Poland

   

Economic Policies

#23
Key Findings
With strong growth despite longer-term sustainability concerns, Poland falls into the middle ranks (rank 23) in the area of economic policies. Its score on this measure has improved by 0.5 points relative to 2014.

Though showing a slight decline to 4.6%, GDP growth has continued to be strong. Personal consumption remains a main driver, boosted by increased social transfers, good labor market conditions, low lending rates and moderate inflation. Private investment has rebounded. Net FDI as a share of GDP has declined, reflecting uncertainty over the government’s economic policies and violations of the rule of law.

Unemployment rates have fallen sharply in recent years, reaching 5.1% in 2019. The government has focused on minimum-wage increases rather than on integrating youth, less-skilled workers and women into the labor market. A large number of women have withdrawn from the labor market following the introduction of a generous child allowance policy.

The corporate-income tax for small businesses is being reduced, and personal-income taxes are being scrapped for low-income young people. The deficit rose to about 1.0% as a result of pre-electoral spending. Public and private R&D spending levels remain far below the Europe 2020 target.

Economy

#16

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
The Polish economy is still on a strong footing. Though real GDP growth declined slightly to 4.6% in 2019 from 5.1% in 2018, the economy has continued to grow well above the EU average. Boosted by a strong increase in social transfers, good labor market conditions, low lending rates and moderate inflation (2.3%), it is still largely driven by growth in personal consumption. Private investment growth strengthened in 2019, after several years of weak growth. Public investment has continued to grow, although at a slower pace. In August 2019, the government announced a new infrastructure program, which is supposed to modernize and expand the network of streets and highways, worth PLN 800 million. Whereas domestic investment has risen, net FDI relative to GDP dropped by 2.2 percentage points, reflecting the uncertainty over the PiS government’s economic policy and violations of the rule of law. In most rankings of international competitiveness, Poland has lost ground. The strong growth in social spending has raised concerns about Poland’s medium- and long-term fiscal stance, and ability to react to a possible economic downturn. As discussions about linking access to EU funds to rule of law indicators will continue, the government may have to adjust its economic policy, which relies heavily on the inflow of EU funds. Economic growth rates are also likely to suffer somewhat as a result of Brexit. Accounting for 6.4% of all exports, the United Kingdom is Poland’s second-largest export market, while the second-largest portion of the remittances from Poles working abroad comes from the United Kingdom.

Citations:
Balcerowicz, L., A. Łaszek (2019): Poland’s economic miracle won’t last, in: Politico, October 10 (https://www.politico.eu/article/polands-economic-miracle-wont-last/).

European Commission (2020): Country Report Poland 2020. SWD (2020) 520 final. Brussels (https://ec.europa.eu/info/sites/info/files/file_import/2020-european-semester-country-report-poland_en.pdf).

Labor Markets

#26

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Poland’s favorable overall economic record has been associated with a marked decline in unemployment. The unemployment rate has fallen further and reached 5.1% in September 2019, a historic low and one of the lowest such rates in the European Union. The employment rate has slowly but constantly increased during the last years and has now nearly reached the EU-28 average. Regional variations in (un-)employment, both between and within regions (voivodships), have been strong and persistent. Temporary employment contracts represent another problem, as Poland still has the highest rate of such agreements in the European Union. The PiS government has done little to foster the labor market integration of young people (unemployment disproportionately affects 15 – 24 year olds), lower-skilled workers and women. Since the PiS government’s introduction of the generous “500+” child allowance policy, it is estimated that over 100,000 women have withdrawn from the labor market.

The government’s main reform project in the field of labor market policy has been the increase of the minimum wage. Following strong rises in the past, the latter was further increased from PLN 13.70 per hour and PLN 2,100 per month in 2018 to PLN 14.70 per hour and PLN 2,250 per month in 2019 (i.e., a rise of more than 7%), with the government promising further increases in its 2019 election campaigns. While these politically popular moves have improved the financial situation of low-wage earners, they have raised concerns about negative employment effects and a rise in the shadow economy.

In some parts of the country and for some professions, labor shortages have become an increasingly pressing issue, and the decrease in the pension age will contribute to an even lower labor-force participation rate, especially among women. Hence, there has been a huge influx of people from Ukraine (2 million over the last four years), who have received work visas in order to fill low-skilled job vacancies in sectors where there is a shortage of domestic workers.

Taxes

#26

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
Poland’s tax system is characterized by a personal-income tax with two rates: 18% up to an income of PLN 85,528 and 32% for those who are above this level. Moreover, the system features a standard corporate-income tax of 19%, a relatively high standard VAT rate (23%) and high social-insurance contributions. In its first year in government, the PiS government reduced the corporate-income tax rate from 19% to 15% for small taxpayers and taxpayers in their first year of existence and increased the tax-free allowance for personal income tax. In 2018, three new taxes were introduced: a “solidarity tax” for high-income earners, an “exit tax” on companies and wealthy individuals, and a new fuel tax called an “emission fee.” The revenues from the “solidarity tax” are earmarked for financing the Solidarity Fund for Support of Disabled Persons, which was created after protests by disabled people in May 2018 that drew considerable public attention. The revenues from the new fuel tax are targeted as well, and will be used for combating smog. At the same time, the government adopted some changes related to the withholding tax system and the taxation of profits derived from cryptocurrencies. Following the 2019 elections, the PiS government has realized some of its campaign promises. The corporate income tax rate for small businesses and businesses in their first year of existence is to be reduced from 15% to 9%, and the personal income tax is to be scrapped for all Poles under the age of 26 who earn less than PLZ 85,528.

