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Contents | | Executive summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Poland published on 11 June 2008.
Contents
Monetary policy should be tightened to lower the risk of higher inflation
It is perhaps of limited surprise that headline inflation has risen from less than 1% per year in 2006 to 4.1% most recently, given the adverse food and energy shocks and the economy’s growth performance. While the first factor was naturally unpredictable, excess demand in both labour and product markets has resulted despite a pick up in potential growth to over 5% per year. The Monetary Policy Council began to raise official rates in April 2007. However, since inflation has risen faster than nominal interest rates, real ex post interest rates have actually fallen. Nevertheless, the real exchange rate has appreciated considerably, leading to a tightening of monetary conditions. Even so, unless this begins quickly to bear down on underlying inflationary pressures, the risk is that inflation expectations will jump and the National Bank of Poland’s (NBP) hard won credibility will be harmed, raising the cost of bringing inflation down to the NBP’s 2.5% target. Achieving the target will also most likely enable the EU price stability criterion for joining the euro area to be satisfied.
The NBP has gone a long way in providing more information to the markets in its periodic publications. Additional steps in that direction could involve the publication of one or more scenarios involving paths of interest rates that would – in the Bank’s view – return the economy to the official inflation target over the forecast horizon. Above all, it should be clear that only the members of the Monetary Policy Committee have the authority to speak publicly on policy matters.
Fiscal policy could also help achieve a better policy mix
One clear benefit of the favourable conjuncture in 2007, and in particular of the sharp decline in unemployment, has been a substantial reduction in the general government deficit to 2.0% of GDP, down from 3.8% in 2006 and a peak of 6.3% in 2003. Both buoyant tax revenues and, to a lesser extent, savings on social security outlays have contributed to this better than expected outcome. Also, by bringing the deficit to such a level Poland has paved the way for the abrogation of the Excessive Deficit Procedure initiated by the European Union in 2004. This positive development notwithstanding, a further reduction in the deficit will most likely prove more difficult to achieve in the short run. Two factors point to a widening deficit in 2008 and, barring policy changes, beyond. First, when activity slows to a more sustainable level, the contribution from the business cycle to budgetary outcomes will become less favourable: the OECD estimates that will cost the budget about 0.7 percentage point of GDP. Second, the 2008 budget contained measures that together imply a loosening of the fiscal stance (of around 0.8 percentage points of GDP). This makes the task of the NBP more difficult.
In March 2008, the government updated its Convergence Programme, which involves an increase in the deficit in 2008 and steady consolidation thereafter. In this context, the priority for fiscal policy is to stick to the deficit targets as laid out in the Programme so as to keep public finances on a sustainable path. This would result in a structural deficit of 1% of GDP in 2011, an objective that the government is committed to achieve. In the near term, this objective will be difficult to reconcile with the commitment to reduce income taxes in 2009, and the strong upward pressures on expenditures related notably to the co financing of EU funded infrastructure investments and the strong increase in public sector wages. Expenditure restraint could be exercised more easily if a multi year planning framework that includes limits on overall spending were to be adopted. In addition, the government should renew its efforts to raise public sector efficiency, including by considering reductions in employment in the public administration in return for better pay. Beyond that, the authorities could eventually achieve substantial savings by completing the long overdue final stage of social security reform, in particular the elimination of most of the early retirement schemes. A good step in this direction has been taken with the recently announced intention to shorten the list of professions eligible for early retirement.
A more complete reform would also involve the integration of the special pension system for farmers into the general regime. However, experience has shown that major changes in this sensitive area should not be introduced with a view to realising short term budgetary gains, but should instead be motivated on efficiency and equity grounds. There may even be some costs involved in the short term, for instance if some form of compensation is offered to those who stand to lose most from reform. Nevertheless, the long term budgetary gains can be substantial, as they arise not only from the savings on transfer payments, but also from an increase in tax receipts. Hence, such reform should not be deferred even if it increases short term pressures on the budget. In fact, all measures that stimulate employment, including well designed measures on the tax side, will facilitate the task of the budgetary authorities, at least in the medium term.
Consumer price indices
Year on year changes
Source: OECD, Analytical database, National Bank of Poland and GUS.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Poland 2008 is available from:
Additional information
For further information please contact the Poland Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Alain de Serres and Rafal Kierzenkowski under the supervision of Peter Jarrett. Research assistance was provided by Sylvie Foucher-Hantala.
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