Poland was the only EU member to survive the crisis of 2009 without falling into recession. A thrilled Donald Tusk, prime minister, presented this achievement by showing a map of Europe with Poland as a green island floating on a red sea of European recession.
But the narrow escape – Poland’s economy grew by 1.7 per cent last year – carries the seeds of serious future problems caused by Poland’s high budget deficit – estimated at 7.9 per cent this year – and a rapidly rising public debt. Poland remains one of the fastest growing economies in Europe, with GDP growth expected to reach 3.5 per cent this year. Both government and National Bank of Poland forecasts call for growth above 4 per cent next year.
There are three major factors behind this solid growth. First, the structure of Poland’s economy proved resilient to the crisis, with low leverage and a low reliance on external trade. Second, pure luck, as Poland reduced taxes just before the crisis. And third, and most worrying, an enormous Keynesian-style fiscal expansion.
This last factor comes as a surprise to many analysts, because 18 months ago the Polish government declared it would not bow to the International Monetary Fund’s pressure to expand public spending. And while Germany and the US tried to revive demand with policies such as the cash-for-clunkers programme to boost car sales, Poland called for increased savings. In early 2009, the government even declared that it would reduce the public administration headcount by 10 per cent.
With time it became evident that not only had the savings trumpeted by the Tusk government failed to materialise, but public spending was expanding. According to government forecasts, the ratio of public spending to GDP from 2008 and 2011 will rise from 42 to 48 per cent. A big part of this growth is due to the massive increase in public infrastructure investment financed by the EU.
Added to that, promised cuts in public sector employment have not materialised; on the contrary a recent Polish statistical agency report showed that in the past 12 months the public administration headcount has increased by 7 per cent. There is one obvious question, is this expansion sustainable?
The government’s medium-term fiscal report predicts that public debt will rise between 2008 and 2013 by 330bn zlotys ($114bn), to which should be added 30bn zlotys of road infrastructure spending shifted from the budget to the National Road Fund. That means new debt comes to 21 per cent of GDP.
Poland has seen these kinds of numbers before, between 1970 and 1980. Then, Poland’s communist leader, Edward Gierek, launched massive infrastructure and industrial investments financed by foreign borrowing.
During the 1970s, Polish public debt increased by 40 per cent of GDP (measured in 1980 terms). That means that during the six years of Mr Tusk’s government, the growth in debt is similar to that seen under Mr Gierek.
Although, as roads and power plants built in the 1970s can attest, not all the money borrowed by Mr Gierek was wasted, the country was unable to repay its debt and went bankrupt.
The fate of Mr Gierek’s leveraged modernisation leads to a question about how Mr Tusk’s heavy borrowing will end. In order to reduce the risk of unpleasant fiscal turbulence, economists have called on the government to accelerate much needed structural reforms: rationalise social spending, end privileges for special groups such as farmers and miners, raise the retirement age from one of the lowest in the EU, and reduce the deficit.
But the government and Bronislaw Komorowski, the president, have responded to those calls by saying there is no need to engage in “romantic” reforms. Romantic or not, they are needed.
And markets are likely to test the government’s willingness to reform immediately after the 2011 general elections.
Prof Krzysztof Rybinski is rector of the University of Economics and Computer Science in Warsaw and a former deputy governor of National Bank of Poland.
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