Poland′s unlikely PiS dividend | Business| Economy and finance news from a German perspective | DW | 21.10.2019
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Poland's unlikely PiS dividend

The new government is determined to go on with its reconstruction of Poland's political economy. But without a Senate majority and economic downturn looming, will it be able to keep its show on the road?

The recently reelected Law and Justice's (PiS) second term in office will run into more problems than its first, with slower economic growth undermining its spending plans. That's the view of many, both on the left and right.

PiS kept its absolute majority in the parliamentary election, but remains short of the "presidential majority" (267) that would allow it to reject a presidential veto (presidential elections are in May 2020) and of the "constitutional majority" (306 votes), allowing amendments to the constitution. It also lost the Senate.

Read moreOpinion: Poland solidifies its illiberal politics

The party has had an impressive record since late 2015, when it came to power, with GDP growth averaging 5%, inflation below target and interest rates at record lows. There had been fears the party's plans would lead to a deterioration in public finances, but this didn't materialize.

Firstly, strong economic growth and improved tax collection boosted tax revenues and public finances were managed prudently right up to just before these recent elections. Secondly, there was a shift in the composition of public expenditure, with the increase in social spending coming at the expense of spending in other areas. 

Polen Nationalkonservative PiS-Partei gewinnt Parlamentswahl (AP/D. Bandic)

The government's plan for a balanced central budget for 2020 is based on optimistic spending assumptions

Is the PiS victory pyrrhic?

The economic backdrop is much less supportive of strong growth now than in 2015. The economy is at a later stage of the cycle, capacity constraints are showing up and weakness in the eurozone will hit Poland's exports.

Think tank Capital Economics projects that annual GDP growth will slow to 2.5%-3.0% over the next parliamentary term.

Capital Economics believes that with the shift toward greater social welfare, spending is set to continue. The plans to almost double the minimum wage, for example, probably won't help the economy, it says. Poland's minimum wage would rise to a much higher share of average wages than in all other OECD countries, pushing up inflation by 0.2 percentage points annually, with a negative impact on employment and productivity.

The government's plan for a balanced central budget for 2020 is based on optimistic spending assumptions, as well as one-off increases in tax revenues, Capital Economics argues, adding it is skeptical this will be achieved.

Polen Parlamentswahl PiS Sieger Mateusz Morawiecki (picture-alliance/Zuma/G. Banaszak)

Prime Minister Mateusz Morawiecki has been a prudent manager of the coffers

External support changing

PiS wants to push on with judicial reform, which could increase the risk of Poland losing out on EU funds. Its approach to energy policy and unwillingness to move away from coal power are also likely to clash with the EU's increasingly pro-environment agenda.

Poland is the largest recipient of EU structural funds, receiving €110 billion ($130 billion) in the 2014-2020 funding period (2.5% of GDP), and the boom in fixed investment since 2016 has coincided with increased utilization of these funds on big public infrastructure projects.

"The ruling party's attacks on the rule of law are also doing major damage to Poland's long-term growth," Leszek Balcerowicz, a former Polish deputy prime minister and finance minister, wrote in Politico recently. Businesses and investors have picked up on the fact that doing business in Poland holds political risks, he wrote.

"Poland's boom is the result of positive external shocks and the next downturn could seriously damage the country's future," Balcerowicz wrote.

President Andrzej Duda

President Andrzej Duda comes up for reelection next May

Not social democracy

"PiS has been accused by some of propagating a form of socialist populism, which breaks from economic liberalism and instead woos voters through offering a series of state-led social welfare policies," Kozminski University sociologist Gavin Rae says.

"Kaczynski's offer of a 'Polish model of the welfare state,' based upon direct money transfers, not public services, proved a successful formula," Rae says.

But the macroeconomic strategy of the government has remained essentially the same as that which came before — maintain an open economy, with low taxation and regulations for businesses and use the funds from the EU to sustain public investment, Rae believes.

PiS also hasn't made any attempt to raise investment in key productivity-enhancing areas and labor productivity has generally kept pace with the surge in wages over the past few years, Rae adds.

Although the government has gained a reputation of increasing public spending and the role of the state in the economy, government expenditure as a percentage of GDP actually fell from 41.7% in 2015 to 41.1% in 2017. The recent increase only brings social spending in Poland back to the level it logged in 2010 and remains far behind that spent in most Western European countries (e.g. France 24.3% and Germany 20.4%).

"Also, the increased strength of the Catholic Church influenced the social policy of successive governments," Rae says.

"And this conservative character of the Polish welfare state has been heightened by the reforms introduced by the PiS government. Most notably, 500+ was partly justified as being a policy that would strengthen the traditional family model by encouraging women to have more children," he argues.

This is the antithesis of the Scandinavian welfare state model and also represents a partial break from the policy of the Civic Platform (PO) governments, which were based on the principle that social spending should be geared toward encouraging people into the labor market, Rae adds.

Read more:  How strong is democracy in former communist Europe?

With the PiS government prioritizing spending on family benefits, and not for example on such things as building preschools or developing child care in workplaces, the burden of childcare is further placed on the family, most particularly women.

"The strategy of the PiS government is to provide social benefits for families, who will then be expected to be responsible for child care, looking after the elderly," Rae adds.

"Although the PiS government has raised and redirected social spending, it has not pursued a classical left-wing program targeting benefits to particular social groups and strengthening the role of the family and church in public life."

The PiS government has maintained its social spending while not raising the taxes for the most wealthy sections of society, Rae concludes.

Watch video 42:31

Poland at the crossroads

Will it, won't it?

Moody's said the draft budget for 2020 does not contain the fiscal effects of PiS' election promises, such as additional pension bonuses and the average annual increase of the minimum wage, which according to the agency may have negative consequences on competitiveness.

A Brussels-based Polish economist told DW that fulfilling all the preelectoral promises would indeed put the government on a collision course with EU fiscal rules. 

At the same time, as long as Poland stays with a deficit below 3% of GDP (which for now is likely), it can choose to ignore the European Commission's recommendations, as there are no strong instruments to punish noneurozone offenders, he said. Romania has already shown how to de facto ignore the so-called significant deviation procedure.

A deeper slowdown or a recession could be more tricky to handle, he concluded. 

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