Europaudvalget 2017
KOM (2017) 0090
Offentligt
1728538_0001.png
EUROPEAN
COMMISSION
Brussels, 22.2.2017
SWD(2017) 86 final
COMMISSION STAFF WORKING DOCUMENT
Country Report Poland 2017
Accompanying the document
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE
EUROGROUP
2017 European Semester: Assessment of progress on structural reforms, prevention and
correction of macroeconomic imbalances, and results of in-depth reviews
under Regulation (EU) No 1176/2011
{COM(2017) 90 final}
{SWD(2017) 67 final to SWD(2017) 93 final}
EN
EN
kom (2017) 0090 - Ingen titel
CONTENTS
Executive summary
1.
2.
3.
Economic situation and outlook
Progress with country-specific recommendations
Reform priorities
3.1.
3.2.
3.3.
3.4.
3.5.
3.6.
Public finances and taxation
Financial sector
Labour market, education and social policies
Investment
Sectoral policies
Public administration
1
4
13
16
16
20
22
27
30
34
A.
B.
C.
Overview Table
MIP Scoreboard
Standard Tables
37
40
41
References
46
LIST OF TABLES
1.1.
2.1.
3.2.1.
B.1.
C.1.
C.2.
C.3.
C.4.
C.5.
Key economic, financial and social indicators
Assessment of country-specific recommendations for 2016
Financial soundness indicators, all banks in Poland
The MIP scoreboard for Poland
Financial market indicators
Labour market and social indicators - part 1
Labour market and social indicators - part 2
Product market performance and policy indicators
Green growth
12
14
20
40
41
42
43
44
45
LIST OF GRAPHS
1.1.
1.2.
1.3.
Contributions to real GDP growth, 2006-2018
Estimated composition of potential GDP growth, 2006-2016
Working age (15-74) population, 2015-2080
4
5
5
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1.4.
1.5.
1.6.
1.7.
1.8.
Selected stock market indices, 2012-2016
Employment, wages and unemployment rate, 2012-2016
Current account balance by components, 2006-2016
Net international investment position by components, 2006-2016
Average quality rank in the 5 biggest exporting manufacturing sectors to the EU28, 2010
and 2015
6
6
7
8
8
9
9
17
18
21
24
26
27
27
28
28
30
33
1.9.
1.10.
3.1.1.
3.1.2.
3.2.1.
3.3.1.
3.3.2.
3.4.1.
3.4.2.
3.4.3.
3.4.4.
3.5.1.
3.5.2.
3.6.1.
GDP growth and fiscal balances (% of GDP)
Yields of 10 year government bonds, 2015-2017
VAT gap in Poland and in EU-27
Medium-term public debt scenarios
Annual credit growth rates
Projected size of student cohort starting the 1st grade of general upper secondary schools
Projected pension replacement rates – the impact of lowering of the retirement age
Public and private investment, 2006-2018
Investment by components as a % of GDP, 2006-2016
Gross investment in intangible assets as a % share of total investment (2013-2015 average)
Local government investment
Highly-cited publications vs public R&D intensity
Annual average concentrations of benzo[a]pirene (BaP) in 2014 in ng/m³
Legislative practice: number of laws passed in the first year of subsequent governments by
the promoter of the draft
34
LIST OF BOXES
1.1.
2.1.
3.4.1.
3.5.1.
State-owned enterprises (SOEs)
Contribution of the EU budget to structural change in Poland
Investment challenges and reforms in Poland
Selected highlights in Poland
10
15
29
33
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EXECUTIVE SUMMARY
This report assesses Poland's economy in light of
the European Commission’s Annual Growth
Survey published on 16 November 2016. In the
survey the Commission calls on EU Member
States to redouble their efforts on the three
elements of the virtuous triangle of economic
policy – boosting investment, pursuing structural
reforms and ensuring responsible fiscal policies. In
so doing, Member States should put the focus on
enhancing social fairness in order to deliver more
inclusive growth.
Poland has benefitted from a very fast catch up
process.
In 2015, Poland's GDP per capita
expressed in purchasing power standards reached
69 % of the EU average, up from 53 % in 2007.
Rising incomes and living standards have been
accompanied by gains in employment, which
reached an all-time high reducing unemployment
to a record low.
The economy is experiencing strong growth
despite some weakness in investment.
Driven
predominantly by domestic demand, especially
private consumption, real GDP is expected to grow
at robust rates between 3.1 % and 3.2 % per year
in 2017 and 2018, well above the EU average.
