Within
two years public debt would cross the safety limit of 55% of GDP and in 2015
the constitutional limit of 60%.
This was the response
of Finance Minister Jacek Rostowski to the recent presentation of the Law and
Justice Party’s economic programme. We should get used to such statements, as Rostowski has already declared that he
will calculate the cost of the economic programmes of all the opposition
parties in such a way. And we can be certain that once he has done his math all
of them will exceed these magic numbers.
According to Poland’s
financial law, if public debt crosses 55% of GDP then the next government’s
budget will have to be balanced. This is upheld by the clause in the
constitution, which states that public debt cannot cross 60% of GDP. Public debt is already edging towards the 55%
mark, economic growth is slowing down and unemployment rising. Combined this
means that any future government will have virtually no room for economic manoeuvre
and will be constrained in a straightjacket of spending cuts. And as the
experiences of countries such as Greece, Spain and the UK show austerity equals
more economic slowdown, further rising unemployment and thus more debt.
Unless the matter of
the 60% constitutional public debt limit is tackled, all the declarations,
programmes and good intentions of the opposition parties are just pure
posturing. By placing such strict restrictions on its public finances, Poland
is effectively ruling out a pro-growth strategy.
But what about the
markets? The invisible hand, that in recent years has become such a sensitive
soul, will be outraged and desert Poland. Well first of all let’s get Poland’s
debt into some sort of perspective. The average level of public debt in the EU
is 82.4% of GDP. In a number of countries it nears or exceeds 100% of GDP, and
in the EU’s leading economy Germany, public debt is over 81% of GDP.
Nevertheless, the
disciples respond, the constitutional limit on public debt provides a guarantee
to the markets that Poland will not be reckless in its spending and keep its
financial house in order. Without this guarantee, our bonds will be sold and
the cost of borrowing rise, leading to economic calamity. Our economic success
and international good-standing are due to our relatively low levels of public
debt.
There is certainly an
element of truth in such thinking. Despite the pretence of neutrality the
international markets are being led by a clear political project that is
becoming increasingly ideological. Any move to change the limits on public debt
in Poland will undoubtedly lead to it being punished on the international bond
markets. As an economy standing on Europe’s periphery, it is more difficult for
it to service high-levels of debt than it is in some of the leading economies
in the West.
Once again, however,
some perspective is needed. The bond markets have fallen sharpest in those
countries in Europe (particularly in Southern Europe) that have introduced the
largest spending cuts. Despite the
pressure on governments to introduce strict fiscal discipline, what the markets
desire more than anything else is stability and growth. Whilst removing the 60%
constitutional limit would ruffle the feathers of the bond markets, these would
soon be soothed if the Polish economy were to continue to grow.
We have to ask
ourselves what the alternative is. Economic growth declined from 3.5% in the
first quarter of 2012 to 2.4% in the second quarter (a period in which Euro2012
was being held). All the major economic indicators are now turning downwards,
most importantly the rate of investment (that had been driven by government led
investment) declining from 9.7% in the fourth quarter of 2011 to just 1.9% in
the second quarter of 2012. With the government seeking a policy of rapid
deficit reduction and holding down its public debt, then it is introducing
economic policies that are damaging the economy.
Poland has retained
its stability and rising international reputation in recent years, not because
of its strict fiscal policies, but because of its relatively sound economic
performance throughout the economic crisis. If Poland were to undergo a serious
economic downturn or recession then all of this would quickly dissipate.
It is for these
reasons that the left should now consider placing the issue of the
constitutional limit on public debt at the centre of its economic programme.
Poland needs a programme of economic and social investment in order to ensure
the long term development of the country. This includes continuing and
improving the infrastructural investment started through utilising EU funds. Significant
investment in education and health is required, which would bring huge
long-term social and economic gains. Primarily a programme of job creation must
be instigated (the SLD’s recent support for a public works programme is a
welcome step towards this aim), as the deactivation of labour has the greatest
negative impact on the country’s economy, social harmony and public finances.
However, in order to
embark on such a programme then there needs to be an initial outlay of money. Over
the next few years Poland should be able to rely on a continual (although
reduced) inflow of EU money that can be used to partly fund some of this
investment. However, these funds are insufficient on their own, are limited to
certain areas of the economy and need the joint investments of the national and
local governments.
As well as looking at
reforming the taxation system, to make it more progressive and fair, there
needs to be a consideration of what funds the state can provide to instigate an
investment programme. Poland was relatively fortunate to have avoided a
full-scale banking crisis and therefore the state was not required to use vast
funds to bailout this sector. However, as the Amber Gold scandal and threat of
bankruptcies in the construction industry show, all is not potentially secure
in the country’s financial sector. Therefore a future left government would
also have to consider how it could help to recapitalise the banks and build its
own capital base that would be the basis for a major programme of economic and
social investment.
This cannot be done
without at least some initial rise in public debt and deficits. This does not
mean that the left wants there to be a continuous rise in public debt. There is
no desire to see public money wasted or spent on soaking up the misery caused
by the increasing number of people pushed out of the labour market. On the
contrary, it is only through a pro-growth/employment strategy that public
finances in Poland can be secured in the long-term. It is up to the left to
show that any short-term rise in public debt is occurring with the long term
interests of the country and its population in mind and at how this investment
will bring future returns.
Abolishing the limits
on public debt entails reforming the country’s constitution, which is a major
political act, requiring a two-thirds majority in parliament. However, the
Polish constitution has already become a document of fiction, that is at best
ignored and at worst abused. The act of reforming the public debt clause should
be addressed as part of a programme to realise the social guarantees that are
already written in the constitution. These include that health care should be
provided by public funds to all citizens regardless of their material
situation; that free state education should be guaranteed to all up to 18 years
of age and that public authorities must introduce policies that guarantee the
housing needs of citizens.
Despite the
proclamations of PiS and its conservative allies that it wishes to create a new
republic and cleanse the state, it has never once tackled the fundamental
problem at the heart of the Polish constitution. For whilst clauses of fiscal
discipline and religious attachment are complied with and referred to, its
social declarations are routinely ignored. The opportunity exists for the left
to take up this challenge and to show how austerity and cuts can be countered
with a programme of investment and growth.
