THE DEBT CRISIS
IN POLAND
Gavin Rae
(Kozminski University)
gavinrae@kozminski.edu.pl
What Crisis?

Public debt below 50% GDP

Only grew by 10% since start of crisis (EU average 25%)

Budget deficit below 4% GDP
BUT:

Polish constitution states public debt cannot cross 60%
GDP (balanced budget if goes above 55%).

EU pressure (signed up to Fiscal Pact)

International markets (30% public debt foreign
currencies)
Four Main Sources of Public
Debt

The debt crisis during the Communism from the 1970s
and the subsequent writing off of part of this debt.

The socio-economic consequences of the neo-liberal
shock-therapy reforms

The introduction of a compulsory private pension pillar
at the end of the 1990s

The effects of the recent global economic slowdown.
Public Debt in Communism

From Mid-1970s Polish government took western credits
to fund investment and consumption

By late 1970s western banks urging reduction of
subsidies to help pay off debt (helped spark Solidarity
movement)

By late 1980s Poland had joined IMF and were
introducing ‘structural adjustment policies’.

In early 1990s foreign debt cut in half by Paris Club and
London Club

Leverage used to push neo-liberal shock-therapy
reforms.
Deactivation of Labour

Shock-therapy = Deactivation of labour

1989 83.5% in paid employment; now 50%.

Over 40% of the Polish workforce economically inactive

Highest number of workers employed on
insecure/temporary contracts
Taxation and Privatisation

Personal and Business taxation systems successively
moved in a regressive direction

Over emphasis on indirect taxes

Debt and deficits have been held down at times
temporarily by increasing privatisation
Government Income from Privatisations (bln PLN)
30
25
20
15
10
5
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Pension Reform

Public debt increased from end of 1990s when new neoliberal reform introduced.

Compulsory third pension pillar based on World Bank
model.

Led to a huge rise in public debt, as national insurance
company had to pay current P-A-Y-G state pensions and
transfer 7.3% of a person’s income to the private
pension funds.

1999-2012 40% pension payments gone to private
pension funds (i.e. financial markets)
Public Debt 1999-2011 With and Without OFE
60
54.8
56.2
55.6
50.9
50
47.1
42.2
40
39.6
39.5
36.8
35.2
37.6
45.7
47.1
47.7
47.1
45
40.9
38.3
37.5
38.2
38.4
37.4
34.5
39.2
36.3
33.6
General Government Debt
38.1
34.3
30
General Government Debt
Without OFE
20
10
0
1991
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Effect of Economic Crisis

Poland only EU country to have avoided a recession

This was driven by increased government spending and
public investment (2007-13 60bln euro structural
cohesion funds)

But economic growth slowed and unemployment back
up to 14%.

Public debt began to reach constitutional limits

Government responded through partially reversing the
private pension reform.
Reversing the Pension Reform

2010: payments from ZUS to OFE declined from 7.3% to
2.3% of a person’s income

February 2014:
- 51.5% of the assets held by the OFEs (mainly
government bonds) shifted to the state pay-as-you-go system.
- Private pension funds banned from investing in treasuries
and treasury-guranteed fixed income secutiries
- During the ten years prior to an individual’s retirement a
person’s funds held by private funds will be transferred to
national insurance company.
- Between April and July 2014, everyone must decide
whether they want to continue investing in OFE at all or have
the whole of their pension payment put into state scheme
Reduction Public Debt

In one day around 36bln euro transfered from the
private pension funds to the state fund

As a percentage of GDP public debt brought down by
about 9%
Summary

Reversal of pension reform was a necessary although
temporary solution

Slow economic growth and high deactivation of labour
means public debt will continue to grow

Constitutional limits mean crisis return

Government spending and public investment meant
Poland could avoid recession

Under threat due to debt constraints

This is leading to the government cutting social
spending that increases poverty and exclusion

Only policies aimed at increasing labour activity can
help to improve public finances.