The Organization for Economic Cooperation and Development (OECD) has issued a dire warning to Poland and the European Union. According to the OECD, Poland risks breaching the EU's fiscal deficit rules next year. The warning comes as the new populist government increases public spending to pay for social programs such as childcare, while simultaneously making politically popular (but financially ill-advised) tax cuts.
Poland has the European Union's sixth largest economy, making the OECD's warning serious for Poland's neighbors, as well. The EU has a rule requiring member states to keep deficits below three percent of gross domestic product (GDP). The rule is designed to force EU member states to stay within certain spending confines and keep them from becoming a financial drag on their neighbors.
Unfortunately, the recently elected, ultraconservative government promised to increase spending while reducing taxes. It also promised to rebalance its economy to favor local businesses. This has caused concerns among foreign investors who believe their investments may not be protected.
The recently elected PiS party targeted poor voters during its run at office. According to its platform, these voters had been excluded from the economic boom of the past decade. Instead, to partially offset lost revenues, the government opted to levy a new tax on banks, and plans to make similar taxes on retailers in the near future. It also plans to close loopholes allowing tax avoidance. Despite these measures, the OECD feels Poland will not come close to making up for the reduced taxes and increased spending.
In fact, the OECD argued that these measures may “yield revenues of a much smaller order" than the increased spending the government has undertaken. Catherine Mann, Chief Economist at the OECD, noted that the enhanced child benefit and reduction in taxes would cost the Polish government the equivalent of one percent of GDP, while the new tax levies would only generate an additional 0.5 percent of GDP in new revenues. That should create a 0.5 percent of GDP total increase in deficit spending.
Senior OECD Economist, Nicola Brandt, said: “It is true that additional stable financing will be needed in 2017. And after 2017 there are a lot of question marks.”
For its part, Poland believes it will stay within its three percent threshold despite the increased spending and reduced revenues. Deputy Prime Minister Mateusz Morawiecki said: “A lot depends on factors like economic growth ... and our capability to acquire new taxation streams ... [Increasing revenues] will not be done overnight. It could take a couple of years.”