependency ratio, the share of population aged 65 and older as a share of the population aged 20-64, is set to increase from 30% to 55% in 2050, faster than OECD average. Pensions consist of a guaranteed minimum and a payment from an earnings-related notional account with an interest rate equal to the growth of the wage bill but not less than price inflation. The overall contribution rate is 19.5% (OECD, 2023a). The statutory retirement age is 65 for men and 60 for women. The authorities project that public pension costs will remain stable at around 10% of GDP between now and 2045 and actually decrease by 0.5% of GDP over the period of 2045-70 (European Commission, 2024b). However, this assumes a reduction in pension benefits driven by the gradual shift to a public ‘notional’ defined-contribution scheme. The replacement rate of public pensions is set to fall from current 60% to 40% by 2060, one of the lowest future net replacement rates in the OECD (OECD, 2023b; European Commission, 2024b).
In absence of adequate private savings, current plans to reduce public pension benefits lack credibility. Policymakers are likely to intervene with pension increases, as they did in 2019 and 2021 when the so-called 13th and 14th pensions, initially one-off payments, became a permanent feature at a cost of 1% of GDP. If current replacement rates are maintained, fiscal pressure from pension expenditures would rise by 3.5% of GDP by 2045 (Guillemette and Chateau, 2023). In addition, special pension schemes, available for farmers, security forces, judges and prosecutors, which cover about 22% of pensioners at a cost of 2.6% of GDP, remain important. More than half of this group are self-employed farmers, as around 10% of employment is in agriculture. Several features of these pensions lead to higher benefits, such as the use of best 10 years of pensionable earnings as a basis for security and defence personnel pensions or more favourable indexation rules for judges and prosecutors (Eckefeldt and Patarau, 2020). Special pensions are largely financed from the general government budget. While their generosity and early retirement options have been reduced, their necessity should be reviewed as those not clearly linked to occupational risks could be a source of inequity.
Private pension savings, currently voluntary, have not increased anywhere near to the amount required to maintain plausible overall replacements rates for Polish citizens (Figure 1.16). While more than half of the working-age population has a voluntary asset-backed pension plan, benefiting from favourable tax treatment, contributions remain small (OECD, 2023b). This is partly a legacy of a previous pension reform that mandated private savings but was reversed later. Three various types of savings were supplemented with a voluntary occupational defined-contribution scheme with auto-enrolment introduced in 2019 (“Employee Capital Plan”, PPK). A gradual increase in coverage of the PPK is under way, with participation rate currently at 49% of eligible employees. Contribution rates are on average 3.5% of salary. Although these can go up to 8% when combining employee and employer contributions, the majority of people save the minimum amount. The funds are accessible once reaching 60 years of age either in a lump sum or at least a 10-year pay-out.
Given past policy reversal on private pension savings that have undermined the citizens’ trust, maintaining regulatory stability is key for rebuilding the reputation of asset-based pension savings. Pension funds’ assets, at around 8% of GDP in 2023, consist mainly of equities, as a result of regulation. Some of the recent losses were recuperated in 2023 (Figure 1.16) (OECD, 2024b). Ten years prior to reaching the statutory retirement age, retirement savings from other pension plans (apart from the PPK) are gradually transferred to the public system, following a life-cycle approach, and paid out by the state fund (ZUS). While the motivation for such an arrangement was to avoid creating a potentially costly annuities market, it could be undermining the trust in the system given past policy reversals.
Source: OECD Global Pension Statistics.
