In answer to an article published recently by Bloomberg (read it here), in which the authors argued that Poland was becoming a regional haven, I would like to say that in my view, Poland’s public finances are not in such good shape and we still have a lot of work to do.

Let me introduce a few facts and figures.

Relatively fast economic growth in recent years (still lower than average real GDP growth in the years 2006-2007) was accompanied by a serious increase in the level of public debt. At the end of 2011, Poland’s public debt had increased by more than zł.300 billion, and 10 percent of GDP, in three years.

According to Polish statistics, the country's public debt was approximately 54 percent of GDP at the end of last year, below the country’s legal ceiling of 55 percent. According to the EU's methodology, however, our debt actually exceeded 56 percent of GDP.

Moreover, in my opinion, the debt-to-GDP ratio of Poland should not be compared to the EU average, but to other EU members from Central and Eastern Europe. When we consider the debt-to-GDP ratios of CEE countries, only Hungary reached a higher level of public debt. This puts Poland behind the Czech Republic, Slovenia, Slovakia, the Baltic states, Romania and Bulgaria.

In addition to the growing public debt, we also noticed an increase in private debt, and the total level of external debts (public and private) now exceed the dangerous level of 60 percent of GDP.

Deeper reforms needed

Let us now turn to the deficit. Prime Minister Donald Tusk announced deficit reduction measures totaling 3 percent of GDP in November 2011. However, the proposed measures mainly aim to increase taxes and pension contributions instead of placing greater emphasis on expenditure cuts. In my opinion, Poland needs more and deeper reforms than those announced by the government.

A major problem is the pension system, which requires support from state budget – to the tune of over 3 percent of GDP last year. The problem will increase in the near future, due to an aging population and a very low fertility rate. To ensure the long-term sustainability of public finances, Poland needs even more unpopular changes than those announced by Mr Tusk, including for groups with pension privileges.

In addition, in 2011 the government reduced the proportion of employee contributions that are paid to pension funds from 7.3 percent to 2.3 percent of wages. As a result, pension funds have less money to invest. The value of shares in which pension funds can invest was also hiked, meaning funds will be less interested in bonds. Furthermore, the EU is calling for an increase in the amount of investing Polish pension funds are able to do outside of Poland. Another factor weighing on Polish public finances is inflation. At the end of 2011, CPI reached 4.6 percent, well above the target set by Poland’s national bank.

For all these reasons, in my opinion, Poland is still far from being in a comfortable position. This is especially true if we take into consideration the fact that at the end of 2010 we were, according to Eurostat, in 23rd place in the EU27 in terms of GDP per capita, with 63 percent of the EU average.

Maciej Rapkiewicz