PUBLIC GOVERNANCE AND TERRITORIAL DEVELOPMENT DIRECTORATE

PUBLIC GOVERNANCE COMMITTEE

Working Party of Senior Budget Officials

7th ANNUAL MEETING OF OECD PARLIAMENTARY BUDGET OFFICIALS

AND INDEPENDENT FISCAL INSTITUTIONS

Austrian Parliament, Vienna 16-17 April 2015

HAND OUT

SITUATION IN POLAND IN THE SCOPE OF PUBLIC FINANCES:

THE MOST IMPORTANT ACHIEVEMENTS AND PROBLEMS TO SOLVE

Zofia Szpringer Research Bureau,

Chancellery of the Sejm

2

SITUATION IN POLAND IN THE SCOPE OF PUBLIC FINANCES:

THE MOST IMPORTANT ACHIEVEMENTS AND PROBLEMS TO SOLVE

In 2014 situation in Poland in the field of economic growth and public finances was relatively

good. However, the existing conditions were not sufficient for making a decision on joining the euro

area. There are still many problems to solve.

Poland weathered the economic crisis and its aftermath very well. Real GDP has increased

cumulatively by 18.5 percent in 2008-2013, which was unparalleled in the EU. In 2014, economic

activity recovered from a temporary slowdown in the two previous years1 and real GDP amounted to

3.3 per cent. Similar economic growth is predicted for 2015-20162. Domestic demand picked up

again, replacing external trade as the main growth driver. Public and private consumption is expected

to remain strong in the near term3, supported by solid employment and real wage growth. The

ongoing recovery of credit growth, coupled with declining financing costs and increasing profit

margins, is expected to provide additional support for private investment, which however, remains

hindered by deficiencies in business environment. Public investment is also projected to gather steam

in 2015 with the rollout of new EU-financed projects4 (see graphs 1-2 and table 1).

In Poland the annual consumer price index is falling since mid-2014 and it is below the

expectations. At the same time, the short-term inflation forecasts had been significantly revised

downwards, and the expected period of deflation had been extended. In addition, an acceleration in

the decline in producer prices is noted (producer prices fall since 2.5 years). Nevertheless, the

opinion may be expressed that the deflation in Poland is mainly driven by external factors, primarily

the decline in commodity prices. The extension of the expected period of deflation is the result of a

downward revision of the forecasted paths for energy and food prices. The deflation may not have

adverse economic effects, because it may support GDP growth, by stimulating an increase in the

purchasing power of incomes. There are currently no signals indicating a risk of deflationary spiral.5

1 Real GDP was 1.8 per cent in 2012 and 1.7 per cent in 2013.

2 3.2 per cent in 2015 and 3.4 per cent in 2016.

3 Public consumption is expected to amount 4 per cent in 2015 and 3.3 per cent w 2016 and private

consumption respectively: 3.1 per cent and 3.2 per cent

4 See: Commission Staff Working Document, Country Report Poland 2015, {COM(2015) 85 final},

Brussels, 26.2.2015, page 1.

5 However, if price declines persist, and the wages of workers do not grow, then it would be a high risk of

falling into a deflationary spiral with all its negative consequences.

http://www.nbp.pl/en/onbp/organizacja/minutes/mi_ii2015en.pdf

3

Graph 1. Real GDP growth (index)

Graph 2 Contributions to real GDP growth in Poland

According to the latest data of the Polish Ministry of Finance, the general government debt

(EDP debt, a part of the government finance Maastricht criterion) was at PLN 866.5 billion6 and

amounted to 50.2per cent of GDP7 at the end of 2014

8.

6 Data regarding the fourth quarter of 2014 are preliminary. Data regarding previous periods were updated if

necessary.

4

Such rate was higher than previously expected by the European Commission (48.6per cent) – See

table 2

The general government debt in 2014:

decreased by PLN 59.6 billion (6.4per cent) compared with the end of 2013;

resulted mainly from changes in State Treasury debt, and it was influenced by inclusion of

PKP Polskie Linie Kolejowe S.A (the Polish Railway Lines), in the general government

sector, and consolidation of National Road Fund liabilities transferred to Demographic

Reserve Fund as a result of the pension system reform;

was revised after changes to the scope of general government sector which were applied in

line with provisions of ESA2010. In particular, the Bank Guarantee Fund (BGF) has been

included in general government sector which resulted in a decrease of debt due to

consolidation of T-securities9 held by BGF.

Simultaneously, at the end of 2014 the consolidated public debt (according to domestic

methodology) stood at PLN 826.7 billion10

, and it amounted to 47.9per cent of GDP11

.

