The Debt Crisis in poland

1. TheDebtCrisisinpoland GavinRae (KozminskiUniversity) gavinrae@kozminski.edu.pl

3. WhatCrisis? • Public debt below50% GDP • Onlygrew by 10% since start of crisis (EU average 25%) • Budget deficitbelow 4% GDP BUT: • Polishconstitutionstates public debtcannot cross 60% GDP (balancedbudgetifgoesabove 55%). • EU pressure (signedup to FiscalPact) • International markets (30% public debtforeigncurrencies)

4. FourMainSources of Public Debt • The debt crisis during the Communismfrom the 1970s and the subsequent writing off of part of this debt. • The socio-economic consequences of the neo-liberal shock-therapy reforms • The introduction of a compulsory private pension pillar at the end of the 1990s • The effects of the recent global economic slowdown.

5. Public DebtinCommunism • From Mid-1970s Polishgovernmenttook western credits to fund investment and consumption • By late 1970s western banks urgingreduction of subsidies to help payoffdebt (helpedsparkSolidaritymovement) • By late 1980s Poland hadjoined IMF and wereintroducing ‘structuraladjustmentpolicies’. • In early 1990s foreigndebtcut in half by Paris Club and London Club • Leverageused to pushneo-liberalshock-therapyreforms.

6. Deactivation of Labour • Shock-therapy = Deactivation of labour • 1989 83.5% in paid employment; now 50%. • Over40% of the Polish workforce economicallyinactive • Highestnumber of workersemployed on insecure/temporarycontracts

7. Taxation and Privatisation • Personal and Business taxation systems successivelymovedin a regressivedirection • Overemphasis on indirecttaxes • Debt and deficitshavebeenheld down attimestemporarily by increasingprivatisation

9. Pension Reform • Public debtincreasedfromend of 1990s whennewneo-liberal reform introduced. • Compulsory third pensionpillarbased on World Bank model. • Led to a hugerise in public debt, as national insurance company had to paycurrent P-A-Y-G state pensions and transfer 7.3% of a person’sincome to the privatepensionfunds. • 1999-2012 40% pensionpaymentsgone to privatepensionfunds (i.e. financialmarkets)

11. Effect of EconomicCrisis • Poland onlyEU country to haveavoided a recession • This was driven by increasedgovernmentspending and public investment (2007-13 60bln euro structuralcohesionfunds) • But economic growth slowed and unemployment back up to 14%. • Public debtbegan to reachconstitutionallimits • Governmentrespondedthroughpartiallyreversingtheprivatepension reform.

12. ReversingthePension Reform • 2010: paymentsfrom ZUS to OFEdeclinedfrom 7.3% to 2.3% of a person’s income • February 2014: - 51.5% of the assets held by the OFEs (mainly government bonds)shiftedto the state pay-as-you-go system. - Privatepensionfundsbanned from investing in treasuries and treasury-guranteed fixed income secutiries - Duringthe ten years prior to an individual’s retirement a person’s funds held by privatefundswill be transferred to nationalinsurancecompany. - BetweenApril and July 2014, everyone must decide whether they want to continue investing in OFE at all or have the whole of their pension payment put into statescheme

13. Reduction Public Debt • In one dayaround 36bln euro transferedfrom the private pension funds to the state fund • As a percentage of GDP public debtbrought down by about 9%

14. Summary • Reversal of pension reform was a necessaryalthoughtemporarysolution • Sloweconomicgrowth and high deactivation of labourmeans public debtwillcontinue to grow • Constitutionallimitsmeancrisis return • Governmentspending and public investment meant Poland couldavoidrecession • Under threatdue to debtconstraints • Thisisleading to the governmentcuttingsocialspendingthatincreasespoverty and exclusion • Onlypoliciesaimedatincreasinglabouractivitycanhelp to improve public finances.