Monday, 24 January 2011

Miller - 'Cut Business Taxes First'


Leszek Miller, the former Prime Minister and leader of the Democratic Left Alliance (SLD), commenting on the present government's public finance and tax policies, has argued that taxes should 'firstly and perhaps only be cut for businesses'. The context of his comments was the experience of his term in office as PM between 2001 and 2004.

The SLD returned to power in 2001 on the back of a disastrous right-wing coalition government (AWS-UW) that saw economic growth fall from nearly 6% to 1% and unemployment rise from 10.3% to 18% . As a result the SLD won over 40% of the vote in the 2001 elections and was able to form a coalition government with the Peasants' Party (PSL).

The SLD was governing during a period of intense economic difficulty. Economic growth was stagnant, exports falling and unemployment exceeded 20%. The government was in continuous conflict with the National Bank of Poland and Monetary Policy Council - which maintained the highest real interest rates in Europe and an overvalued currency. Miller was also in disagreement with his former ally, President Aleksander Kwaśniewski. Simultaneously the government was finalising the EU accession negotiations, which exerted a huge external pressure upon it to reduce government spending and - in the words of its own manifesto - to 'finish the process of ownership transformation in the Polish economy'. Combined with a series of corruption scandals and the decision by Miller to support George Bush's adventures in the Middle East, the SLD faced a turbulent time in power from which it is yet to recover.

One of the first victims of the government was the Finance Minister Marek Belka. Belka - who is the current head of the National Bank of Poland - had been widely blamed for costing the SLD an overall majority when he announced shortly before the election that he would push through austerity measures to rebalance the budget. The resignation of Belka was as much a result of the conflict between Miller and Kwaśniewski (of whom Belka was an ally) than to do with concrete economic policy. However, it did open the way for the return of Grzegorz Kołodko - who had been the relatively successful Finance Minister during the term of the first SLD-led government in the 1990s.

Kołlodko offered a break from the more liberal policies of Belka and proposed a programme aimed at reigniting economic growth and reducing unemployment through the government taking a more interventionist role by supporting industries threatened with collapse; actively reducing inequalities; increasing education spending; devaluing the currency to boost exports and increasing taxes for the highest earners. Whatever the merits of such a programme, it did not comply with the wishes of those controlling the financial levers in Poland or Europe. After a period of political struggle Kołodko was replaced by Jerzy Hausner as Finance Minister.

It is Hausner who Miller praises in his recent interview, claiming that the 'Hausner Plan' was the last attempt to seriously reform Poland's public finances. He states that this was necessary due to the fact that the budget deficit had reached 11% of GDP. Unfortunately, Miller's memory seems to be playing tricks with him as the budget deficit in Poland, throughout the SLD's term in office, hovered at around 5-6%. Miller is in fact probably referring to the infamous prediction made by the Finance Minister from the AWS-UW government, Jarosław Bauc, who predicted that the budget deficit might exceed 11% of GDP - a statement that triggered that government's collapse. Also, although Hausner did propose a number of reforms to public finances, he was opposed to Kołodko's policy of rapidly entering the eurozone and was therefore not so concerned about quickly bringing down the budget deficit. Therefore a major component of his programme was to cut the country's corporation tax from 27% to 19% (Kolodko had proposed reducing it to 24%.) This action led to Poland having one of the lowest corporation tax rates in the whole of Europe, thus starving the budget of essential funds and further placing the burden of public finance onto employees. Simultaneously the government proposed decreasing subsidies for mines and railways, reducing sickness allowances, cutting help for companies employing disabled workers, increasing the retirement age for women, limiting public sector pay and reforming the labour code.