These growth rates add to a long period of
uninterrupted economic expansion, since 1992 —
with Poland being the only EU country that
weathered the post-2007 global financial and
economic crises without undergoing a recession.
The overall economic outlook is positive, with
risks mainly related to domestic policies.
Private
consumption is set to remain the main growth
driver in 2017, given rising wages, employment
and fiscal transfers. Private investment is expected
to gradually recover from its 2016 weakness due to
strong domestic demand and a high degree of
capacity utilisation. The impact of policy and
regulatory uncertainty is a key risk and may dent
business confidence and investment. Public
investment is expected to recover strongly
following a decline in 2016, predominantly due to
progress in the implementation of projects
financed from the EU structural funds. Inflation is
projected to pick up moderately, driven by global
commodity prices and subdued domestic price
pressures. Export performance is expected to
remain robust. However, with strong domestic
demand fuelling imports, the overall contribution
of net exports to growth is projected to be close to
zero.
There are significant structural challenges to
the long term growth outlook.
A continued
improvement in living standards is more difficult
when the population of working age is falling and
when productivity growth, initially facilitated by
transition and integration processes, becomes more
challenging to achieve. This increases the
importance of further gains in labour force
participation and creating an environment
conducive to investment and further productivity
gains. Progress on these fronts depends on a range
of policies that are discussed in this report.
Overall, Poland has made limited progress in
addressing
the
2016
country-specific
1
recommendations ( ).
No progress was made in
addressing the extensive use of reduced VAT rates
and in establishing an independent fiscal council,
although some progress was achieved in improving
tax compliance. No progress was made on
ensuring the sustainability and adequacy of the
pension system, including for special pension
regimes, and in fact a key recent measure goes in
the opposite direction. No progress was made on
increasing labour market participation and recent
measures may also go in the opposite direction.
Limited progress was reached on removing
obstacles to investment in infrastructure and on
spatial planning coverage.
Regarding progress on reaching the national
targets under the Europe 2020 strategy, Poland is
performing well in the following areas: emissions
of greenhouse gases, poverty, energy efficiency,
tertiary education, reducing early school leaving
and the employment rate. Progress is limited in
R&D investment and renewable energy.
The main findings of the analysis in this report and
the related policy challenges are as follows:
Returning to fiscal consolidation in the short
term
and
addressing
long-term
sustainability are key fiscal challenges.
Although the 2016 general government
headline deficit is estimated to have reached its
lowest level since 2007, it is set to rebound
(
1
) This overall assessment does not include an assessment of
compliance with the Stability and Growth Pact.
1
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Executive summary
and, without corrective measures, is expected
to reach 3 % of GDP by 2018. This would
happen in the context of strong GDP growth.
Consequently, the structural balance is
expected to widen significantly in 2017-2018.
Poland faces no major fiscal sustainability risks
in the short term. However, risks become more
pronounced in the long term due to the
unfavourable initial budgetary position and
age-related spending, recently aggravated by
the decision to significantly lower the statutory
retirement age.
Despite significant steps taken, there is still
scope to improve budget revenue.
Tax
compliance, in particular as regards VAT, is
markedly below the EU average. Budget
revenue could benefit from more efficient tax
administration. Many reforms to address some
of these issues have recently been put in place.
Their impact on the costs of tax compliance
and revenue collection remains to be felt.
Poland continues to use reduced VAT rates
extensively. The government has plans to
create mechanisms to improve the efficiency
and effectiveness of public spending. The
public finance framework lacks an independent
fiscal council.
The banking sector remains solid, and the
capital market is the largest in the region.
Credit institutions support the country's
economic performance through balanced loan
growth and the capital market is an important
source of funding for companies. The impact
on bank profitability of the new tax on
financial institutions remained contained.
Moreover, proposals concerning the mandatory
conversion of foreign-currency mortgages,
which could affect the stability of the financial
sector, have not materialised. In turn,
ownership changes have led to the state having
an increasing role in the banking sector.
Investment seems to be dampened by policy
uncertainty and other barriers.
Legal
certainty, trust in the quality and predictability
of regulatory, tax and other policies and
institutions are important factors that could
allow an increase in the investment rate. The
rule of law and an independent judiciary are
also essential in this context. The current
systemic threat to the rule of law creates legal
uncertainty. With the government aiming to
increase its role in the economy, ensuring the
economic viability of investment decisions will
be important.
