Poland: Spending Pledges And The Budget Impact

The Polish government's spending pledges are higher than expected and while they pose limited risk to the budget in 2019, we worry about 2020 and beyond. After two years of very positive surprises on the fiscal side, there is now more uncertainty and we should end up with quite a different picture. Still, the EU threshold, at 3% of GDP, is not under threat so far.

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What exactly has the ruling party pledged?

The ruling PiS has announced its spending pledges before the 2019 European and general elections. These include:

  • A broadening of the 500+ family support programme to cover first children as well. According to our estimates, this will cost PLN17-18 billion in 2020 and half of that in 2019 as the programme starts midyear.
  • 13th pension for retirees (lump-sum PLN1100), paid in 2019 for sure, but possibly also in the following years subject to PiS re-election and fiscal space (yearly costs at about PLN10 billion).
  • Cut of personal income tax to zero for young people (below 26). Annual cost at about PLN2-3 billion, to be implemented in 2020.
  • Raising of deductible expenses from personal income tax base (cost for budget about PLN4-8 billion), to be implemented in 2020.

We estimate the total cost of the above measures at PLN18 billion in 2019 (0.8% of GDP) and PLN35-40 billion in 2020 (1.7% of GDP, cumulative costs). This is above what we expected (PLN15 billion in 2019 and PLN20 billion in 2020 cumulative). Also, PiS wants to provide a more generous package than what was delivered after the 2015 elections, with child benefit and a cut in the pension age costing PLN33 billion).

How do we assess the package?

We don’t like the fact that three-quarters of the package is spent on clear social measures, which are politically effective (supporting PiS's position in the polls), but providing only a transitory boost for GDP (not solving any structural issues). We would prefer to spend three-quarters of the package on education or health care or to simply stop the tax system from tightening (more tightening will come when the economy slows to keep the deficit under control). The earlier tightening of the tax system had a very negative impact on private investment, which grew by just 3.5% year-on-year in 2018, below the pace of GDP. As a result, Poland is losing its competitiveness in the region in terms of investment's share of GDP, which undermines long-term growth potential.

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