This debt in 2014:

decreased by 55.5 billion (6.3 per cent) compared with the end of 201312

;

resulted mainly from the cancellation of ST securities13 in February 2014 as a result of

pension system reform. That operation resulted in a one-off reduction of ST debt by PLN

130.2 billion.

Excluding the effect of cancellation of ST securities (regardless of its influence on debt

servicing costs) public debt increased by PLN 74.6 billion. It was the second largest debt increase

during the last 15 years. It was bigger only in 2010 – PLN 78 billion. It is recognized that the debt

growth results from the unbalanced pension system. According to data from the Social Insurance

7 According to the first estimate of the Central Statistical Office from 27 February 2015 GDP in 2014

amounted to PLN 1 724.7 billion.

8 See: http://www.mf.gov.pl/documents/766655/1185164/zsfp_2014_12_en.pdf

9 Treasury securities.

10 Data regarding the fourth quarter of 2014 are preliminary. Data regarding previous periods were updated if

necessary.

11 According to the first estimate of the Central Statistical Office from 27 February 2015 GDP in 2014

amounted to PLN 1724.7 billion.

12 The decrease of public debt in 2014 (by PLN 55,5 billion) was a result of:

- central government debt decrease by PLN 58.5 billion (7.2 per cent),

- local government debt increase by PLN 3.3 billion (4.8 per cent),

- social security funds debt decrease by PLN 0.3 billion (68.7 per cent).

We can also add that in 2014, the State budget execution was better than expected:

The State budget revenue amounted PLN 283.5 billion (i.e. 102.1 per cent of the Budget Act), the State

budget expenditures amounted to PLN 312.5 billion (i.e. 96.1 per cent of the Budget Act), the State

budget deficit amounted to PLN 29 billion (representing 61 per cent of the plan).

13 State Treasury securities.

5

Institution (ZUS) in 2014, the difference between the revenues from social security contributions and

the cost of benefit payments amounted to approx. PLN 56 billion. In 2015, it will amount to PLN 51

billion, and in subsequent years it will continue to grow and it is expected to reach about PLN 62

billion in 2020. The above means that despite decent growth, public finances remain unbalanced.

In Poland, the problem lies in keeping of double counting of the debt and deficit (i.e. by national

and EU methods). Regardless of the administrative costs of that, it is visible that there are differences

between the amounts resulting from the application of these methods. For example, difference

between the public debt and the general government debt in 2014 amounted to nearly PLN 40

billion14

. Reported lower debt - according to the national methodology - may not create strong

enough pressure on expenditure cuts, because it is below the limit set by the Polish Constitution15

.

The next threat for public finances is that the share of foreign debt in the total public debt

increased to 35.3per cent at the end of 2014 (up by 4.9 percentage points). Such a high proportion -

as indicated by historical experience - can lead to destabilization of the State in terms of significant

changes in exchange rates and to the speculative behaviour of investors16

.

Up to now Poland is not prepared for entering the euro area. In January 2015 Poland fulfilled

the criterion on price stability and the interest rate criterion. The exchange rate criterion is not

fulfilled due to the fact that Poland does not participate in ERM II. The fiscal criterion remains

unfulfilled due the excessive deficit procedure that has been imposed on Poland. Actions taken in

2014, in order to reduce deficit of the general government below 3per cent of GDP were positively

evaluated by the European Commission. In the spring of 2015 the European Commission will

provide its next assessment of Polish actions, based on the Convergence Program and Report on

actions taken to reduce the excessive deficit (these documents will be forwarded to the European

Commission and to the EU Council in the end of April 2015). The latest European Commission

forecasts indicate that Poland should fulfil the fiscal criterion in 2016 (based on 2015 data)17

.

Before entering the euro area, changes in the Polish Constitution are necessary, which is not

easy with an expected balance of political forces in the Polish Parliament. Poland should also

improve its public finances; i.e. balance the budget and reduce debt to approx. 35-40per cent of

GDP. This would create a financial buffer which the government could use in case of a possible

economic slowdown and if low rates of the European Central Bank were unable to stimulate the

economy. Poland must also meet new challenges and increase its competitiveness18

.

14

It is supposed that the departure from the double-counting will be possible when Poland prepares for entry

into the euro area and invites changes of an existing legislation (Constitution and the Public Finances Act).

15 See article 216 item. 5. “ It shall be neither permissible to contract loans nor provide guarantees and

financial sureties which would engender a national public debt exceeding three-fifths of the value of the

annual gross domestic product…”.