Securing robust productivity growth is
becoming
increasingly
challenging.
Efficiency gains are harder to achieve as
Poland gradually catches up with the more
developed EU Members States. Long-term
economic prospects will depend on the
country's capacity to move from the production
of relatively low-technology goods to more
advanced products and services. This will
emphasise the importance of inclusive
education that provides people with adequate
skills and competences, and of improving the
quality of higher education and applied
scientific research.
Despite its strong performance, the labour
market faces constraints as regards
participation,
skills
and
mobility.
Employment rates have continued to increase,
but several recent policy measures may act
towards reducing labour force participation
going forward. These disincentives are likely to
be concentrated on groups that are currently
characterised by employment rates lower than
the EU average: women, low-skilled people
and older people. Labour market segmentation
continues to be high with negative effects on
productivity and the accumulation of human
capital in the longer term. With unemployment
at a record low, lifelong learning becomes even
more crucial. Geographical and occupational
labour mobility is hampered by factors such as
housing policies, transport infrastructure,
access to childcare, skills mismatches and
preferential sector-specific social security
arrangements — in particular the highly
subsidised pension systems for farmers.
The efficiency of the social protection system
merits monitoring.
Poverty and income
inequality were declining in recent years and
the new child benefit is expected to further
improve both indicators. However, there are
still questions about the social protection
system's overall efficiency, incentives for
social integration through work, and the
2
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Executive summary
availability of resources to support other
important social policy areas, such as long-term
care.
Research and innovation are increasingly
regarded as engines of long-term growth in
Poland, but challenges remain.
The quality of
science and innovation' outputs are still far
below EU standards. R&D investment has been
gradually increasing supported by public
financing with a large role of the EU structural
funds.
Poland has been rapidly improving its
infrastructure,
but
key
structural
bottlenecks persist.
EU funding has facilitated
the fast development of the road network, but
the road fatality rate is still among the highest
in the EU. The railway sector continues to face
challenges and bottlenecks in project
implementation.
Despite
a
gradual
improvement, the Polish economy remains
energy- and carbon-intensive; the power
generation infrastructure is ageing, power
generation is heavily reliant on coal and may
be insufficient to match projected growing
electricity demand. Recent policy initiatives
may limit the potential for the renewable
energy generation. Improving Poland's air
quality, currently among the worst in the EU,
remains a major challenge.
Poland
is
gradually
improving
in
international 'doing business' rankings, but
the regulatory framework weighs on the
business environment in some areas.
Frequent changes in regulations often passed
with limited public consultations impact on
business confidence. The weakness of spatial
planning increases administrative burden
related to construction permits. The business
environment is also affected by shortcomings
in the justice system which contribute to
lengthy legal proceedings and contract
enforcement. In its Strategy for Responsible
Development the government has proposed a
number of measures to make it easier to do
business.
3
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1.
ECONOMIC SITUATION AND OUTLOOK
3.1 % in 2018, just above potential. Private
consumption is set to rise strongly in 2017, and
moderate in 2018 as employment growth
decelerates and the temporary effects of new social
transfers fade out. Public investment is expected to
rebound strongly in 2017 and 2018 on the back of
a higher utilisation of EU funds. Private
investment is projected to recover gradually,
helped by solid domestic demand and an outlook
for further export gains. This will also be driven by
relatively high capacity utilisation, still solid
corporate profits and low interest rates. However,
investment decisions are likely to be affected by
uncertainty about the future direction of economic
policies. The main risks in this scenario are the
prolongation of uncertainty, which may start
affecting not only business but also household
spending decisions, and the very limited fiscal
space available to react to possible negative
shocks.
Potential growth
GDP growth
Poland is experiencing strong economic growth.
Domestic demand has been the dominant growth
driver since 2014. In 2016, following a contraction
in investment activity, GDP growth supported by
private consumption was 2.8 %, well above the EU
average. Private consumption expenditure has
benefited from very favourable labour market
conditions, a significant increase of social transfers
and low lending rates.
Graph 1.1:
10
forecast
8
Contributions to real GDP growth, 2006-2018
6
%, pps
4
2
0
-2
-4
06 07 08 09 10 11 12 13 14 15 16 17 18
Inventories investment
Consumption
Real GDP growth
Investment (GFCF)
Net exports
Source:
Eurostat, European Commission
In 2016, investment activity declined
significantly due to a low utilisation of the EU
structural funds and increased uncertainty.
