Executive Summary
The coronavirus (COVID-19) crisis has hit the economy and society hard. The pandemic occurred after a long expansion of living standards when unemployment and poverty rates had fallen to historically low levels (Figure 1). Early containment measures have limited contagion in the first part of 2020. Though production and consumption rebounded quickly after their easing until September, a new rise of infections led to renewed restrictions in October.
Despite extensive policy support, the recession will have long-lasting consequences (Table 1). Broad fiscal measures and unprecedented monetary support cushioned the socio-economic impact of the pandemic. Growth and employment have hold up well at the beginning of 2020, notably compared to European peers. Yet, even if sanitary conditions improve progressively, GDP is projected to drop sharply, while further outbreaks would weaken economic outcomes.
Uncertainty is particularly high. More severe than expected coronavirus outbreaks or the delayed roll-out of an effective vaccine could hurt economic conditions. International trade tensions also remain high and could spread further.
The crisis legacy will compound long-term issues. Employment has declined and public debt has increased abruptly, while the low productivity of some workers, weak environmental outcomes and the shrinking working-age population remain key challenges. In welcome moves, the government has vouched to increase healthcare spending and to boost investment, innovation and entrepreneurship.
As economic conditions weakened rapidly, fiscal and monetary policy easing helped cushion the coronavirus shock.
The government adopted a comprehensive fiscal package, worth around 5.2% of GDP in 2020, to support the most affected households and firms. Temporary measures, combined with the spontaneous impact of the recession, will push the deficit to 11% of GDP in 2020. Maastricht debt will reach historically high levels. In addition, the Financial Shield programme supports small, medium and large companies. The discussed EU budget and the planned EU recovery package are also set to support the economy. As high uncertainty and weak global conditions will dent the recovery, the fiscal stance should remain supportive. Frontloading investment, notably in healthcare and infrastructure, would boost short- and long-term prospects, while supporting the transition to a more sustainable economy. Once the recovery is firmly underway, the authorities should pursue fiscal consolidation to reduce public debt.
Monetary policy responded quickly and forcefully. The Central Bank reduced its policy rate to 0.1%, and introduced unprecedented quantitative easing. The authorities also eased firm financing, extended liquidity support and decreased capital requirements for banks. In the case of a further weakening, monetary policy could expand asset purchases further or consider negative nominal rates, especially as inflationary pressures have receded on the back of depressed total demand.
Tax reforms should support the recovery. The labour tax wedge shows little progressivity, tax breaks remain numerous and property taxes are relatively low. The tax wedge for low-skilled workers could be lowered to boost job creation. When the recovery is firmly underway, Poland could build on its past successes to further increase tax compliance and revenue collection to finance such measures. Reducing inefficient tax expenditures and strengthening property taxes, notably on vacant properties and building lots, would raise revenues and housing supply.
Strengthening the recovery to sustain the catch-up of living standards is a challenge. The reforms proposed in this Survey – targeted at improving productivity, skills and employment outcomes – could have a substantial impact, lifting GDP by 5.6% after 10 years.
The productivity of many workers and small and medium-sized enterprises (SMEs) is low (Figure 2). The pandemic has disproportionally affected weaker regions, smaller firms and disadvantaged workers. The development of higher-technology sectors is also increasing the demand for non-routine tasks and higher skills, and many workers are at risk of being left behind.
Improving the business environment would boost the growth and internationalisation of numerous small-firms. Tax-compliance costs remain high, while regulatory and tax changes are frequent. Tax expenditures and derogatory regulative measures for small firms lower these costs, but they run the risk of creating fiscal and regulatory “cliff edges” hindering firm expansion. Continuing to foster the use of digital tools by the tax administration and smoothing tax and administrative thresholds would support firm growth. Ensuring effective consultations and evaluations in the design of taxes and regulations would also support firm growth and investment. Finally, fostering judicial independence is key for business confidence, notably from foreign investors, which would require limiting the potential involvement from the executive branch in procedures applicable to judges.
Digital and transport infrastructure are still a bottleneck for innovation and resource allocation. Absorption of EU funds for large transport infrastructure has reduced infrastructure gaps, though it focused on new roads. A stronger focus on local public transport and the maintenance of the local roads would reduce congestion, pollution and trade costs. The development of high-speed broadband and data hubs, for example in the health sector, would also boost productivity. Establishing an independent evaluation body for ex-ante cost-benefit analyses would ensure better management of large local projects. Tasking this institution in collecting data on projects’ ex-post performance would provide more evidence for spending prioritisation.
Ensuring the supply of the right skills would boost job creation and productivity. The test scores of 15-year olds have made impressive progress, but lagging adult basic skills (except for younger workers) limit employment opportunities. Small firms have lacked engagement in upskilling strategies, hampering the diffusion of new technologies and their productivity and internationalisation. The planned integrated skills strategy should provide stronger guidance for SMEs looking for employees and encourage the creation of SMEs’ consortia for training. Evaluating and scaling-up effective training and consulting programmes for digital technology diffusion in SMEs would help to boost worker reallocation and productivity.
Higher job quality is key to an inclusive recovery. The 2020-21 minimum-wage rises could eventually weigh on the labour-market recovery and increase some atypical forms of employment. Strengthening incentives for permanent contracts, including through labour law enforcement, will be essential for low-wage workers and SMEs. Rapidly developing a well-designed international migration strategy would also increase employment opportunities for migrant workers.
Strengthened active labour market policies and a more efficient housing market would support access to jobs. Unemployed and low-skilled workers make little use of training, and information about training quality should be developed. The new schemes to develop the rental market should go hand in hand with increased mobility vouchers for low-income workers. Strengthening urban planning would avoid further urban sprawl and the associated risks of concentrating poverty and negative consequences on congestion and pollution.
Air pollution and population ageing are pressing concerns. Greening investment and containing demographic pressures are essential to support the recovery and sustainable growth.
The use of poor quality coal and biomass in the housing sector, together with low energy efficiency, produces substantial urban air pollution (Figure 3). This, together with an old car fleet and mostly coal-fired electricity generation capacity, contributes to climate change and poses health hazards that have a negative impact on productivity.
Strengthened environmental policies would improve health and environmental outcomes. The “Clean Air programme” that targets energy efficiency in the housing sector and efforts to develop electric mobility and reduce the dependence of the energy mix on coal are welcome. Once the economy is on a clear recovery path, increasing the tax rates on energy use while boosting social transfers for the poorest households would be positive. Adopting a clear strategy together with higher and more homogeneous price signals, notably taxes on cars and carbon emissions, should be a priority to ease the transition towards a less carbon intensive energy mix. This should include relevant support for low-income households.
Ageing will weigh on labour supply and public finances. The old-age dependency ratio is rising (Figure 4). The ongoing increase in healthcare spending and the foreseen decline of pension replacement rates will boost social expenditures in the long term, while public debt is historically high.
Increasing the efficiency of health-related spending and promoting longer working lives is essential to free up public resources in the longer term. Beyond pandemic related expenditures, the planned increase in health spending should focus on prevention and coordinated care to reduce the high prevalence of risky behaviours and costly hospital admissions. Incentives to expand working lives and policies to improve the employability of old-age workers are also needed to encourage old-age employment and boost long-term growth.