THE DEBT CRISIS IN POLAND Gavin Rae (Kozminski University) [email protected] What Crisis? Public debt below 50% GDP Only grew by 10% since start of crisis (EU average 25%) Budget deficit below 4% GDP BUT: Polish constitution states public debt cannot cross 60% GDP (balanced budget if goes above 55%). EU pressure (signed up to Fiscal Pact) International markets (30% public debt foreign currencies) Four Main Sources of Public Debt The debt crisis during the Communism from 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. Public Debt in Communism From Mid-1970s Polish government took western credits to fund investment and consumption By late 1970s western banks urging reduction of subsidies to help pay off debt (helped spark Solidarity movement) By late 1980s Poland had joined IMF and were introducing ‘structural adjustment policies’. In early 1990s foreign debt cut in half by Paris Club and London Club Leverage used to push neo-liberal shock-therapy reforms. Deactivation of Labour Shock-therapy = Deactivation of labour 1989 83.5% in paid employment; now 50%. Over 40% of the Polish workforce economically inactive Highest number of workers employed on insecure/temporary contracts Taxation and Privatisation Personal and Business taxation systems successively moved in a regressive direction Over emphasis on indirect taxes Debt and deficits have been held down at times temporarily by increasing privatisation Government Income from Privatisations (bln PLN) 30 25 20 15 10 5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Pension Reform Public debt increased from end of 1990s when new neoliberal reform introduced. Compulsory third pension pillar based on World Bank model. Led to a huge rise in public debt, as national insurance company had to pay current P-A-Y-G state pensions and transfer 7.3% of a person’s income to the private pension funds. 1999-2012 40% pension payments gone to private pension funds (i.e. financial markets) Public Debt 1999-2011 With and Without OFE 60 54.8 56.2 55.6 50.9 50 47.1 42.2 40 39.6 39.5 36.8 35.2 37.6 45.7 47.1 47.7 47.1 45 40.9 38.3 37.5 38.2 38.4 37.4 34.5 39.2 36.3 33.6 General Government Debt 38.1 34.3 30 General Government Debt Without OFE 20 10 0 1991 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Effect of Economic Crisis Poland only EU country to have avoided a recession This was driven by increased government spending and public investment (2007-13 60bln euro structural cohesion funds) But economic growth slowed and unemployment back up to 14%. Public debt began to reach constitutional limits Government responded through partially reversing the private pension reform. Reversing the Pension Reform 2010: payments from ZUS to OFE declined from 7.3% to 2.3% of a person’s income February 2014: - 51.5% of the assets held by the OFEs (mainly government bonds) shifted to the state pay-as-you-go system. - Private pension funds banned from investing in treasuries and treasury-guranteed fixed income secutiries - During the ten years prior to an individual’s retirement a person’s funds held by private funds will be transferred to national insurance company. - Between April 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 state scheme Reduction Public Debt In one day around 36bln euro transfered from the private pension funds to the state fund As a percentage of GDP public debt brought down by about 9% Summary Reversal of pension reform was a necessary although temporary solution Slow economic growth and high deactivation of labour means public debt will continue to grow Constitutional limits mean crisis return Government spending and public investment meant Poland could avoid recession Under threat due to debt constraints This is leading to the government cutting social spending that increases poverty and exclusion Only policies aimed at increasing labour activity can help to improve public finances.