16 We can also add, that in 2014 the share of public debt towards domestic nonbanking sector fell from 28.9

per cent to 16.3 per cent. The share of public debt towards domestic banking sector rose by 6.4 percentage

points to 26.6 per cent. The share of public debt towards foreign investors rose from 50.9 per cent to 57.1

per cent. Those changes resulted from pension system reform and depreciation of zloty. See: Public debt

4Q2014. Quarterly newsletter. Warsaw, 31 March 2015, Ministry of Finance, page 4.

17 The excessive deficit procedure is covered by 11 of the 28 EU countries.

18 See: W. Bogdan, D. Boniecki, E. Labaye, T. Marciniak, M. Nowacki and Poland 2025: Europe’s new

growth engine, McKinsey & Company, January 2015.

http://www.mckinsey.com/locations/warsaw/publications/Poland_2025 per cent20Executive per

cent20Summary1.pdf

6

Recently, public support for joining the euro area has decreased from 2/3 to about 1/4. In

addition, entrepreneurs are rather sceptical about the need to protect themselves against the risk of

exchange rate. This is because the euro exchange rate has stabilised now and earlier entrepreneurs

have learnt their lesson when they lost approx. PLN 6 billion for currency options offered to them by

banks, which means that these instruments supposed to protect them against the risk of exchange rate

turned out to be ineffective19

.

It cannot be excluded that in adverse circumstances it may be difficult to meet exchange rate

criterion (participation in the European exchange rate mechanism for at least two years, with a

maximum exchange rate fluctuation band of +/- 15per cent deviation from the designated central

rate). Hence, some Polish economists indicate that Poland will not join the euro area before 2023.

During the last months some problems emerged, that force the authorities (government and the

central bank, the Parliament, the Polish Financial Stability Committee, the Office of Competition and

Consumer Protection (UOKiK)) to deal with the country's financial stability issues, particularly in

relation to the banking system. One of them was a significant increase in the Swiss franc in relation

to the Polish currency, which had a negative impact on the financial situation of many people who

have mortgages in Swiss francs, the second was the disclosure by the Financial Supervision

Authority of a bad financial situation of credit unions (SKOK)20

. In addition, it has become

expedient to deal with non-bank lending market (shadow banking) in order to introduce surveillance.

In that situation became necessary to provide additional budgetary resources for the functioning of

the Office of Competition and Consumer Protection and to start works on changes in the law on

competition and consumer protection, as well as other laws. The President of the UOKiK wants

some far-reaching amendments in the law on competition and consumer protection to be enacted as

soon as possible. In the prepared project he wants, among others, the right to issue temporary,

immediately enforceable decisions, the right to search the companies with the prior agreement of the

court, to impose financial penalties up to 10 percent of annual turnover after finding an illegal clause

or the possibility of making the purchase of a controlled trial. The latter proposal would allow

officials to impersonate, for example, the bank customer to verify the proposed agreement for

unauthorized records / unlawful clauses. In changing existing law it may be also important to ensure

a fair sharing of risk between the bank and the bank clients.

The National Bank of Poland (NBP) in its Financial Stability Report21

, confirmed the relatively

good situation of the Polish economy. However, it also noticed the existence of different risks (e.g.

risk related to the Russia-Ukraine conflict) as well it prepared many recommendations concerning: 1)

passing legislation creating a macroprudential authority, 2) passing legislation introducing the

mechanism of corrective actions, recovery and resolution for banks, 3) acting towards a limitation of

systemic risk which might be caused by the activity of central counterparties - CCPs, particularly

towards creation of recovery and resolution mechanism for these entities, 4) changes of regulations

and tightening of the integration of the sector of cooperative banks, 5) necessity to maintain high

capital levels by banks, 6) limitation of risk concerning the banks’ financing structure, including its

concentration, 7) particularly cautious loan policy of banks in the segment of commercial properties,

8) banks taking into consideration the risk regarding the portfolio of housing loans with high LtV in

calculation of the cost of credit risk and capital policy, 9) banks conducting a lending policy assuring

that borrowers who take long-term loans with a floating interest rate have income buffers high

19

See: R. Omachel, Korzyści z euro (Benefit from the euro), Polska Newsweek nr 15/2015, page 72.

20 Credit unions are subject to supervision by the Financial Supervision Authority from 27 October 2012.

21

See: Financial Stability Report, National Bank of Poland, January 2015.

http://www.nbp.pl/en/systemfinansowy/fsr201501.pdf

7

enough in case of an increase of interest rates, 10) continuation of the restructuring of the sector of

credit unions22

.

We can also add that the NBP put forward the proposal to create the Systemic Risk Board, and

began the construction of facilities, but so far no such council has been established, because the

government works on the relevant Act are still in progress.