Miller had traditionally been seen to be a 'hardliner' in the party and had not gained the trust of the liberals as Kwaśniewski had done. He therefore attempted to curry favour with the establishment through adopting an economic stance (which he still maintains) that was even more liberal than his rival in the President's palace. This culminated in his announcement, the day after the EU referendum, that he would be prepared to consider the implementation of a flat-income tax rate in Poland. This is probably the first time in history that a leader of a social democratic government has made such a proposal. Expressing this newly found liberal faith he stated:
'Generating national wealth and its redistribution are to a large extent separate spheres. The first is decided by the hard and objective laws of economics and the market and the second by social justice. Policies must have a liberal character because the market can only fulfill its potential in conditions of a free economy. The problems of society must not be placed on the market nor should ideology be an impediment for the free market. Economic growth will be quicker through low taxes, a low budget deficit and better management of budget resources.' (Trybuna, 09.10.2003)

In his latest interview Leszek Miller quotes a colleague who told him that the Hausner Plan would be 'very good for Poland but fatal for the SLD'. Well at least he was right in one respect. Miller managed to cling onto power until the day after Poland joined the EU, after which he was replaced as PM by Marek Belka (returning from his post as financial advisor in Iraq) to form a 'government of experts'. The SLD's support had fallen into single figures, the party split and around a third of its membership left. The SLD has not even managed to win a half of the vote it gained in 2001 in any election since.

However, Miller claims that it was these policies that allowed the Polish economy to grow again and for unemployment to fall. This analysis completely ignores the impact of Poland entering the EU, which led to an increase in foreign investment, an inflow of European funds, alongside the emigration of around 1.5m people. In fact, the cutting of business taxes did not even lead to any real increase in private investment. The recent growth within the Polish economy has had more to do with public investment than a stagnant private investment rate, despite the fact that private businesses have enjoyed a huge tax break for the best part of a decade.

There are many lessons for the left from the experience of its last term in office. Unfortunately it seems that Leszek Miller has not learnt them.

Thursday, 20 January 2011

The Continuing Divisions of Smoleńsk

Last week the Russian Interstate Aviation Committee published the final report of its investigations into the causes of the Smoleńsk aircrash on April 10 last year. They announced that it had been caused primarily by pilot error that had been partly the result of the pressure exerted by other senior figures that were present in the cockpit when the crash occurred. The results seemed to confirm the theory that the trip to Katyń last April had been so politically charged that the decision was made to land the President’s plane come what may. Such conclusions were inevitably going to be met with suspicion and hostility in Poland.

In response to this report the Polish government published recordings of discussions between the control-tower and the aircraft, that they claimed showed how the crash was partly the fault of the crew in the control-tower in Russia (almost immediately the Russians then reproduced the full transcript of these discussions). The Polish government sought to show how the control-tower staff had itself come under external pressure and committed fundamental errors, that they did not provide the pilots with sufficient help and that in such weather conditions they should have refused the plane permission to land and closed the airport.

It is difficult for anyone observing this debate to make a conclusion on the technicalities of such an event. However, it is clear that this report must be seen to be fair and objective and be broadly accepted as such in both Poland and Russia as well as in the wider international community. However, public opinion polls in Poland show that the majority of the population does not believe that the crash was soley due to errors on the Polish side. 26% of Poles believe that the crash was due both to the pilot attempting to land the plane in difficult conditions and the decision not to close the airport; 24% place the blame soley on the Russian control-tower staff and 19% believe that it was caused by external pressure placed upon the pilot during the flight. Thankfully only 8% of Poles believe that the Smoleńsk tragedy was the result of a deliberate attack. Unfortunately nothing about this whole episode is clear or straightforward and any difference of opinion or uncertainty can be used by different sides for their own political gain.

Therefore beyond the technical discussion about the reasons for the Smolensk tragedy, a wider political game is being played. This involves external relations between Russia and Poland – with all the historical sensitivities that this throws up – and internal political realities in both countries. In Poland it is has become the major issue of attack by the opposition party PiS, who have claimed that the Polish government has acted in a subservient manner to Russia since the events of April 10. PiS was able to lead relatively large mobilisations of people outside the Presidents’ Palace, even although they represented the views of a minority of society. Even after the dispute over the cross had been resolved, they have managed to organise manifestations there on the 10th of every month. The publication of the Russian report last week has led to a new wave of denunciations and criticisms – not least by the arch-conspirator Antoni Macierewicz – about the role of Donald Tusk’s government and their supposed subservience to Russia.

The irony of this whole situation is that this is precisely what PO and Tusk would want to occur. For the previous few weeks media attention had moved away from the Smoleńsk tragedy, and the symbolic cultural conflicts that surround it, and begun to focus on the real issues that face Poland: such as its pension system, transport infrastructure, cost of living, etc. If the major opposition party was able to keep the public debate on such issues; concentrate on how the government’s policies are affecting people’s living standards and offer concise alternatives to them, then PO could be seriously challenged at this year’s elections. PiS neither has the political will nor ability to do this.

