2019-02-25
FOR Communication 5/2019: Law and Justice: "Après nous, le déluge" [After us, the flood]
Summary:
- In its economic policy the Law and Justice party announced a repetition of its actions from 2007. At that time, at the peak of the world economic boom, the Law and Justice party government passed laws that came into force during the slowdown in 2008 and 2009, increasing the public finance sector deficit by 2% of GDP and forcing the PO-PSL government to look for savings. The current announcements were also communicated at the peak of the world economic boom, but will only fully enter into force in the coming years, when economic growth will be slower according to the available forecasts and, as a consequence, the situation of public finances will be more difficult.
- The years 2015-2018 was a period of the fastest growth of our largest trading partner - the euro zone - since 2007, which was favorable for the rapid growth of the Polish economy. While the euro zone economy grew by 3.2% over the entire 2013-2015 period, growth accelerated to 6.4% between 2015 and 2018. The cyclical slowdown in the euro zone is already starting to be visible (growth forecast by the IMF for the period 2019-2021: 5.2%).
- The rapid growth of the euro zone supported the growth of the Polish economy, which grew rapidly despite the negative effects of the Law and Justice party policy, best visible in the collapse of the investment rate, which after 3 years of the Law and Justice party government is at the lowest level in over 20 years. Rapid economic growth, mainly based on consumption, has contributed to a rapid increase in tax revenues. The latest announcements of the ruling party are much worse than the laws it passed in 2007. At that time, PIT and Social Insurance Institution (ZUS) contributions were reduced, which, although increasing the public finance sector deficit in 2009 by over 2% of GDP, at the same time lowered taxes on labour and fostered employment growth. The current announcements in Q3 concern an increase in social spending (500+ for the first child and a thirteenth pension is a total of PLN 25-30 billion), and only in one quarter - a reduction in labour taxation (PIT exemptions for young people and an increase in tax deductible costs - a total of about PLN 10 billion).
- Apart from the promises announced on Saturday, the Law and Justice party government had already adopted an increase in spending on health and the military by 0.27% of GDP, i.e. about PLN 5 billion, for 2020. Together with the latest announcements, this results in an additional expenditure at the level of PLN 40-45 billion (almost 2% of GDP).
- The good economic situation over the last 3 years has facilitated an increase in tax collection, hidden tax increases (no change in tax thresholds) and savings (freezing public sector wages). While in 2019 it will be possible to finance the new expenditure coming in from the middle of the year without increasing the planned deficit, in 2020 the situation will be much more difficult. During the economic slowdown, the next government will have much more limited room for manoeuvre. Firstly, it will make it more difficult to finance new expenditures and, secondly, it will reduce the scope for other necessary reforms, such as a thorough tax reform.
Author:
Aleksander Łaszek, Chief Economist
aleksander.laszek@for.org.pl
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