Preservation of the financial system stability is important because the risks indicated by the

central bank should not materialize. However, we know that the Russia-Ukraine conflict may have a

negative impact on the budget, especially if the current conflict escalates. We can also remind that

according to the Act on Public Finances prudential and remedial procedures associated with

maintaining control over the level of public debt are not being used the case of imposition of martial

law (in this case the escape clause may come into effect23

). So, in such circumstances growth of

public debt may be quite real.

Many important challenges facing Poland have been diagnosed quite well some years ago. They

include the unfavourable demographics, too low savings and innovation, inefficient justice (which is

reformed by the introduction of an adversarial procedure), the problem of mining24

and recently there

is a problem with finding a balance between climate and energy agenda25

.

For Poland it is important to carry out recommendations issued by the Council of the European

Union during the European Semester, because such recommendations can be generally considered

beneficial for our State and up to now, Poland - like many EU countries - has made limited progress

in some areas (for example: in improving the targeting of social policies, in improving the cost-

effectiveness and the overall efficiency of the healthcare sector, in strengthening outreach to

unregistered youth, in increasing adult participation in lifelong learning, in combatting labour market

segmentation, in stepping up efforts to promote the employability of older workers, in strengthening

the links between research, innovation and industrial policy, on effective implementation of railway

investment projects and on developing the gas interconnectors)26

.

So, the Council recommended Poland taking the following action within the period 2014‐2015:

27

1. Reinforce the budgetary strategy to ensure the correction of the excessive deficit in a

sustainable manner by 2015 through achieving the structural adjustment effort specified in

the Council recommendation under the Excessive Deficit Procedure. After the correction of

the excessive deficit and until the medium‐term objective is achieved, pursue an annual

22

Ibid, pages: 13 and 101-104.

23 See: Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the

Member States, Official Journal of the European Union, L 306 from 23.11.2011.

24 With which it is difficult to face during the parliamentary elections.

25 See: J. Lewandowski, Frankowicze to nasza klasa średnia (Swiss francs borrowers are our middle class),

Rzeczpospolita z 9 kwietnia 2015, page A 10.

26 See: http://ec.europa.eu/europe2020/pdf/csr2015/cr2015_poland_en.pdf , pages 31-36.

27 See: Council Recommendation of 8 July 2014 on National Reform Programme 2014 of Poland and

delivering a Council opinion on the Convergence Programme of Poland, 2014, Official Journal, C 247 from

29.7.2014, page 97.

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:C:2014:247:TOC,

8

structural adjustment of 0.5 per cent of GDP as a benchmark. A durable correction of the

fiscal imbalances requires a credible implementation of ambitious structural reforms to

increase the adjustment capacity and boost growth and employment. In that regard, Poland

should minimise cuts in growth‐enhancing investment, improve the targeting of social

policies and the cost-effectiveness of spending and the overall efficiency of the healthcare

sector, broaden the tax base for example by addressing the issue of an extensive system of

reduced VAT rates, and improve tax compliance, in particular by increasing the efficiency

of the tax administration.

Establish an independent fiscal council28

.

2. Strengthen efforts to reduce youth unemployment, in particular by further improving the

relevance of education to labour market needs, increasing the availability of

apprenticeships and work‐based learning places and by strengthening outreach to

unregistered youth and the cooperation between schools and employers, in line with the

objectives of a Youth Guarantee. Increase adult participation in lifelong learning in order to

adjust skills supply to skills demand. Combat labour market segmentation by stepping up

efforts to ensure a better transition from fixed‐term to permanent employment and by

reducing the excessive use of civil law contracts.

3. Continue efforts to increase female labour market participation, in particular by taking

further steps to increase the availability of affordable quality of childcare and pre‐school

education and ensuring stable funding. Include farmers in the general pension system,

starting by speeding up the creation of the system for the assessment and recording of

farmers' incomes. Phase out the special pension system for miners with a view to

integrating them into the general scheme. Underpin the general pension reform by stepping

up efforts to promote the employability of older workers to raise exit ages from the labour

market.

4. Improve the effectiveness of tax incentives in promoting R&D in the private sector as part

of the efforts to strengthen the links between research, innovation and industrial policy, and

better target existing instruments at different stages of the innovation cycle.

5. Renew and extend energy generation capacity and improve efficiency in the whole energy

chain. Speed up and extend the development of the electricity grid, including cross‐border

interconnections to neighbouring Member States, and develop the gas interconnector with

Lithuania. Ensure effective implementation of railway investment projects without further

delay and improve the administrative capacity in this sector. Accelerate efforts to increase

fixed broadband coverage. Improve waste management.

