Poland After the Elections: Risk of Growing State Intervention

Orban-Kaczynski-picture
EPICenter

The elections held this Sunday, October 25, have brought substantial change in the makeup of the Polish parliament. After eight years in power, Civic Platform (PO) lost to the main opposition party Law and Justice (PiS), led by former Prime Minister Jarosław Kaczynski, whose twin brother and former President Lech Kaczynski died in the plane crash in Russia in 2010.

For the first time since Poland’s 1989 transition to democracy, one party won an absolute majority (235 seats) and will be able to form the government without the need for a coalition partner. PO, whose former leader and ex-PM Donald Tusk became President of the European Council in 2014, was second with 138 seats. The other forces in the lower house of the Polish parliament (Sejm) include Kukiz’15, led by a rock musician, pro-market Nowoczesna (Eng. Modern) founded just 6 months ago by economist Ryszard Petru, and the agrarian PSL, a former coalition partner of Civic Platform.

Poland has achieved great success since the fall of the communist regime. For more than two decades average economic growth reached 4% a year, faster than the other countries of Central and Eastern Europe. Per capita income increased from 29% of its German equivalent in 1992 to 55% in 2014. Polish economic growth was not only fast, but also very stable. None of the cyclical slowdowns in Poland was accompanied by a decline in GDP. Moreover, Poland is the only EU economy which did not shrink during the global financial crisis.

Why, despite relatively good economic performance, did the PO-led coalition lose the elections after eight years in power? From the perspective of freedom, the rule of law and economic growth the assessment of the last 8 years is mixed. In 2007, PO won elections proposing lower and simpler taxes, reduced public expenditures, significant deregulation, more privatisation and other reforms to strengthen economic freedom. Some electoral promises were only partially fulfilled, while others were completely abandoned. Instead, new interventionist measures were implemented and even Prime Minister Tusk, whose views were once close to classical liberalism, admitted that he had become a social democrat. The nationalisation of over €35 billion worth of assets from the private pension funds (50% of total holdings) to replace them with promises in the pay-as-you-go system was probably the biggest blow for many PO voters.

Moreover, this policy was supported by a majority of political forces including Law and Justice, who voted against nationalisation only because it was not radical enough for them. At the same time one of the most important and necessary reforms of the PO-PSL collation was to increase the minimum retirement age to 67 to the improve stability of the pension system. It was fiercely attacked by irresponsible opposition parties, in cooperation with trade unions, and the government incurred some political costs as a result. Finally, political scandals involving key PO politicians (including tapes secretly recorded during meetings in restaurants) destroyed the image of the party before the elections, stimulating voters to look for alternatives.

One of those alternative choices was Law and Justice (PiS). They are typically portrayed as a right-wing party but their economic programme is much closer to that of left-wing European parties. Before the elections, the Civil Development Forum (FOR) think tank estimated that PiS electoral promises, if fulfilled, would increase the public debt by €32 billion euro in 2016-19 (i.e. 13% of the current public debt level). By comparison, the PO’s pre-election proposals would have increased the public debt by €5 billion and the pro-market Nowoczesna party’s programme would allow the public debt to fall during the next parliament term.

The most costly promises of PiS include lowering the retirement age (back to 60 for women and 65 for men), additional social benefits for families with children and a much higher income tax threshold, which would mean lower public revenues absent a similar fall in public expenditures. Moreover, PiS has promised a range of regulatory interventions. Firstly, they would like to introduce new taxes on banks, the financial sector and supermarkets. Secondly, Law and Justice wants to strengthen the state’s role in sectors like energy, mining or banking. The last time PiS was in power in 2005-7 they halted many privatisations, and there is a danger that this might be repeated. However, there is still room for privatisation in Poland, which is essential to improve productivity and to limit political control over key enterprises. Finally, there is a risk of higher politicisation of the justice system due to PiS proposals to strengthen government supervision of prosecutors and judges. And how will PiS’ electoral promises will be financed? Are the remaining assets in the private pension funds safe, or will they be nationalised by the new government, as Viktor Orbán did in Hungary?

Our think tank’s research shows that without free-market reforms all factors of economic growth will be weaker in the next 25 years. Firstly, the labour force will decrease, because Polish society is aging quickly. Secondly, the growth of productivity will be slower, as the possibilities of its improvement without new investment are largely exhausted. Thirdly, in Poland the investment rate is one of the lowest in Central and Eastern Europe and it has to be improved to increase economic growth. Unfortunately, the Law and Justice programme does not offer any serious responses to these challenges.

A potential weakening of the Polish economy might be a problem for the EU. It means that Poland, which is the sixth-largest economy in the EU, will become a less attractive place to do business for foreign investors. Moreover, a weaker economy means less money for strengthening external security, so important at a time of instability in Ukraine and an aggressive foreign policy by Putin’s Russia. What is more, PiS’ electoral promises, if fulfilled, would increase the risk of a fiscal crisis in the biggest economy in Central and Eastern Europe. It may have some negative regional spill-overs. Law and Justice belongs to the European Conservatives and Reformists group in the European Parliament. Nevertheless, their Euroscepticism is strong only when it suits their political purposes. It is why they are currently against Poland’s entry into the Eurozone.

However, they would like to get even more money from the EU budget than Poland currently receives to sponsor public investments and agricultural subsidies. Finally, Law and Justice’s success may strengthen nationalism in Poland, which could make European cooperation more difficult.
Jarosław Kaczyński, PiS leader, once said he would like to “turn Warsaw into Budapest,” inspired by Victor Orbán’s political success. Orbán’s policies in many areas have run counter to the rule of law, economic freedom and individual liberties. Hopefully, PiS will moderate its economic programme after the election and renounce some of its harmful pre-election promises. If the new government decides to choose the “Orbánisation” path it will be harmful for Poland, the region and the EU. Nevertheless, the election results show the important role of civil society and think tanks such as FOR in educating voters about the negative consequences of state intervention and in promoting the pro-market reforms needed to strengthen economic growth.

Article was originally published by the EPICenter

Marek Tatala