How will Poland pay for election campaign promises? – DW – 09/21/2023

This is the first election since the end of communism in 1989 where Poland is facing an economy in retreat, albeit only a bit. However, the stuttering economy hasn’t deterred political parties from making ambitious spending promises ahead of the October 15 polls, leaving many Poles wondering if their country which has become one of the largest economies in the European Union over the past three decades can afford to pay for the promised handouts.

Opinion polls show the ruling Law and Justice (PiS) and its allies ahead of the main opposition grouping, Civic Platform (PO), led by former European Council President Donald Tusk.

PiS is focusing on security — national defense and migration — while blaming Tusk for the EU withholding funds from Poland.

Tusk, meanwhile, has shifted his party into unfamiliar left-of-center fiscal territory, while also wielding his party’s traditional liberal shibboleths on gay and women’s rights. His stance on defense spending is ambiguous, seemingly unwilling to follow PiS into a bidding war when huge sums are already being spent on new weaponry as the war in Ukraine rumbles on.

On the monetary policy front, the central bank on September 5 cut its base rate from 6.75% to 6.0%, its first cut in three and a half years, in a move that many analysts believe was politically motivated.

With inflation around 10%, though down from highs of 18% earlier this year, cutting rates is unlikely to help bring it down.

State of economic play

One key problem is that Poland’s €635-billion ($680bn) economy is showing signs of weakening. ING bank, for example, downgraded its growth forecast for 2023 from an already meager 1% to 0.4%.

The economy officially contracted 0.6% in the second quarter and 0.3% in the first quarter.

The budget deficit is set to widen further. In the revised budget for 2024, the deficit is seen coming in at 4.5% of GDP, compared to 3.4% forecast in April. According to the 2024 budget bill, the planned income next year is 683.5 billion zlotys ($145 billion; €135 billion) and the deficit is pegged at 164.7 billion zlotys.

That would increase Poland’s borrowing needs, making it more reliant on foreign financing in 2024. Net borrowing needs for 2024 are projected at 225.4 billion zlotys (6% of GDP), up 55% from 143 billion zlotys this year.

Successive governments have been able to navigate any economic vicissitudes since 2004  in large part thanks to the cushion afforded by EU funds. Therefore, Brussels’ withholding of €35 billion, about 5% of GDP, over democratic backsliding concerns is adding to the fiscal squeeze.

The Polish Economic Institute (PEI), a think tank, estimates GDP per capita — based on purchasing power parity (PPP) — as 31% higher than if Poland had not joined the EU.

PiS spends big

“PiS has been spreading cash around like a firehose essentially trying to buy the next election. The loose monetary policy of the central bank is part of the same game. Neither has been good for inflation,” said Anthony Levitas of Brown University.

PiS has proposed raising child benefits and providing free medicine to children and the elderly. It says it will spend 137 billion zlotys on raises for public-sector workers and on social programs like increasing its child benefit scheme by 60% to 800 zlotys per month per child, and additional payments to pensioners. 

PiS also promises to modernize pre-1989 apartment buildings, which house more than 8 million people. But, crucially, PiS said the government will spend over 4% of GDP on defense in 2024.

The opposition PO’s program, meanwhile, includes pay rises of 1,500 zlotys for teachers and civil servants. It’s promising a minimum wage of 6,450 zlotys from July 2024, up from the current 4,000 zlotys.

A key element is a move to help small businesses, a group that has been moving towards the nationalist and libertarian Confederation party. PO pledges tax cuts and tax-free status for income below 6,000 zlotys, up from 3,000 zlotys per month. 

“Tusk’s policy positions on social spending are no longer knee-jerk neo-liberal,” Levitas said.

Which spending plan is more realistic?

The promises of the two main parties with the greatest chance of winning the elections do not differ much in terms of the scale of social spending, Maciej Gazda, head of forecasting and econometric modeling at the Polish research center PMR, told DW.

“Therefore, regardless of the election result, social spending will increase, as will the risks for the state budget,” he said. “We estimate that in both cases, financing will be very difficult and may involve either attempts to increase budget revenues or giving up some of the promises.”

PMR estimates that PiS’s promises are slightly more expensive, but notes that some of them have a longer implementation horizon, until 2031.

DW spoke to three UK-based Polish economists under the banner of ‘Dobrobyt na Pokolenia’ (Prosperity for Generations) — Pawel Bukowski and Lukasz Rachel from UCL, London University, and Wojciech Paczos from Cardiff University — to understand the feasibility of the spending plans of various political outfits seeking to attract voters.

“None of the promises, as they stand today, are realistic in terms of financing,” says Paczos. The most modest promises cost 120 billion zlotys a year, for PO and the coalition called Trzecia Droga (Third Way), he said. 

The programs of both Left and Confederation would have the highest fiscal impact among all parties, said Bukowski. “The Left’s plan would cost an estimated 217 billion zlotys, while Confederation’s would cost 182 billion zlotys.”

“If either party joins the government, fiscal policy could tilt towards tax cuts or more spending. But it’s important to remember that both might trade economic policies for concessions on social issues like abortion, women and LGBTQ+ rights, or immigration policy,” Bukowski added.

Edited by: Ashutosh Pandey