OECD warns Poland on deficit risk

Jaroslaw Kaczynski (C), leader of the ruling Law and Justice (PiS) party, attends a Parliament session in Warsaw, Poland January 13, 2016. The European Union launched an unprecedented inquiry on Wednesday into whether Poland's new right-wing government has breached EU democratic standards in taking more control of the judiciary and public media. REUTERS/Kacper Pempel©Reuters

Jaroslaw Kaczynski (C), PiS leader, has announced a spending program targeted at poorer voters

Poland risks breaching EU fiscal deficit rules in 2017 as the new populist government steps up public spending to pay for childcare handouts and promised tax cuts, the OECD has warned. 

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The EU’s sixth-largest economy is forecast to break rules mandating a fiscal deficit below 3 per cent of gross domestic product next year unless it backs down on the spending promises or finds a way to increase tax revenues rapidly.

The warning on fiscal stability from the club of mainly rich countries is the starkest since the Law and Justice party came to power in Poland in November. The ultraconservative PiS promised looser spending and a rebalancing of the economy towards local business that has raised concern among foreign investors.

The PiS has pledged widescale spending increases, from 500zl (€114) monthly child benefit payments to almost trebling the income tax-free allowance as part of a programme targeting poorer voters it says have been excluded from the economic boom over the past decade. 

The government has brought in a new tax on banks, promised a similar levy on retailers and vowed to crack down on value added tax avoidance to plug the funding gap. But the OECD said in a report on Tuesday that the measures would “yield revenues of a much smaller order [than the increased spending]”.

Catherine Mann, the OECD’s chief economist, said the child benefit and tax changes would cost 1 per cent of GDP each while the new levies would bring in new revenues worth 0.5 per cent of GDP.

“That adds up to around 1.5 per cent additional,” Ms Mann told a press conference in Warsaw. “It is substantial.”

Nicola Brandt, senior economist at the OECD, said: “It is true that additional stable financing will be needed in 2017. And after 2017 there are a lot of question marks.”

Warsaw has said it will remain within the 3 per cent threshold despite the increased spending. Mateusz Morawiecki, deputy prime minister, said: “A lot depends on factors like economic growth . . . and our capability to acquire new taxation streams.”

Describing the scale of tax evasion in the country as “enormous”, Mr Morawiecki cautioned that increasing revenues “will not be done overnight. It could take a couple of years.”

In its report the OECD also forecast that Poland’s GDP would grow 3.4 per cent this year and 3.5 per cent in 2017. But it said labour and migration reforms were crucial to avoid a looming demographic crisis that means the working age population is forecast to shrink by the largest amount in the OECD by 2060.

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