6. Take further steps to improve the business environment by simplifying contract

enforcement and requirements for construction permits. Step up efforts to reduce costs and

time spent on tax compliance by businesses. Complete the ongoing reform aimed at

facilitating access to regulated professions.

28

This recommendation was not accepted by the Polish government because the establishment of the

independent fiscal council does not bring any added value. Poland has a strong independent control

authority (NIK), which may, inter alia, control adopted fiscal rules.

In my opinion establishing an independent fiscal council will be reasonable if the existing State institutions

are not effective enough. Such establishment should mean a significant change in the functioning of

existing institutions.

9

As noticed OECD, the following measures are crucial for Poland: further reduction of

administration burdens and entry barriers, improvement of bankruptcy procedures, and

implementation of the planned deregulation of professional services, as well continuation of

privatisation in competitive segments of the economy (notably for mining and chemical companies,

while ensuring sound governance of the remaining state-owned enterprises)29

. Important is also a

reform of welfare system and reduction of labour taxes, because some elements of the tax and

benefits system hold back employment, especially for older and low-skilled workers.30

So, OECD

recommendation is – among others - to increase women`s retirement age at a more rapid pace than

scheduled, phase out all special occupational pension regimes, eliminate remaining pre-retirement

schemes, and prevent disability pensions from becoming more attractive than old-age pensions,

removing the prohibition to lay off workers less than four years before retirement, reduction of the

tax wedge on labour income, especially for low wages, by shifting the tax burden to environmental

and immovable property taxes, making all labour contracts subject to the same tax and social

contribution regime.31

Such OECD recommendations are interesting, but in some cases difficult to be rapidly

implemented when we take into account a possible public resistance. Their compliance with the

Polish Constitution should be also taken into account.

It should also be noted that in many cases progress may be visible in the long run. Moreover, it

depends not only on government activity but also on reactions of other entities (for example: the

unemployed, trade unions, workers and employers) or other factors (for example the unemployment

rate).

Recently, Poland had made substantial progress in liberalising the access to regulated

professions and some progress: in increasing the efficiency of the tax administration; in

strengthening efforts to reduce youth unemployment; in further improving the relevance of

education to labour market needs, in increasing the availability of apprenticeships and work-based

learning places; in strengthening the cooperation between schools and employers; in increasing

female labour market participation; in better targeting existing instruments at different stages of the

innovation cycle; in energy efficiency and energy generation; in the development of cross border

electric interconnections; on improving waste management, in particular concerning planning of

necessary infrastructure; in contract enforcement; in improving tax compliance by businesses- the

implementation of the tax compliance action plan is progressing well32

.

In 2014 and 2015 a lot of laws were enacted. They aimed to assure conformity with EU law and

have contributed to the implementation of the recommendations of the European Council33

. Works

on different laws still are in progress. Nevertheless, great attention must be directed to the tax code

changes, which could allow the taxpayers to operate in more predictable circumstances (for example

by eliminating provisions that allow maintaining tax liabilities endlessly).

29

See: OECD (2015), “Poland”, in Economic Policy reforms 2015: Going for Growth, OECD Publishing,

page 264.

30 Ibid.

31 Ibid.

32 See: Commission Staff Working Document, Country Report Poland 2015, {COM(2015) 85 final},

Brussels, 26.2.2015, pages 31-35.

33 See examples of such regulations at the end of this information.

10

Poland should also adapt to the guidance presented by the European Commission which focuses

on interpretation the Stability and Growth Pact (without modifying existing legislation) with respect

to (i) investment, in particular as regards the establishment of a new European Fund for Strategic

Investments as part of the Investment Plan for Europe; (ii) structural reforms; and (iii) cyclical

conditions34

.

The Commission has thus designed a matrix (see Annex) which clarifies and specifies the fiscal

adjustment requirements under the preventive arm of the Pact. This matrix is symmetrical,

differentiating between a larger fiscal effort to be undertaken during better times and a smaller fiscal

effort to be undertaken during difficult economic conditions. This should make it possible to better

capture cyclical conditions. It should also smoothen the required fiscal effort over time and avoid

unwarranted discontinuities as economic circumstances change35

.

