What next for Poland’s economy? - Economics Observatory

Poland’s new government is prioritising competent policy-making, the rule of law and investment in skills and education. There is real promise that new policies will be based on solid research evidence, including the appointment of senior ministers with deep ties to the academic community.

In October 2023, Poland held parliamentary elections, where a record 74% of the electorate turned out to vote (BBC, 2023). After eight years in power, the Law and Justice (PiS) party lost office and a new government headed by Donald Tusk of the Platforma Obywatelska – or Civic Platform party – took office in December 2023 (House of Commons Library, 2023).

Poland now stands at a pivotal moment as the new government takes charge, promising a departure from the dark years of the outgoing nationalist party, the PiS.

What is the legacy of the PiS?

The PiS party’s time in office was marked by scandals, rule of law violations and gross incompetence in policy-making. The consequences have been palpable. The removal of checks and balances led the country towards authoritarianism, endangering democracy and the economy’s ability to grow.

Conflict with the European Union (EU) over not adhering to the rule of law even caused Poland to lose access to Covid-19 recovery funds worth €60 billion – around 8% of Polish GDP. In recent weeks, the European Commission has ‘unfrozen’ these funds as Tusk has sought to repair relations with the EU and restore the rule of law (Politico, 2023).

Under PiS rule, the country also faced a huge increase in inflation, hitting almost 20%, the highest among the big European economies.

Figure 1: Inflation in Poland, 1997-2024

Source: OECD

The outgoing government’s incompetence was especially evident in their handling of the pandemic. In Poland, sudden and prolonged school closures were put in place, without consideration for the long-term effects on people’s skills and economic development. This was very different from the approaches that many other European countries took, where school closures were considered as the last, rather than first, resort.

Further, the tax reform introduced in 2021 was chaotic at best, showing poor planning and coordination within the government. The reform, hailed as the ‘Polish Deal’, was supposed to move the tax burden from low earners to high earners, but it was met with universal opposition from the public.

In response, the government introduced a complicated formula for a ‘middle-class discount’, but this only complicated the tax code further. Two months into the reform, in order to salvage it, the government allowed taxpayers to use the old tax code if they wished. This led to a situation where two different tax codes were in place at the same time, which caused even more confusion and disorder.

What might change under the new government?

The new coalition government – known as the ‘15 October coalition’ – marks a sharp departure from the past. It is prioritising competence, the rule of law and investment in the skills and education of the Polish people (their human capital).

Comprising the liberal Civic Platform, the conservative Third Way and the progressive New Left, the coalition reflects a spectrum of values and ideologies. While prone to internal disagreements, having such a wide coalition in power also presents opportunities.

These opportunities arise when there is a solid agreement about the strategic direction and a clear division of portfolios and responsibilities across the three coalition partners. After three months in office, it looks like this is indeed happening.

In addition, internal cross-party scrutiny is a welcome temporary substitute for the institutional checks and balances dismantled by the previous government. The different experiences and viewpoints that the three parties bring to the table is also a chance for better and more thoughtful policies.

There is a real promise that new policies will be based on solid evidence – which is a big shift from how things have been done in recent years. This is not merely rhetoric, as evidenced by the appointment of figures like Andrzej Domanski (minister of finance, from Civic Platform), Agnieszka Dziemianowicz-Bak (minister of family, labour and social policy, from the New Left) and Katarzyna Pelczynska-Nalecz (minister of development funds and regional policy, from the Third Way). All three have deep ties to the academic community and are known for advocating the application of research in policy-making.

What’s more, Donald Tusk’s strategic choice of ministers – for example, Barbara Nowacka for education – indicates a deliberate effort to bridge ideological divides and to foster unity among traditionally neo-liberal and centrist-left factions. And the appointment of Adam Bodnar, an independent lawyer, as the new prosecutor general and minister of justice, is a crucial step towards depoliticising public prosecution.

Bringing back the rule of law is the one of the most important tasks for the new government. Over the last eight years, there has been a systematic erosion of checks and balances in Poland, with the constitutional court, the high court, the judiciary, the public prosecution service, the police, the army, the public media and state-owned enterprises all being infiltrated by PiS loyalists.

By putting back judges and prosecutors who were unfairly fired and investigating various scandals, Tusk’s government is showing that it is serious about fixing these problems.

Each of these changes will help to improve investors’ confidence and normalise relations with the EU. The coalition’s stance is also likely to spell the end of any serious consideration of Poland leaving the bloc – a ‘Polexit’.

Research shows that investment in human capital is key to keeping the economy growing in the long run (Paczos et al, 2023). A significant and highly welcome move in this direction is the substantial increase in teachers’ salaries in Poland.

In 2023, the starting salary for teachers in public schools was, on average, £11,300 a year before taxes, while the most experienced teachers would earn, on average, £17,400, which was on par with the average salary in the private sector.

With the new changes that came into force on 1 January 2024, teachers are earning 30% more. This will dramatically change the situation of underpaid and overworked teachers, attracting talent back into the profession.

What are some of the challenges facing the new government?

The coalition is up against some big challenges from the outside. The president has the power to veto legislation, the constitutional court is currently filled with people loyal to the previous government, and the governor of the central bank sides with the PiS. This will make it hard for the coalition to undertake significant reforms.

On top of that, Poland has significant economic challenges. It is still dealing with increased inflation – 6.1% by the end of 2023 – and anaemic annual economic growth – 0.4% in 2023, down from 5.5% a year earlier in the post-pandemic recovery period. The budget deficit, which is currently at 2.5% of GDP, is set to rise to 4.5% to accommodate some of the election promises.

In the short term, the coalition’s economic policy is likely to be characterised by targeted, yet cautious, interventions. The big promises made during the election – such as more spending, tax cuts and bigger tax credits – will face a reality check against the backdrop of inflation and a bigger budget deficit.

Recovery funds from the EU are set to provide some fiscal breathing room. But these funds might also raise demand, which could push inflation even higher. As a result, any aggressive fiscal policies are likely to be moderated, focusing instead on fiscally light measures such as public sector pay rises, including the teachers’ salaries and increased child allowances.

Conclusion

As the coalition deals with these immediate financial and political constraints, its commitment to the rule of law, investment in human capital and European integration brings optimistic prospects for Poland’s economic and political future.

The road ahead is filled with challenges, needing careful planning and a long-term outlook. But the coalition’s broad and progressive plans offer a vision for a stable and thriving Poland.

Where can I find out more?

Six myths about inequality in Poland: Article by Pawel Bukowski for Notes from Poland.
Poland’s economy in the pandemic: Article for CentrePiece magazine, Centre for Economic Performance at the London School of Economics (LSE).
Poland: Country assessment in the European Bank for Reconstruction and Development’s 2022-23 Transition Report.
Can the opposition win this year’s Polish election? LSE blog by Aleks Szczerbiak.
Poland’s economic growth slowed sharply to 0.2% in 2023: Notes from Poland blog.