And so once again the television screens and newspapers are filled with arguments that abstract from the real events that occurred in Smoleńsk and end up in a phoney cultural war. Recent polls have shown that almost a half of PO’s entire electorate remains loyal to the party because of a fear that PiS and Jarosław Kaczyński could return to power. In other words, PO’s vote is more likely to remain strong when PiS and Kaczyński are most vocal and active. The first anniversary of the Smoleńsk tragedy will take place in less than three months time - which will undoubtedly be a focus of new political debate and division - and will shortly after be followed by the planned beatification of John Paul II on May 1. This will then take us up towards the parliamentary elections planned for later this year. As long as there are no unexpected economic shocks between now and then, PO should be able to keep the political debate precisely where it wants it and as always PiS will be more than willing to help it achieve this.

Friday, 14 January 2011

Road Investment Set to Slow


In 2009, over 4,500 people died in car accidents in Poland, the highest number in any country in the whole of the EU. This figure is just the tragic tip of the iceberg, with drivers and pedestrians having to survive in an infrastructure which, amongst others, lacks decent motorways and ring-roads and where the city streets are pitted with pot-holes and jammed full of fuming vehicles and drivers.

The drastic situation on Poland's roads is the result of the transport policy pursued over the past two decades. During Communism car-ownership was a luxury, there was little traffic and the road system was underdeveloped. Those who were able to obtain a car would usually have to make do with a poor quality one (such as the infamous mały Fiat) and struggle to obtain petrol to run it. Following the collapse of Communism the car became available to a far wider section of society. It was now not just a vehicle for transport but a symbol of status and wealth. It was a signal that one was no longer reliant upon the state and its public transport system. Individual ownership of the car was equated with freedom.

This change in system meant that while in 1990 41.3% of passenger transport was on the road, by 2009 this had risen to 85.5% (the EU average is 83.5%). Likewise freight transport on the roads grew from 32.8% to 75.9% (EU average 76.4%) over the same period. This shift to the car led to a decline in the use of trains, with the share of passenger travel on the railways falling from 30.6% to 6.2% (EU average 7.3%).

Now it could be stated that this was an example of Poland catching up with the West and modernising its economy. There is of course a wider question about whether cars should be the main source of transport in any country, particularly due to the environmental damage and loss of human life. However, this is a matter that affects all countries in the world and is hardly specific to Poland. What is particularly concerning about the situation in Poland, is how the rise in the ownership and use of cars has not been matched by a subsequent investment in the infrastructure upon which these cars have to drive. Someone may buy themselves the shiniest, most expensive car and drive it out of their private garage inside their gated community on their way to drop their child off at their private school; but they will still have to drive on a public road to do so. In jargonic terms the authorities allowed a huge rise in private goods, while under-investing in the public goods which they are dependent on.

The result of this policy has been that in 2008 Poland only had 765km of motorways nationwide. As a comparison, much smaller countries such as Belgium had 1763km and Holland 8450. Even Poland's neighbouring countries such as the Czech Republic (691km), Hungary (858km) and Slovakia (384km) fare much better than Poland when land-mass is taken into account. This has led to a situation where any journey across the country involves driving along single lane roads that pass directly through villages and towns, polluting the inhabitants that live there. Add into the mix the presence of transit lorries and an element of irresponsible drivers and one has a lethal cocktail.

Nevertheless in recent years there has been a significant increase in road building in Poland. This has been instigated by gaining access to EU funds for investment in the country's infrastructure and the impetus given to developing the transport system after becoming joint hosts of the Euro 2012 football championship. Therefore, between 2008 and 2010 51.8m zł was invested in the country's roads and motorways, 2m zł more than the total spent during the previous 13 years. This investment programme is not confined to Poland, although it is the major beneficiary. A programme of investment in roads, partly funded by EU money, is occurring throughout Central Eastern Europe with a planned 1,717km of motorways (41% in Poland) and 1,231km of express-roads (66% in Poland) planned to be built in the region between 2010 and 2013.