Under the PiS government, the tax-to-GDP ratio has risen. At about 35%, it is below the EU average. Despite the rise in the tax-to-GDP ratio, there is a fiscal deficit.

With just two income tax rates and a relatively high VAT rate, vertical equity is limited. This is partly compensated for by the new solidarity and exit taxes. The abolishment of income tax for young people clearly violates horizontal equality.

Compared to other East-Central European countries, the corporate tax burden, the extent of red tape and the instability of tax provisions have been relatively high. For small domestic enterprises, this is partly balanced by the lower corporate-income tax rate.

Poland collects relatively high environmental taxes, as compared to other EU member states. However, only a small proportion of revenue from environmental taxes is used to promote environmentally friendly behavior. Most environmental taxes are energy-related, but there are exemptions, for instance, for energy-intensive industries. In addition, in 2019, the excise duties on energy were lowered and energy prices administratively controlled, with the state compensating energy producers for potential losses.

Citations:
European Commission (2020): Country Report Poland 2020. SWD (2020) 520 final. Brussels, 18-20 (https://ec.europa.eu/info/sites/info/files/file_import/2020-european-semester-country-report-poland_en.pdf).

Budgets

#23

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
6
Benefiting from the strong economic growth and higher than expected revenues, former Minister of Finance Mateusz Morawiecki, the current prime minister, succeeded in bringing the general government fiscal deficit down from 2.7% in 2016 to 0.2% in 2018. Despite strong revenues, the fiscal stance slightly deteriorated in 2019 with the deficit climbing to about 1.0% as a result of spending increases in the run-up to the 2019 parliamentary elections. For 2020, the government has announced a balanced budget, but this goal looks difficult to achieve without creative accounting. The medium- and long-term outlook is clouded by the strong increase in social spending and the lowering of the retirement age under the PiS government. A second risk is related to EU transfers under the Common Agricultural Policy, and from the structural and cohesion funds. These transfers will shrink due to improved regional development and might decrease further if cuts in transfers are embraced as a form of penalization for violations of EU law. Poland’s fiscal framework is weak. Its credibility has suffered from the modification of the official expenditure rule in December 2015 and the fact that the country, contrary to almost all other EU member states, still does not have an independent fiscal council.

Research, Innovation and Infrastructure

#24

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
While the Polish R&I system has been significantly restructured since 2010, its performance has remained relatively weak. Polish universities have ranked low in international comparisons, while cooperation between universities and business has been limited, and is highly dependent on EU funds and personal connections, and the innovation capacity of the economy has been weak. The PiS government has sought to stimulated cooperation between universities and business by expanding tax incentives for R&D and startups, and simplifying patent procedures. The amount of tax-deductible R&D spending has increased to 30% – 50% depending on the size of the company. In addition, the period in which companies may deduct these costs has been expanded from three to six years. The strong reliance on tax relief has been criticized for a lack of efficiency. According to recent empirical research, such a policy might have a greater impact on the economy, but is 2.5 times more costly than additional government spending on R&D. Within the framework of his “constitution for science,” Minister of Science and Higher Education Jarosław Gowin has sought to strengthen university-led research. In April 2019, he announced a new initiative to promote research-oriented universities. As it stands, however, R&I spending in Poland, in both the public and the private spheres, however, has remained far below the European Union’s 2020 targets. The National Institute of Technology (NIT), which was intended to start work as a bundle of 35 existing research institutes in January 2018, still does not exist.

Citations:
Brandt, N. (2018): Strengthening innovation in Poland, OECD Economics Department, Working Paper No. 1479, Paris.
Zawalińska, K., N. Tran, A. Płoszajc (2018): R&D in a post centrally-planned economy: The macroeconomic effects in Poland, in: Journal of Policy Modeling 40(1): 37-59.

Global Financial System

#20

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
Poland has not been an agenda-setter with regard to the regulation of international financial markets and this has not changed with the PiS government. The idea of a EU banking union is opposed by PiS due to its nationally oriented stance in this respect. However, Poland’s financial sector has remained stable despite rapid expansion, as various stress tests have demonstrated. The Financial Stability Committee is in charge of macroprudential supervision since 2015.

Citations:
IMF (2019): Republic of Poland: Financial System Stability Assessment, Country Report 19/39, Washington, D.C. (https://www.imf.org/en/Publications/CR/Issues/2019/02/05/Republic-of-Poland-Financial-System-Stability-Assessment-46578).
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