To sum up, we may say that in Poland the prospects for economic growth are rather good. It is

expected that such growth would gradually pick up. A further increase in employment, moderate

wages growth and improvement in consumer confidence indicators, may have positive impact on

high growth in consumer demand. Investment demand may be supported by a further fast growth in

investment expenditure of enterprises, also by an acceleration in infrastructure investment financed

from EU funds. The forecasted acceleration in GDP growth in the euro area may be also an

additional source of the economic upturn in Poland. Such growth should not lead to a build-up of

34

See: Communication from the Commission to the European Parliament, the council, the European Central

Bank, The Economic and social Committee, the Committee of the regions and the European Investment

Bank, Making the best use of the flexibility within the existing rules of the Stability and Growth Pact

COM(2015) 012, Strasbourg 13.01.2015

35 We can also add, that:

1. The Commission`s Communication does not constitute a major breakthrough in the interpretation of the

Stability and Growth Pact, however it includes two important new features:

• in the preventive arm of the Pact the Commission specified the required pace of the investigation to the MTO

(matrix annual fiscal adjustment required in the investigation to MTO);

• in the corrective arm it provided the possibility for countries covered by the Excessive Deficit Procedure

(EDP) for a long time to correct the excessive deficit subject to the submission of a detailed plan of reforms

(most likely contained in the National Reform Programme) with a reliable timetable for implementation.

2. In accordance with the corrective arm of the Pact, the Ecofin Council designates recommendations

concerning nominal annual budgetary targets for the entire period subject to the procedure and determines

the structural improvement necessary to achieve those objectives. In the communication, the Commission

finds that the payment to the EFIS will be treated as a one-time action, as such, does not deteriorate so the

structural and, consequently, the State will not be negatively assessed by the Commission when considering

the status of implementation of recommendations of the EDP. At the same time, the payment will worsen

the nominal result of the sector, which in turn may extend the period of recovery from the EDP, because

when exiting this procedure the reference value for the nominal deficit of 3 per cent of GDP is valid.

3. The application of the investment clause in the Pact (I.2) is not present (unlike previously requested by the

Commission), subject to actions for debt reduction. Similarly, the ability to apply the structural reforms was

not dependent on taking steps to reduce debt.

4. With regard to the desired improvement in the structural balance in the light of cyclical developments

clause in the economy (Section III.1) situation of the country, which recorded close to zero, but positive

economic growth (ie. 0.1 per cent of GDP) is radically different from a country with a small negative

growth (-0.1 per cent of GDP): the first one must pursue the path of achieving the MTO, the second - no.

5. Interpretation of the provisions of the Pact presented in the Commission`s Communication is consistent

with the strategy recommended by the Commission concerning the consolidation of public finances

conducive to economic growth (growth friendly consolidation).

11

imbalances in the economy. There is of course a risk of a slowdown in growth at the end of 2015 and

at the beginning of 2016. This risk may arise, among others, from the small percentage of enterprises

planning to start new investments36

, limited rise in consumer demand (because of an increase in the

Swiss-franc denominated debt of households), lower than the expected GDP growth in the euro area,

and the possible appreciation of the zloty)37

.

Poland ought to meet new challenges and increase its competitiveness; it should be better

prepared for joining the euro area, because it is in its own interest and interest of other EU countries.

For Poland it is important to adapt the NBP recommendations which may help to stabilize the

financial system and to carry out recommendations issued by the Council of the European Union

during the European Semester, as well as the OECD recommendations. Poland should also adapt to

the guidance presented by the European Commission which focuses on the interpretation of the

Stability and Growth Pact.

In the nearest future it is important to face challenges coming from the next budgetary

framework (2011-2018), when EU financial support for Poland will be reduced and own drivers of

economic growth should be crucial. In this respect it may be justified to develop a new national

strategy or update existing strategies and long-term programs.

It can be stressed that during existing Financial Perspective (2014-2020) Poland may be the

biggest beneficiary of EU funds. Therefore, the most efficient use of them should be a priority. It is

not surprising that under the preventive control the NIK checked Poland`s preparedness for using

these funds. Results of the checks were optimistic, however, in the coming years, it is important to

constantly test the effectiveness of expenditure by various institutions (including services of the

Ministry of Finance).

36

The growth in investment outlays of enterprises might be also adversely affected by continued uncertainty

about demand and their low expected profitability compared to the yields on alternative forms of savings

allocation.

37 See: http://www.nbp.pl/en/onbp/organizacja/minutes/mi_ii2015en.pdf

12

13

ANNEX-MATRIX FOR SPECIFYING THE ANNUAL FISCAL ADJUSTMENT TOWARDS THE MEDIUM-

TERM OBJECTIVE (MTO) UNDER THE PREVENTIVE ARM OF THE PACT38

Required annual fiscal adjustment*

Condition

Debt below 60 per cent

and

no sustainability risk

Debt above 60 per cent

or sustainability risk

Exceptionally

bad times

Real growth <0

or output gap <-4 No adjustment needed

Very bad

times

-4 ≤ output

gap <-3 0 0.25

Bad times -3 ≤ output

gap < -1.5

0 if growth below

potential, 0.25 if growth

above potential

0.25 if growth below

potential, 0.5 if growth

above potential

Normal times -1.5 ≤ output

gap < 1.5 0.5 > 0.5

Good times output gap

≥ 1.5 per cent

> 0.5 if growth below

potential, ≥ 0.75 if

growth above potential

≥ 0.75 if growth below

potential, ≥ 1 if

growth above potential

* all figures are in percentage points of GDP

Definitions:

Fiscal adjustment: improvement in the general government fiscal balance measured

in structural terms (i.e. cyclically adjusted and without one-off measures).

