The lifting of the excessive deficit procedure is undoubtedly a signal that public finances are in a better condition. However, the improvement of the fiscal balance is very slow, because countries of the region such as Lithuania, Latvia, Romania and Hungary were exempted from special supervision of the European Commission in 2013 already. According to the EC, the public finance sector deficit will be 2.8 percent of the GDP, so a little under the limit of 3 percent.
The Commission’s decision should not cause excessive optimism among the government, entrepreneurs and employers, for whom the deficit is often an indication of the likelihood of public burdens increasing. While in the near future an increase in tax rates and ZUS contributions is unlikely – due to a.o. the political calendar, the risk that fiscalism will increase in the next 5 year is relatively high. To keep the long story short – the problem of Polish fiscal policy is not the short-term deficit, but lasting processes which will result in increased tax burdens and public debt.
Firstly, the erosion of the tax base caused by the drain of companies and employers outside the borders of Poland continues. There are less taxpayers and ZUS contribution payers and more benefit receivers, which is indicated by the high expected deficits of the Social Security Fund (FUS). Meanwhile, costly pension and tax privileges for selected jobs are maintained. Maintaining preferences within the Special Economic Zones is also among factors contributing to the tax base erosion, as the Ministry of Finance under Jacek Rostowski pointed out.
Secondly, due to public healthcare being insufficiently financed and the ageing of society an increase in public spending on these issues is only a matter of time. Only the way in which additional obligations will be formulated is subject to discussion – whether the health insurance contribution will be increased or whether the state will decide to cover some of the costs with subsidies from the central budget, as is the case with social security.
Thirdly, better current results of the public finance sector are partially caused by the dispossession of those who saved in Open Pension Funds (OFE), The EC expects this decision of the PO-PSL government to result in an improvement of 0.75 percent of the GDP in the fiscal balance. This shows that without these changes in the pension system Poland would still be dealing with excessive deficit. In fact, the restrictions on OFE only made it possible for the official debt to be increase at the expense of increasing the hidden debt, that is increasing ZUS liabilities towards pensioners.
Furthermore, according to the newest EC prognoses the public finance deficit will stay close to the 3 percent limit, at least until 2016. This means that it is practically certain that this limit will be overstepped should an strong economic slowdown or recession occur. Particularly as the very same prognoses estimate the structural deficit at 2.7 percent in 2014 and 2.3 percent in 2016. Structural deficit is estimated with the assumption that the economy develops at a rate equal to its potential, so it does not take into account the impact of the fluctuating economic situation on the budget balance.
Combatting the tendencies outlined above requires adopting a completely different approach to economic policy that the one we are dealing with now – focused on moving problems further in time or solving current problems. Maintaining medium and long-term balance in public finances will require reforms supporting productivity and job activity (including entrepreneurship) which will both broaden the tax base and increase budgetary income without raising fiscal burdens in relation to GDP.
A positive signal in this context is the growing awareness among Polish politicians that the tax law currently in force needs to be comprehensively changed. Thus far, the administration has successfully blocked efforts to simplify tax regulations and tax collection justifying it with concern for decreased budgetary income. However, what was missing was an assessment of alternative costs that is how much profit and how many jobs the economy as a whole has lost due to sticking to one of the worst tax systems among developed countries.
Damian Olko, research and analysis expert of Employers of Poland