May 18, 2021

Europe

POLAND: Ambitious recovery package aims to revert the decline of United Right

BY Andrius Tursa

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The government’s ambitious post-pandemic recovery plan is an attempt to recover public support after a challenging year marked by the pandemic and recurring fractures within the United Right coalition. New spending initiatives could slow down fiscal consolidation in the coming few years and raise inflationary pressures.

On 15 May, three governing parties jointly presented a long-anticipated plan for economic recovery after the pandemic. The plan – named the Polish Deal – outlines the government’s medium-term policy proposals in ten thematic areas with the greatest emphasis on healthcare, taxation changes and support for families. Some of the main initiatives include:

  • Increasing spending on healthcare to 6% of GDP in 2023 and 7% of GDP in 2027 (up from 5.3% of GDP in 2021).
  • Raising non-taxable annual income allowance from PLN 3,091 (EUR 683) to PLN 30,000 (EUR 6,635), which would also apply to pensions.
  • Raising the threshold to enter the highest income tax bracket (32%) from PLN 85,500 (EUR 18,800) to PLN 120,000 (EUR 26,540) per year.
  • Providing families with PLN 12,000 (EUR 2,654) for the care of their second and each subsequent child aged 1-3 years old.
  • Simplifying construction regulation of small residential buildings and offering state guarantees and financial support for families to acquire housing.
  • Creating a PLN 650bn (EUR 144bn) investment fund to modernize the country’s infrastructure, aiming to generate 500,000 new jobs.

The Polish Deal will be further refined over the summer. Then, the outlined initiatives should be translated into legislative bills and submitted for parliament’s consideration in autumn. In the meantime, the governing parties are planning to actively promote the recovery plan across the country.

With the pandemic in Poland swiftly retreating and disagreements within the United Right coalition now seemingly patched up, the government is seeking to recover voter support, which suffered greatly from pandemic-related challenges and other unpopular decisions such as the tightening of abortion laws. The Law and Justice (PiS) party is polling at around 34-35%, which is 10 percentage points lower than a year ago, while both of the PiS’s junior coalition partners would not pass the 5% threshold to win seats in parliament. Generous social policies have helped the PiS to sustain its popularity in the past and the Polish Deal is intended to serve the same objective, particularly as the opposition looks disunited and weak.

According to Prime Minister Mateusz Morawiecki, the proposed tax breaks will cut budget revenue by an estimated PLN 22-23bn (or around 1% of GDP), and other spending initiatives could cost around PLN 20-30bn. For now, the government does not appear to have a clear plan of how to finance the Polish Deal beyond expectations of higher revenues due to economic recovery and better tax collection. Part of the presented projects will likely be financed from the EU post-pandemic recovery funds as well as bonds issued by the national development bank (BGK). Nonetheless, the outlined initiatives could slow down fiscal consolidation in the next few years, especially as the parliamentary elections scheduled for autumn 2023 – but possibly held earlier – will keep the political pressure on to sustain spending. Finally, there are concerns that ambitious spending plans will further fan inflation – which is already among the highest in the entire EU – and create imbalances in the housing market.

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