To save or to spend?

Image: Jan Malinowski

Mateusz Szczurek, Minister of Finance, talks with WBJ Observer about Poland’s budget and fiscal policy, his position on Claude Juncker’s (chairman of the EU Commission) proposal for establishing a revival fund for strategic investments in the EU. We also inquired about guidelines for Polish tax system reform prepared by the Ministry of Finance

Interview by Ewa Boniecka
WBJ Observer: The budget for 2015 has been approved and there is a deficit of PLN 46.08 billion. How do you assess the current condition of Polish finances?

Mateusz Szczurek: In the creation of budget and fiscal policy, we take into consideration the deficit of the entire general government sector. The central budget deficit is at the level you have mentioned, but to conduct responsible fiscal policy, the deficit of the whole sector of public finances is important. The overall deficit in the general government sector is linked to the level of public debt. The EU principle is that this deficit should be maintained within a limit of 3 percent of a member country’s GDP.
From 2009, which was the peak of economic and financial crises in European Union, the deficit in the general government sector in many EU member states was and still is far above the limit of 3 percent of GDP. In Poland, in spite of our steady economic growth, we also have a general government sector deficit above 3 percent of GDP. Our goal is to keep the deficit of the whole public finance sector within the limit of 3 percent.

Does the approved state budget guarantee the fulfillment of all social promises, presented by Prime Minister Ewa Kopacz ?

The ambitious elements of our social policy, like the new shape of family tax incentives, indexation of retirement pay and other social promises of Prime Minister Kopacz were taken into account while preparing the state budget, so there are no reasons to worry about their feasibility.

Your predecessor, Jacek Rostowski, was known for being parsimonious in spending public funds, especially on social programs. Are you more flexible?

My predecessor and myself have both acted in accordance with the rule that policy, whether it is public spending, general government deficit or tax policy, should be adjusted to cycles of economic performance. In other words, there is time for austerity measures and there is time for more expansionary fiscal policy. The time for looser fiscal policy was in 2009, at the peak of the economic crisis in the EU. The problem at that time was the lack of private sector expenditure, a decline in investments, a substantial slowdown in consumption, so there was a need to compensate it with higher government spending. When the economic environment improves and the companies begin to invest more, then naturally, public spending should be pulled back.
This is one way of approaching budget policy. The second approach posits that the level of public spending is constrained by tax revenue. Poland is a country where the share of taxes in the GDP is relatively low. There are not many countries in Europe, where that proportion is smaller. This requires a reduction in Polish public expenditures. So, if we do not want to overburden the private sector with higher taxes, we have to limit our budget expenses, sometimes also in social spending, which are lower in Poland than the average in Europe.

Yet in spite of economic growth in Poland, Poles do not feel there is an improvement in their living standards. On the contrary, they complain about low incomes and low pensions. Some economists point out, in a recently prepared report (issued by the Kościuszko Institute), that the natural assets of our economic growth based on low costs of production and low pay are vanishing. What is your comment in light of this?

Using the World Bank definition, Poland has left the middle-income area and has started moving into high

Image: Shutterstock

Image: Shutterstock

income territory a long time ago. With regard to the matter of catching up with rich Western countries, let me point out that incomes measured in Poland per head amount to 70 percent of the average for the European Union and have never been so close to Western Europe as they are now. In the last 25 years, the GDP has more than doubled.
The period of global crises did not bring recession in Poland. The rate of catching up with the West has been spectacular in the last 8-9 years. It does not mean that we do not have economic problems, but worries that our model of economic development is in danger are unfounded. Poland has not based its economic growth in the last years on frantic credit taking and dependence on external financing is being reduced. Our country is making use of all the possibilities the market economy and free trade have to offer.

What about the very low wages of Poles?

They are lower than in rich Western countries, but the real wage increase in Poland during last few years was one of the highest among EU countries. Whether it means that it’s possible in the next 3-5 years to build such national wealth as was created in some other Western nations, which were not ruined by war, deserves a realistic answer, and not some wishful thinking. Such processes require many years of effort, but we have not wasted the last decade and the economic facts are a good prognosis for the future.

