Communication 1/2017: Public debt exceeded PLN 1 trillion. The government wants to increase our indebtedness to 55% of GDP by the end of the year
Public debt of Poland exceeded PLN 1 trillion (a million million). The debt-to-GDP ratio reached almost 54%, practically returning to the level it had in the years 2011-2013, i.e., before the capital pillar of the pension system was dismantled. Previously it was so high in the early nineties, but dropped later – even to 36% in 2000. Now it is growing again and fast, even though the good economic situation helps the state of public finances. The excellent situation on the labor market increases state revenue from PIT and social contributions as well as reduces the expenditure on unemployment benefits. Its effect, i.e. a rapid increase in consumption, is, in turn, increasing the budget revenue from VAT. Moreover, the state of public finances is improved by the lowest interest rates ever. This is why, despite the level of debt-to-GDP ratio which is almost the highest ever, the debt servicing costs account for a record low percentage of GDP (1.7% of GDP, more than a third lower than in 2012). Paradoxically, this situation is also improved by the decision-making paralysis in state offices, which delays many purchases of the public sector.
Public debt in Poland is still much lower than in the majority of developed countries. Even in Germany, considered a safe bet by investors, the debt-to-GDP ratio – although falling – is still 68%. However it would be a mistake to conclude that this level of debt is safe for Poland. Our country is not yet fully developed and has less opportunity to raise additional tax revenue if it proved necessary for timely repayment of debts. Less affluent society has less capacity to increase savings which would cover government borrowing needs without reducing the availability of capital for business and without resorting to foreign capital, more prone to outflow than national savings.
For these reasons, public debt in Poland should be compared with the debt of other countries of our region, because they are, in general, on a similar level of development, and consequently, have similar possibilities for regulating their obligations. (However one should remember that the level of Polish debt perceived by investors as safe is lowered by the refusal in the eighties to settle liabilities that were incurred irresponsibly in the days of Gierek). In comparison, we do not fare well. Higher public debt is in Croatia (84% of GDP), Slovenia (80% of GDP) and Hungary (73% of GDP). The rest of the region is less indebted than we are. At the same time, the three countries have the weakest economic performance in the region, as far as the period following the enlargement of the EU to the east is considered. Similarly, among the highly developed countries, the biggest public debt problems occurred in those with the highest public debt: Greece, Japan, and Italy (as Reinhart points out). It is no coincident.
High public debt weakens the systematic forces of economic growth. Although Reinhart and Rogoff's widely cited empirical study on the subject was sharply criticized, the critique was unjustified. Firstly, as the authors of these studies rightly point out, the results reached by their critics are quite similar to theirs. Secondly, and primarily, there are many other studies, some using much more advanced econometric techniques, in which the harmful effect of public debt on economic growth has been confirmed.
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You are welcome to contact our expert:
Andrzej Rzońca, Economist
e-mail: andrzej.rzonca@for.org.pl
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