Growth potential: estimated rate of growth if the economy is at its potential output.

Output gap: difference between the level of actual and potential output (expressed

in percentage points compared to the potential output).

Potential output: a summary indicator of the economy's capacity to generate sustainable,

non-inflationary output.

38

See: Communication from the Commission to the European Parliament, the council, the European Central

Bank, The Economic and social Committee, the Committee of the regions and the European Investment

Bank, Making the best use of the flexibility within the existing rules of the Stability and Growth Pact

COM(2015)012, Strasbourg 13.01.2015, page 20 and next.

14

Explanations:

The matrix ensures that Member States can adapt their fiscal adjustments over the economic

cycle while taking into account their fiscal consolidation needs.

The larger the positive (negative) output gap, the greater (lower) the required adjustment effort.

The matrix takes into account the direction into which the economy is moving, i.e. whether the

economic situation is improving or deteriorating, by distinguishing whether the real GDP exceeds or

falls short of a country-specific potential growth rate.

The required effort is also greater for Member States with unfavourable overall fiscal positions,

i.e. where fiscal sustainability is at risk or the debt-to-GDP ratio is above the 60 per cent of GDP

reference value of the Treaty.

All Member States are expected to accumulate savings in good times so as to be able to have

sufficient latitude for the operation of the so-called automatic stabilisers (e.g. higher welfare

spending and lower tax revenues) during the downturns. In good times, the revenues of the state

increase due to more vigorous economic activity and expenditure related to the unemployment falls.

Therefore, the matrix envisages a higher fiscal adjustment for the Member States identified as

experiencing good times, i.e. when their output gap is estimated to be ≥ 1.5 per cent. This is

particularly important for the Member States with fiscal sustainability risks or debt-to-GDP ratios

exceeding the 60 per cent and therefore such Member States would be required to provide a

structural fiscal adjustment of ≥ 0.75 per cent of GDP or ≥1 per cent of GDP, depending on whether

their good economic situation continues to improve further or not.

In normal times, interpreted as an output gap between -1.5 per cent and +1.5 per cent, all

Member States with a debt-to-GDP ratio below 60 per cent would be required to make an effort of

0.5 per cent of GDP, whereas the Member States with debt levels above 60 per cent of GDP would

need to make an adjustment greater than 0.5 per cent of GDP.

In bad times, interpreted as an output gap between -3 per cent and -1.5 per cent, the required

adjustment would be lower. All EU Member States with the debt-to-GDP ratio below 60 per cent

would be required to ensure a budgetary effort of 0.25 per cent of GDP when their economies grow

above the potential, and a fiscal adjustment of zero would be temporarily allowed when their

economies grow below the potential.

In very bad times, interpreted as an output gap between -4 per cent and -3 per cent, all Member

States with the debt-to-GDP ratio below 60 per cent would be temporarily allowed zero adjustment,

meaning that no fiscal effort would be required, whereas Member States with debt-ratios exceeding

60 per cent would need to provide the annual adjustment of 0.25 per cent of GDP.

In exceptionally bad times, interpreted as an output gap below -4 per cent or when real GDP

contracts, all Member States, irrespective of their debt levels, would be temporarily exempted from

making any fiscal effort.

The output gap thresholds set at -3 per cent and -4 per cent are supported by past data: since the

1980s, output gaps in EU countries have been below -4 per cent in only one year out of twenty, while

they reached -3 per cent in one year out of ten, hence these two values are truly indicating very bad

and exceptionally bad times.

