Expensive Rule of Law and Justice

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The new government of Poland draws a lot of attention. Fort the first time since 1989 one party gained majority in the Polish parliament and along with its potential allies is close to reaching constitutional majority. Eight years in opposition radicalized Law and Justice (PiS) and increased its determination. A mask of friendliness worn during the campaign was thrown away much quicker than it had been anticipated. Government consists of hard core conservatists with a very strong position, making Prime Minister Beata Szydło a weak figure. The leader of PiS Jarosław Kaczyński made this extra clear by humiliating her before the appointment so that everybody knows where the source of power is.

At the same time, the heads of economic departments are people known for their liberal views (at least as far as economy is concerned): Mateusz Morawiecki (former CEO of a major bank in Poland) and Paweł Szałamacha. This is at odds with PiS economic and social program which is much more etatist in nature. Let’s not forget that the driving force of PiS is the fear of the ‘other’ which translates into promotion of nationalistic values. But being Polish is not good enough – a guarantee for the success according to the newly appointed government is state ownership. How this general point of view is aligned with the economic liberals remains unclear. Nevertheless, if the past may offer us any hints, the actual actions shall be liberal while rhetoric remains nationalistic.

Yet, the promises PiS has made are unsustainable and the party keeps claiming that they intend to keep them. As Ryszard Petru – the leader of the opposition party Nowoczesna has noticed – fulfilling them will make the state go bankrupt within first 100 days. Let’s see what is in store as far as the expenses are concerned (total spending of Polish budget amounts to PLN 350 billion).

  1. PLN 500 per child per month for everyone (cost: app. PLN 22-25 billion)

Well, not exactly for ‘everyone’ after all – one cannot receive money for the first child unless the family is poor. Still, the support is at the level of the richest countries in Europe. The goal is to support families and provide incentives to have more children. What is lacking is the explanation why more children is better. In most cases the issue of pension system is raised. However, to save our pension system, children should have been born 15 years ago. Today it is far too late and it will actually have a detrimental effect on the situation (in addition to large number of retirees, working people will have to support a lot of children). Therefore one must conclude that the program arises from conservative agenda that values traditional family, preferably with many children. This promise was probably one of the major factors that helped PiS win the elections and it seems unlikely they will abandon it. At the same time it is one of the most costly and the final results are uncertain.

  1. Increase of tax-free income to PLN 8000 per year (cost: PLN 21 billion)

The tax free income in Poland is at quite a strange level of app. PLN 3100 per year. This is neither noticeable nor negligible. Either way, it was bound to be changed – either by liquidation or increase. Of course, because of the elections the second approach has been chosen. Sadly, the tool that is supposed to help the poorest, actually gives nothing to those who do not have any income at all.

  1. Lowering retirement age to 65 for men and 60 for women (cost: PLN 10 billion per year for the first 4 years; increasing exponentially later on)

Probably the most devastating idea. Polish pension system (and most of the European ones as well) is bound to fail even at current parameters. Its reforms in the past made the situation slightly less catastrophic (at least in comparison with the rest of the EU) but these achievements were monetized for current spending over the last years. Recently, the only rational change was to increase retirement age to 67. Reversing that reform, in addition to extra cost to the budget, will cause a drop in average benefits for women by 35% (and slightly less for men). Complete demolition of the system that was started by the previous government and is now continued by PiS makes a total collapse of the system much more possible.

  1. Increase of minimum wage to PLN 12 per hour

The cost of the idea is not easy to gauge. This will result in higher unemployment benefits and drop of tax inflow. Due to high diversity in the level of economic development in some regions, the change is insignificant (large cities) while in other may cause major disturbances.

  1. Lowered income tax (15%) for some small companies (cost unknown)

One of the funniest promises. The tax would be applied for a limited number of companies and only the very small ones. They would have to employ few people but pay them well. We may estimate that currently there are about 50 companies in Poland that fit the requirements. On the other hand, this can be a good deal for law firms that will slice and dice companies to create couple of small ones from one big. (Actually, with transfer prices, only one small company is sufficient enough…)

  1. PLN 1.4 trillion (sic!) investment program

Well, we do not exactly know what that exactly means and in what will we invest. Regardless of that the amount of funds is far too great for Polish economy to absorb. The money is supposed to come from:

- the European Union
– financing by National Bank (LTRO kind of instrument, illegal under current law)
– Bank Gospodarstwa Krajowego (state-owned bank)
– current savings of companies (nobody explained how companies would be forced to use the money)
In conclusion, this idea is mostly PR with no merit to it, aimed to shock with the amount of money.

The total extra spending (excluding investment program) is about PLN 60 billion (including other points – such as free medication for elderly, decrease of mining tax, etc). That is over 17% of total budget and cannot be financed by deficit alone. Here is how PiS thinks the spending can be managed:

  1. Better tax collection (PLN 2,5 billion)

Well, that sounds quite nice and is definitely something that needs to be done. However, PiS is refusing to implement most obvious and reliable methods (like reverse charge for VAT) and is going towards more bureaucracy and more complicated laws. As we know, this usually yields opposite results. It is hard to determine the possible outcome of government’s actions but the estimated PLN 50 billion increase in revenue is simply ridiculous. Reaching PLN 5 billion in the coming year would be a tremendous success. Half of it may be reachable.

  1. Bank tax (PLN 4 billion)

PiS plans to introduce tax on banks’ assets. Assuming all the banks comply with it, it may yield PLN 4 billion. However, banks will surely find easy ways of tax avoidance like debt securitization. Nevertheless, the one bank that will undoubtedly comply is the state-controlled PKO BP – although extra bank tax will be offset with lower income tax and lower dividends from this bank. Politicians claim banks will not transfer the cost onto clients due to competition. Clearly they have not participated in ECON101.

  1. Supermarket tax (PLN 1-3 billion)

Supermarkets along with banks are treated in Poland as scape goats (for not being owned by Poles…) hence the idea of extra taxation. It seems that all supermarkets will have to pay it. Again, politicians claim this will have no influence on prices. As we speak, supermarkets consider division into smaller shops to avoid this tax.

  1. 39% income tax for the richest (up to PLN 500 million)

Rich are always easy to tax in theory but quite hard in practice. Even assuming full success, the results for the budget are negligible.

So what is the bottom line? About PLN 60 billion in spending and (in the beast case scenario) PLN 10 billion in extra revenue. PLN 40 billion of deficit. It seems that Poland can go broke within the forthcoming year. And even if we survive the following year, we will only have larger deficit. I wonder how economic liberals in the current government feel facing such a perspective. The question is whether PiS intends to sink the country or maybe Beata Szydło’s cabinet is designed to withdraw from the promises and fail so that Jarosław Kaczyński may step in and save the day?

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Liberte