To encourage people to work longer, pensions increase if people postpone retirement beyond the statutory age (65 for men and 60 for women) and there are tax incentives up to a certain threshold. Men tend to leave the labour market at around 64.2, close to the statutory age, and women at 61.2, which is below the OECD average (OECD, 2023b). The required contributory period for a minimum pension is 25 years for men and 20 years for women. Those over the retirement age who do not claim a pension and continue to work are exempt from personal income tax up to PLN 85 528 (1.2 times the average wage). Providing these incentives is relatively costly and working life could be extended in a more efficient way by raising the statutory retirement age. Model estimates of raising the retirement age by one year suggest that the employment rate of people aged between 55-74 could increase by over 2 percentage points (Morgavi, 2024). By 2066, the average statutory retirement age across the OECD countries will rise to 66 years, and only a handful of countries will maintain a lower retirement age for women. Raising the statutory retirement age, including by gradually aligning the female with the male statutory retirement age and increasing them in line with gains in life expectancy, would improve the financial position of the pension system and boost growth, potentially allowing the replacement rate to be higher than currently planned. Another incentive for longer working lives could be to increase the minimum pensions benefit with longer working years or increase the number of years required to reach the minimum benefit.
Living standards have increased and social inequality has remained low, below the OECD average although higher than in other Central European countries. Relative poverty rates are low compared to most OECD countries and have remained broadly stable since the pandemic. Supported by government policies to contain the rise in food and energy prices, strong income growth among lower income households has helped to cushion the recent inflationary period. Nevertheless, extreme poverty rates rose from 4.6% to 6.6% in 2023.
When looking at the gender pay gap, gender inequality appears low, but important differences between men and women remain, notably in the distribution of unpaid work. Women’s total earnings were, on average, 9% lower than men’s in 2022, which is one of the lowest gender pay gaps in the EU (Figure 1.17, A). The largest difference existed for women between the age of 35-44 with a reversal of this gap for those between 55-64 years. Research based on Polish administrative data estimates that women who have children receive earnings that are around a third lower than men’s, which is higher than in Scandinavia but lower than in English-speaking countries. This ‘child penalty’ on women’s earnings is likely to be driven by lower labour market participation, which is significantly lower than that for men with children (Palka, 2024). However, for those women working the gender gap in hours is only between 2-3 hours per week. Lack of flexibility and the low prevalence of part-time work might be a barrier to female labour market participation. Women tend to be underrepresented in leadership positions. Although it has been steadily rising, the share of women on management and supervisory boards in the largest listed Polish companies was 18% in 2023, while the share of female MPs in Parliament was around 30% in 2024 (Olszewska-Miszuris and Kloka, 2024; IPU, 2024).
Note: In Panel A, the difference between median wages of men and women, relative to the median wages of men is reported; wages are the gross earnings of full-time dependent employees. Nordic countries correspond to the average of Denmark, Finland, Norway and Sweden. OECD refers to the average of the 38 member countries. In Panel B, OECD refers to the average of the 38 member countries.
Source: OECD Distribution of earnings database.; and OECD Social Expenditure database.
A major factor keeping women out of the labour market is childcare and other caring responsibilities. So far, most of the family policy focus has been on cash benefits and expansion of childcare for older children. The experience of OECD countries suggests that effective family policies combine various tools, such as tax-breaks, childcare services, benefits and measures to improve the work-life balance. Family policy was already one of the most generous among the OECD countries in 2021 (Figure 1.17, B) and, although more recent data is not readily available, the generosity of the benefits has increased since. Despite a recent expansion of childcare facilities, the share of 0-2-year-old infants enrolled in childcare is relatively low at around 10%, mainly due to lack of places as around 40% of municipalities do not have nursery facilities. However, most children aged 3-5 are enrolled in early childhood education. An expansion of childcare should also include facilities for very young children.
Making it easier for fathers to assume caring responsibilities can also boost women’s labour market participation and lessen gender inequalities. Poland has extended parental leave rights for fathers. Parents can share 36 months of unpaid parental leave. As of 2023, fathers can take two-weeks of parental leave within the first year, paid at 100% of their wage and 9 weeks out of 8 months of parental leave are reserved for fathers at 70% of previous salary, although this is less generous than the OECD average. These policy changes are relatively recent and only around 1% of fathers exercised their rights in 2022, among the lowest in the OECD (Andrian, 2023). Higher use of parental leave by fathers may lead to more equal division of responsibilities across a child’s entire childhood. In addition, further development of long-term care, as discussed in Chapter 2, can also support older women caring for family and keep them in the labour market for longer.
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