One of the crucial problems which is ahead of us, is the preparation of a new Tax Code. Poles expect that it will facilitate their relations with tax offices, protect the rights of taxpayers and create a more transparent and effective system of tax collecting. The Ministry of Finance has presented its postulates for the new Tax Code. What will be the general direction of the changes?

Preparing the new Tax Code is a fundamental task, crucial to our financial and economic activity for years to come. The Tax Code should be a non-partisan document. The Codification Commission, which has already been set up by the Ministry of Finance, is manned by the best experts. The chairman of the Codification Commission is professor Leonard Etel, the president of the University of Białystok and outstanding specialist in tax law and financial matters.
Preparation of a new Tax Code requires time and I expect that the presentation and approval by parliament will take around two years. In the postulates prepared by the Ministry of Finance, there are regulations which will protect the taxpayer in his relations with tax offices. There will be a limitation on the period for executing former tax obligations, and also less controls will be conducted by workers of tax offices. There will be the possibility of legal settlement in the course of proceedings with tax offices and greater effectiveness of the whole tax collecting process is expected. Also available will be an electronic system providing information about tax issues.
Let’s remember that the present Tax Code comes from 1997. The economic and financial conditions in Poland have changed greatly since then. We are now a member of the European Union, which implies new obligations, so the need for new tax regulation is obvious.

There is time for austerity measures and there is time form more expansionary fiscal policy.

There is no consensus regarding the European Commission chairman Claude Juncker’s plan for building mechanisms to revive strategic investment in the European Union. What is your position on the subject?

Juncker’s proposal is very interesting. There is no doubt that the EU needs to push up strategic investments in many sections of the economy and infrastructure, as many member states are still in an economic crisis or suffer from a slowdown. Juncker proposed the establishment of a €300 billion fund including EU, EIB contributions leveraged by private investments.
At the meeting of finance ministers in Brussels, I appealed to the other members to contribute some money from national budgets to those mechanisms. I told them that Poland would be ready to do so. The final approach was to make use of “national platforms,” co-funded by national promotional banks. In Poland, Bank Gospodarstwa Krajowego and Polskie Inwestycje Rozwojowe will be the basis for such a platform, providing up to €8 billion to fund Polish investments. This money can be augmented by the European Fund for Strategic Investments.
I think that a common investment in energy infrastructure and in other strategic economic fields in many European regions would be useful, especially because Juncker’s plan includes participation of the private sector.

An international journalistic investigation has shown that 350 companies – including Apple and Amazon – have agreements with authorities in Luxembourg allowing them to pay low taxes and avoid them in the countries in which they operate. Some of those firms are also present in Poland. At the meeting in Brussels you said that such activity should be strongly condemned. How do you want to prevent such practices?

This situation is a side effect of globalization. Even when there is a clear case of tax avoidance, many tax mechanisms are defensible within the present legal environment in Poland. Yet, I want to underline that the majority of the international companies operating in Poland do pay taxes here. It is the state’s duty to ensure that the field of economic competition is equal for all entities.

The EU needs to push strategic investments in many sections of the economy and infrastructure

You have rejected recommendations of the European Union for establishing a new institution called the Fiscal Council in Poland. It has been said, that the Fiscal Council could ensure  long-term strategy in the domain of financial stability. What is your comment on that matter?

Poland has not rejected this recommendation of the European Council. The essence of the matter is that we already have independent institutions in Poland, responsible for monitoring compliance with fiscal rules. These are the Supreme Audit Office (NIK), the Regional Audit Chambers, and the tripartite commission. On top of this, the Monetary Policy Council of the NBP previews the budget draft. NIK is monitoring the entire process and execution of the state budget. These independent institutions are firmly established in Poland’s Constitution, so I do not see any place for establishing a new body, which would be redundant

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