It is of course highly questionable whether such investment should be going into the roads, while the railways have been continually underfunded. The point to be made here is that both of these infrastructures have been neglected - at a high human, social, economic and environmental cost. If the government is going to allow an explosion of car ownership to occur then it must provide decent and safe roads, whilst also offering an alternative public transport system to lure people away from their cars. With the government failing to so-far invest significantly in the railways, it has prioritised the development of the road system. However, it seems that even the future of this investment is now in question.
In order for the Polish government to receive EU funds must also commit at least 15% of the cost of any investment project itself. In 2010 around 20m zł was spent on road development, with about 12m of this sum coming from the EU. Simply put, the more a national government is able to invest itself, the more it will be able to gain from the EU (within the confines of the set budget) and the further the whole investment project will go. For Poland it is essential that it takes advantage of the situation it finds itself in now, with the largest sum of structural and cohesion funds in the 2007-2013 budget allocated to it. Thereafter, it is totally unclear what money will be available in the 2014-22 EU budget, with many of the richer countries trying to tighten the purse strings.

One of the successes of the PO government had been its ability to gain EU funds and begin a number of investment projects. However, the government is now beginning to rein in the amount of money that it is prepared to spend on investment in the roads, as part of its general attempt to curb public spending. So while an impressive 20m zł was spent in 2010 this was down from the 30m previously planned. Also, the 38.6 and 33.3m zł ear-marked for road building in 2011-12 has now been cut by 19m zł. A number of projects have been shelved and delayed till after 2013, although, as explained above, no one can be clear as to what money will be available after 2013. Government investments, partly funded by the EU, have kept the Polish economy growing throughout the global economic slowdown as private investment has slumped. It is only by increasing its efforts to further this investment that the Polish economy will be able to continue to grow. This is not just an immediate economic imperative but is necessary for the country to make full use of the funds that are only temporarily available from the EU in order to help the country take a developmental step forward. This really is more important than self-imposed restrictions on the size of public debt.

Tuesday, 11 January 2011

PO and the Hypocrisy of Racism

Leading Citizens' Platform MP - Jarosław Gowin - claimed in an interview this weekend that he believes "a section of the electorate vote for us as the 'last hope for white people' - or rather for white-collar workers. Our base - young, well educated, entrepreneurial - could turn against us if we do not reform public finances, the health service and pensions.'

The use of such language by one of the leaders of a party that claims to be liberal and representing the young and educated is breathtaking. Despite his attempts at humour it reveals an ingrained feeling of superiority amongst some politicians from PO that can be expressed in terms of racism.

Unfortunately these utterances by Gowin have so far largely been unchallenged by the mainstream media. This is in stark contrast to its willingness - usually justified - to quickly condemn discriminatory language used by politicians from parties such as PiS.

Gowin is from the conservative wing of PO and he combines a strong support for neo-liberal economics with conservative social and cultural policies. His increasing rise to prominence in PO is a cause for concern

Friday, 7 January 2011

Rising Cost of Living

During the past couple of years the government's message has been that Poland was largely unaffected by the economic crisis and is a 'green island' in a sea of red. While it has not suffered the GDP decline of many other European countries, it has been far from untouched by the changing economic climate. In this 'post-crisis' period people are now seeing their living standards fall as costs rise while salary growth has slowed or in some cases even declined.


This has been exaggerated by the government's decision to make poor and average earners cover the costs of the growing budget crisis. This was most blatantly revealed when the government decided to raise VAT by 1% this year, while leaving the regressive income tax policies introduced by the PiS government untouched. Also the only country that has a lower corporate income tax in the EU than Poland is Ireland - hardly an economic model for emulation.


Therefore from January 1st VAT for electronic equipment, transport, building materials and petrol has gone up from the already high 22% to 23%. VAT for food products will increase to 5%, and for books from 0% to 5%. Also, in line with EU regulations, the government is hiking the VAT rate for children's shoes and clothes from 7% to 23%.


Combined these rises are adding a huge new burden on the Polish consumer, with the price of food, consumer products, petrol (edging above the psychological barrier of 5zł a litre), heating, and transport (with the railways even having the cheek to put up their prices) all going up.


The political response from the left should be to create an economic policy that can protect low and medium earners from the worst effects of the economic crisis. We may expect that PO will do its utmost to avoid introducing its planned cuts until after the next election and move the public debate away from the economic arena and onto matters of secondary importance. However, as people feel the economic pain of the government's previous decisions, this will become incresingly hard to do.