15

Source: Public debt 4Q2014. Quarterly newsletter. Warsaw, 31 March 2015, Ministry of Finance

16

17

18

Table 2. Differences between public debt (according to domestic methodology) and general government debt (PLN bln)

ITEM XII 2008 XII 2009 XII 2010 XII 2011 XII 2012

XII 2013

XII 2014

Public debt 597,8 669,9 747,9 815,3 840,5 882,3 826,7

1) Adjustments concerning the scope of the sector 2,6 12,4 25,8 39,5 41,5 45,9 41,8

Debt of National Road Fund 5,9 15,7 24,8 36,4 41,2 43,6 31,6

T-Securities held by funds managed by Bank Gospodarstwa Krajowego 0,0 -1,3 -0,2 -0,4 -3,0 -0,9 -1,2

National Road Fund (acquisition of infrastructure assets) 2,4 4,3 8,2 11,1 11,6 11,4 11,5

T-Securities held by Bank Guarantee Fund -5,5 -6,1 -7,1 -8,2 -9,1 -9,4 -9,6

Research & development units -0,2 -0,2 - - - - -

Public corporations included in general government sector 0,0 0,0 0,2 0,5 0,8 1,1 9,5

2) Differences concerning debt instruments -5,0 -4,0 -3,3 -3,4 -3,5 -2,1 -2,1

matured payables -5,1 -4,7 -3,9 -3,5 -3,6 -2,2 -2,0

debt assumption - activation of a guarantee 0,0 0,0 0,0 0,0 0,0 0,0 0,0

restructured/refinanced trade credits - 0,3 0,6 0,1 0,1 0,1 0,2

derivatives 0,0 0,3 0,0 0,0 0,0 0,0 -0,3

General government debt 595,4 678,3 770,5 851,4 878,4 926,1 866,5

Differences between public debt and general government debt 2,4 -8,4 -22,6 -36,1 -37,9 -43,8 -39,8

Source: Ministry of Finance.

19

Examples of regulations enacted in 2014-2015 aimed to assure conformity with EU law and have contributed to the implementation of the recommendations of the

European Council:

- Act from 7 November 2014 on facilitating the economic activity (so called “fourth deregulation law”) was adopted (Journal of Laws item. 1662). This Act introduced more than 40 facilities in running own business, including abolishing some unnecessary bureaucratic requirements in business law (for example, information and administrative responsibilities of entrepreneurs);

- Act from 20 February 2015 amending the Law on Administrative Court Proceedings. This regulation aims to improve, simplify and ensure the speed of the procedure before the administrative court;

- Act from 20 February 2015 amending the Law on tax on goods and services and the Public Procurement Law;

- Act from 20 February 2015 on support for rural development with the participation of the European Agricultural Fund for Rural Development under the Rural Development Programme 2014-2020 (Journal of Laws item. 349);

- Act from 5 February 2015 on payments under the direct support schemes (Journal of Laws item. 308);

- Act from 16 January 2015 amending the Income Tax Act of individuals and the Act - Tax Law. It concerns the implementation of the Constitutional Court's judgment; comprehensively regulate the taxation of income that are not covered in the disclosed sources or incomes from sources undisclosed (Journal of Laws item. 251);

- Act from 15 January 2015 amending the Act on principles of financing science and some other laws. The Act introduces an improved system which will facilitate the funding of science and the scientific community making research and development (Journal of Laws item. 249);

- Act from 15 January 2015 on bonds. The Act applies to long-term support for the development of non-market debt securities to issue corporate bonds. (Journal of Laws item. 238);

- Act from 20 February 2015 amending the Construction Law and other laws. The Act applies to the abolition of the requirement to obtain a decision on the construction permit with respect to the construction and reconstruction of single-family dwellings (Journal of Laws item. 443);

- Act from20 February 2015 on the development of participatory local community (Journal of Laws item. 378);

- Act from 15 January 2015 amending the Act - Code of Civil Procedure and some other laws. The Act applies to establishing the base for further computerization of land and mortgage proceedings. (Journal of Laws item. 218);

- Act from 15 January 2015 amending the Law on Customs Service, the law on Tax Offices and chambers and some other acts. The Act create legal conditions for organizational strengthening and improving efficiency of the Customs Service. (Journal of Laws item. 211);

- Act from 19 December 2014 amending the Act on special solutions for the protection of jobs. The Act applies to the use of aid instruments aimed at promoting employment by wage subsidies for workers threatened with redundancy, employed by entrepreneurs, who have a temporary worsening business conditions. (Journal of Laws from 2015 item. 150);

- Act from 5 December 2014 amending the Act - Code of Civil Procedure and the Act on court costs in civil cases. The Act concerns the modification of implementation the model of automatic enforceability of judgments, court settlements, as well as official documents from other Member States (Journal of Laws from 2015 item. 2);

- Act from 5 December 2015 amending the law on farmer’s health insurance contributions for 2012-2014. The Act extends for the years 2015 and 2016 validity of existing solutions for the amount and method of payment of health insurance contributions for farmers and their family members (Journal of Laws item. 1935);

- Act from 5 December 2014 of the Charter of the Large Family. The Act applies to the complex

regulation of the powers granted to families with many children (Journal of Laws item. 1863).