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FISCAL CHALLANGES
IN 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 policy
in 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.
Results of inappropriate
fiscal policy measures
THE CASE OF POLAND
STRUCTURAL GAP BETWEEN PUBLIC REVENUES AND
PUBLIC EXPENDITURES : General Government
revenue, expenditure (% GDP)
55
50
43,8 44,3 44,7 42,6 43,4 43,9
43,3 44,5
42,2
45 41,1
40
40,2 40,3 39,6
35 38,1 38,5 39,3 38,5 37,2 39,4
37,4
30
25
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
revenue
Source: Eurostat
expenditure
HIGH AND INCREASING COSTS OF FINANCING
PUBLIC DEBT
:
interest payable
10
7,4 7,1
6,7
6,5
6,5
6,4
6,1
5,5
5,1
2,3
2,2
5,9
5
3
3,1
3
2,9
2,8
2,8
2,7
2,6
09
2
0
08
0
2
2
0
07
06
0
2
2
0
05
04
0
2
2
0
03
02
2
0
01
0
2
2
0
00
0
Percentage of GDP
Percentage 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
8
7,1
7
6
5,3
6,2
5,4
5,3
5,0
5
4
6,8
6,2
5,0
4,1
4,3
3,7
3,6
3,9
3,6
3,0
3
1,9
2
1,2
1
1,8
1,4
0
2000
2001
2002
2003
2004
Budget deficit (% GDP)
Source: Eurostat
2005
2006
2007
2008
Real GDP
2009
ACCELERATION OF PUBLIC DEBTS TO A LEVEL DANGEROUS
TO PUBLIC FINANCES: Public Debt (% of GDP)
60
51,0
50
47,1
45,7
47,1
47,7
2003
2004
2005
2006
42,2
40
36,8
37,6
2000
2001
45,0
47,2
30
20
10
0
2002
Source: Eurostat
2007
2008
2009
GROWING RATE OF OBLIGATORY EXPENDITURES
(interest rates, transfers to pension funds, etc.):
Structure of State Budget Expenditure
100
90
26,5 25,1 28,6 27,1 25,7 26,9 25
33,2
80 46,3 41,8 38,9
70
60
50
40
73,5 74,9 71,4 72,9 74,3 73,1 75
66,8
30 53,7 58,2 61,1
20
10
0
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)
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
1
0,4 1,0 1,0 -0,1
0,2
0 0,5 -0,1
-0,1
-0,7 -0,4
-0,9 -0,9
-1
-2,9
-3,5
-2
-4,0 -4,1
-4,7
-5,0 -4,3
-5,9
-3
-6,3
-5,8
-4
-6,6 -6,7
-5
-6
-7
-8
Cyclical balance
Source: Eurostat
Structural balance
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 taskbased 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.