Thursday, 6 January 2011

Polish Railways - The Failure of Deregulation


As I spent my Christmas in the UK this year, my TV viewing was largely taken up watching the private monopoly - Heathrow Airport - completely fail to deal with snowfall in December. If I had chosen to stay in Poland during the festive period, I would have been watching another transport disaster unfold.


In the run up to Christmas thousands of passengers were stranded for hours in trains or waiting in stations in freezing conditions. The immediate blame for the chaos was put on the sub-zero temperatures and heavy snow throughout the country. And yes the weather was extreme but we're talking about Poland in December here! The second direct cause was the introduction of a new schedule, that seemed to create not just total disorder on the network itself but lead to a complete breakdown in communication, with passengers unable to obtain information about when and where trains would be running.


As a result of this disorder heads rolled, with the President of the Polish Railways (PKP), Andrzej Wach, and Deputy Infrastructure Minister, Juliusz Engelhardt, losing their jobs. It is politically significant that Engelhardt was fired and not the Minister of Infrastructure Cezary Grabarczyk. A motion placed in parliament by the opposition SLD, calling for Grabarczyk to be dismissed, has been rejected. Grabarczyk is one of PM Donald Tusk's closest political allies, both in the government and inside the ruling party PO, while Engelhardt is a member of the minority coalition party PSL.


These latest events have not been caused by a combination of unfortunate coincidences or even poor management by those presently in control. Rather they are a culmination of sustained underinvestment and the results of de-regulation and the break up of a centralised managed railway system.

In 2001, the AWS-UW government (yes those lot again!) radically reformed the Polish railways. The major change of this reform was the creation of a series of companies to replace the single company PKP. These companies were formed to run different parts of the railways in different regions of the country. This reform was obviously ideologically led, intended to create more competition within the railways and pave the way towards privatisation. The result has been spiralling costs, as these companies compete for funds and charge each other for their services, and an industry that is in conflict internally and incapable of coordinating its work.

Simultaneously the Polish trains have been continuously neglected and underfunded by successive governments. There are over 19,000 km of railway track in Poland, the third largest in the whole of the EU. However, while only and average of 4,000 euro is spent annually on 1km of track in Poland, 20,000 is spent in the Czech Republic, 130,000 in Germany and 400,000 in Holland. Unfortunately the situation has hardly improved since Poland entered the EU. While the country has managed to invest significantly on roads and stadiums it has completely failed to do the same on the railways. Although some investments on the railways have been carried out using money available from the EU budget for 2004-06, the Polish government is yet submit any proposal to Brussels for money for railways out of the 2007-13 budget.

It has been a depressing sight to see the steady decline of the Polish railways. Previously, although they were often dirty and the stations unkept, the trains ran efficiently and the price of tickets was reasonable. The government has favoured roads over railways and let an important public service, upon which millions of people - particularly the least well off and those living in the countryside - rely. This is also hugely short sighted economically. A well developed railway service is not just important socially and environmentally but is also beneficial to the economy and helps to attract investment into the country. Proper investment in the railways would therefore bring long-term returns to the Polish economy and thus the government. An efficient and well run railway service can also become profitable and partly self-financiing. For example, the German railways have an annual income of 30bn euro, which alongside state subsidies and ticket sales helps to fund investments in the network.

Of course as the state system has been run-down and broken up, and the service has consequently detiorated, calls for its privatisation have grown louder. The argument runs that private business would invest more in the railways and manage them better. However, there is no basis for this thinking either in practice or in theory. Private businesses will only invest in the railways if they think they are able to gain a profit from this investment. Naturally, therefore, they will only want to buy those parts of the network that are at least potentially profitable. This would mean buying up the most desirable parts of the service and leaving the rest to the national and local government. This would undoubtedly lead to many local and regional lines being shut down, while the private sector builds its 'flagship' projects, targeted at the large cities and better off in society.

Anyone who remembers the disaster of the attempt to de-regulate and privatise the British railways, which included an increase in fatal accidents, will be fearful of such an outcome.




References:

Bogusław Liberadzki: Na Ślepym Torze

Michał Sutkowski: Państwo Wykolejone