FISCAL CHALLANGESIN POLAND

Stanislaw Owsiak

Professor of Economics and Finance

Cracow University of Economics, Poland

A fundamental observation of Poland’s fiscal policy

1. Poland has not been affected by the financial crisis as strongly as other EU countries. This applies to the most developed countries, as well as to post communist countries belonging to the EU. In 2009 Poland was the only country, among the EU 27 with a positive rate of GDP growth. Poland is sometimes referred to as a „green island” on the red ocean of the crisis.

A fundamental observation of Poland’s fiscal policy

2. However, the Polish economy was not heated by

the crisis, though the situation with regards to public finances worsened dramatically. The reason is that errors in fiscal policies among all former governments have accumulated over time.

3. One of the main factors behind this occurrence concerns fiscal policy imitation and fiscal policy, which was conducted by developed countries. This provokes a narrow view of the fundamental mistakes in fiscal policy, in the general sense.

Main mistakes in fiscal policyin the past – general overview

1.There was an irrational and inadequate

approach to public expenditures and to public revenues.

2. The golden rule of public finance was broken in order to balance long term taxes

and outlays.

Trends revealing a diminishing of public revenues - reasons

1.Doctrinal background – neoliberal approach to taxes, which were treated as barriers to economic growth.

2.Devastating tax competition between countries provoked by New Member States of the EU.

3.Soft regulations against the outflow of income to tax havens.

IRRATIONAL EXPECTATIONS ON POTENTIAL CUTS IN EXPENDITURE

1. There are social rights, which limited potential cuts in expenditure in a democratic state.

2. Public expenditures are strongly influenced by political games and political cycles.

CONCLUSION

1. The assumption that tax reductions will generate a higher rate of GDP and, as a consequence, the mass of public money will not diminish was not verified positively.

2. On the other hand the assumption that cuts in expenditure will be a move closer to balancing public finances has proved illusionary.

THE CASE OF POLAND

Results of inappropriate fiscal policy measures

STRUCTURAL GAP BETWEEN PUBLIC REVENUES AND PUBLIC EXPENDITURES : General Government revenue, expenditure (% GDP)

38,5 39,3 38,5 37,239,4 40,2 40,3 39,6

37,4

43,8 44,3 44,742,6 43,4 43,9

42,2 43,3 44,5

38,1

41,1

20

25

30

35

40

45

50

55

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

revenue expenditure

Source: Eurostat

HIGH AND INCREASING COSTS OF FINANCING

PUBLIC DEBT : interest payable

3,1 2,9 3 2,8 2,8 2,7 2,3 2,2 2,6

7,16,5 6,7 6,5 6,4 6,1

5,5 5,15,9

3

7,4

0

5

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Percentage of GDPPercentage of total government expenditure

Source: Eurostat

RANDOM WALK OF THE RATE OF GDP AND THE RATE OF GENERAL GOVERNMENT DEFICITS:Budget Deficit (% GDP) and Real GDP

3,0

5,35,0

6,2

5,4

4,13,6

1,9

3,7

7,1

4,3

1,2 1,4

3,9

5,3

3,6

6,26,8

5,0

1,8

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Budget deficit (% GDP) Real GDP

Source: Eurostat

ACCELERATION OF PUBLIC DEBTS TO A LEVEL DANGEROUS TO PUBLIC FINANCES: Public Debt (% of GDP)

36,8 37,642,2

47,1 45,7 47,1 47,745,0

47,251,0

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat

GROWING RATE OF OBLIGATORY EXPENDITURES (interest rates, transfers to pension funds, etc.): Structure of State Budget Expenditure

53,7

46,3

58,2

41,8

61,1

38,9

66,8

33,2

73,5

26,5

74,9

25,1

71,4

28,6

72,9

27,1

74,3

25,7

73,1

26,9

75

25

0102030405060708090

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Legal Expenditures Elastic Expenditures

Source: The Ministry of Finance of Poland

PREDOMINANT SHARE OF STRUCTURAL FACTORS IN GENERAL GOVERNMENT DEFICITS: Cyclical and Cyclical adjustments in Budget balances (% of GDP)

0,5

-3,5

-0,1

-5,0

-0,7

-4,3

-0,4

-5,8

0,2

-5,9

-0,1

-4,0

0,4

-4,1

1,0

-2,9

1,0

-4,7

-0,1

-6,3

-0,9

-6,6

-0,9

-6,7

-8-7

-6

-5

-4

-3

-2

-1

01

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Cyclical balance Structural balance

Source: Eurostat

CHALLANGE

1.Most important: to find an optimal model

in the social system, which precisely describes what kind of social goods should be financed from private funds and which from public funds.

2.There should be social pact between

Government and society.

CHALLANGE

3.To change the attitudes of the people

towards taxes and to convince them that taxes are not only a burden to people, but it is investment in human capital (education, health, pro-family policy expenditures) and investment in economic infrastructure as

well as the intergeneration solidarity.

PRECONDITIONS

� TO ACHIEVE THESE GOALS THE FOLLOWING PROBLEMS SHOULD BE RESOLVE:

1. Ensuring of honest disscussion with

society on taxes, expenditures (Scandinavian model);

2. Neutralizing of influence of polititians hypocrisy on public finance;

3. Finding support in mass media to tax policy.

PRECONDITIONS

� RATIONALISATION OF PUBLIC EXPENDITURES IS FUNDAMENTAL REQUIREMENTS FOR PUBLIC FINANCE. AMONG THESE ARE:

1.Transparency in allocations of public money;

2. Using money in rational way;

3. Implementation of new method in public management like Task-Based Budget.

PRECONDITIONS

4. The financial stability of budgetary units is also one of the fundamental preconditions for the implementation of modern tools for the management of public finances and to ensure stability.

5.Without of this precondition the effectiveness of newly implemented

methods and tools will be limited.

REQUIREMENTS

1. Government can not make shocking cuts in expenditures, because it will generate instability in the inflow of money (financing) for budgetary units, which are providing public and social goods.

2. A longer perspective in budgetary planning is required.

REQUIREMENTS

3. The state budget should be more linked to

business cycles. According to recommendations of the EU Commission, Governments should create a surplus in the state budget during boom periods in order to have spare during recessions.

4.The Treasury should be more active and effective in collecting taxes, and should diminish tax abuse.

REQUIREMENTS

5.To assure the provision of credible information

to society concerning the real state of Government Finances (i.e. to refuse practice of so-called creative financial statistics for political rent).

6. To improve the presentational form of the task-based budget to Members of Parliament. At the present time in Poland, this document has too many details, and it is not useful for decision makers.