beyondbrics

By Krzysztof Rybinski

Here is the official story: Poland was the only country in the EU to survive the 2009 crisis without falling into recession; is posting further solid growth in 2010 and will see an expansion of nearly 5 per cent next year. Unlike other European states, the country has absolutely no need to embark on painful economic reforms.

Here is the story as told by those Polish economists that Donald Tusk, the Polish prime minister, has called the ‘mad people’. Public spending is growing, and so is public borrowing, with a fiscal deficit close to 8 per cent of GDP expected for this year, topping last year’s 7 per cent. The reform of public finance has stalled since 2008; energy shortages loom; infrastructure is creaking and entrepreneurs are drowning in bureaucratic red tape.

I am one of the ‘mad people’. And I am worried that we are right. Poland avoided recession in 2009 partly because of pure luck. In the absence of reforms we will need much more luck in the coming years to avoid public finance turbulence.

The government predicts that by 2012 GDP growth will reach almost 5 per cent – having accelerated to 3.5 per cent in the second quarter of this year from 1.9 per cent last year. Polish public debt is projected to stabilize at 54.99 per cent of GDP (conveniently just below the 55 per cent legal threshold), amid moderate tax increases, innovative spending rules and a huge privatization programme.

If you deduct the cost of pension reform from the public debt – as ministers like to do on the grounds that no country should be punished for doing reforms – it falls below 45 per cent, one of the EU’s lowest levels. Basking in a stable popularity rating of close to 50 percent, the government says others should learn from Warsaw how to skilfully manage an economy during tough times.

The ‘mad people’ take a different view. These fools, who include prominent economists, former ministers and ex-central bank governments, point out that between 2008 and 2010 the ratio of public spending to GDP went up from 42 per cent to 47 per cent. Part of the increase was due to an EU funds driven investment surge, but part was due to a continued increase in social spending. In 2009 alone public spending in Poland rose by 10 per cent – or more than 6 per cent in real terms, pushing up deficits.

The government is basing its policy on a very optimistic growth path. If for any reason – such as another global slowdown – growth falls short of expectations, public debt will likely top 55 per cent in 2011 or 2012 at the latest, and will exceed 60 per cent soon after, breaching a constitutional limit. One may resort to creative calculation and deduct pension reform costs from the public debt, but bonds have to be rolled over no matter whether they are owned by hedge funds or domestic pension funds.

Meanwhile, energy companies are ringing alarm bells that Poland will face power shortages starting from 2012 due to ageing infrastructure and limited investment. Poland remains the most over-regulated OECD economy and has dropped 20 places in the World Bank’s Doing Business ranking between 2005 and 2010. Poland occupies the tail position in the EU’s innovation ranking. The employment ratio is one of the lowest in Europe; the effective pension age is 59 years, also one of Europe’s lowest. Soldiers and police officers can retire before they turn 40.

In a 34-page statement when taking office in 2008, Tusk made 197 promises, including pledges to lower taxes, reduce the fiscal deficit and slash the public debt. Instead, the deficit, debt and taxes are on a steep rise.

Structural reforms are necessary. However, no such reforms are planned for 2010-2011, although markets are betting that the government’s reformist agenda will surface after elections in 2012.

Krzysztof Rybinski is a professor at the Warsaw School of Economics and a former deputy governor of the National Bank of Poland