Investment fell by 5.5 % in 2016, with a
particularly strong contraction of public
investment (estimated at around -15 %). This was
mainly related to the slow start of projects financed
by the EU structural funds in the 2014-2020
programming period. Private investment also
weakened substantially, especially due to
decreased activity by state-owned and state-
influenced enterprises. The slowdown of private
investment appears to be related to increased
uncertainty about the future course of economic
policies (e.g. changes to taxation, strategic
decisions on energy policy and the role of state-
owned enterprises).
The short-term growth outlook remains
favourable, with some risks to the downside.
GDP growth is projected at 3.2 % in 2017 and
Poland has experienced fast per-capita income
convergence with the EU in recent years.
GDP
per capita in purchasing power standards increased
from 53 % of the EU-28 average in 2007 to 69 %
in 2015 (
2
). Poland (alongside Lithuania and
Romania) was thus the country with the fastest
catch-up process. Estimated potential growth has
stabilised at around 3 % since 2013. Together with
stable capital accumulation and solid gains in total
factor productivity (despite the slowdown
observed since 2012), labour has also contributed
positively to potential growth (see Graph 1.2). This
was mainly driven by a falling natural
unemployment rate and rising labour force
participation that more than compensated for a
decrease in the working age population.
A decrease in the working age population is
expected to limit growth potential in the
decades to come.
Fewer people aged 15-45 means
that even if fertility rates were at the highest level
currently observed in the EU (2 instead of 1.32, as
in 2014), this would not change the negative
outlook for the working age population (see Graph
1.3). With the natural unemployment rate already
low, labour force participation is a key factor in at
(
2
) Purchasing power standards is the artificial common
reference currency unit that eliminates price level
differences between countries.
4
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1. Economic situation and outlook
least partly mitigating the effects of a decreasing
working age population. Immigration can be
another factor improving the employment outlook.
Graph 1.2:
Estimated composition of potential GDP
growth, 2006-2016
5
4.5
4
3.5
3
2.5
PPS
TFP
Capital
Labour
from low-productive agriculture to other sectors.
This emphasises the importance of addressing
mobility barriers caused by e.g. very limited skills
upgrades and some features of the special pension
regime for farmers. Other important factors
include improvements in the quality of human and
physical capital and business’ ability to adopt new
technologies and to innovate.
Graph 1.3:
millions
29
27
Working age (15-74) population, 2015-2080
-19% by
2050
-12% by
2050
2
1.5
1
0.5
0
06
07
08
09
10
11
12
13
14
15
16
19
17
15
2015
zero-migration with fertility
rate equalling 2
25
23
21
zero-migration variant
Source:
European Commission
The medium- to long-term investment outlook
hinges on a number of policy-related factors.
Significant contributions from EU funds should
help support public investments in coming years,
but fiscal space will be needed to maintain public
investments after the end of the 2014-2020
programming period for EU funding. A stable
development of the banking sector, but also of
capital markets, would secure sources of funding
and create conditions conducive for household
savings increase. Legal certainty, trust in the
quality and predictability of regulatory, tax and
other policies and institutions are an important
factor in the assessment of risks related to
investment decisions. All these factors, alongside
the macroeconomic outlook and stability, will
ultimately determine investment decisions. There
are also strong links between investment and the
availability of skilled labour and productivity
growth (see Section 3.4.).
After several years of fast productivity growth,
further increases will be more difficult to
achieve.
The slowdown in productivity in recent
years is a phenomenon observed in many advanced
economies. Continued productivity gains depend,
inter alia,
on the inter-sectoral mobility of factors
of production, including the reallocation of labour
2025
2035
2045
2055
2065
2075
(1) Zero-migration variant of the Eurostat's 2013 population
projection. (2) High fertility scenario assumes fertility rate
rising from current levels to reach 2 by 2020 and staying at 2
throughout the projection period.
Source:
Eurostat, European Commission
Macroeconomic
stability
and
the
implementation of structural reforms are
crucial for keeping potential growth high.
As
reiterated in the 2017 Annual Growth Survey,
pursuing structural reforms and ensuring
responsible fiscal policies are important elements
of economic policy. Whether Poland’s economy
will be able to continue the catching-up process
will depend on the extent to which the
sustainability of public finances can be ensured,
taking into account expected future costs related to
an ageing population and the adequacy of future
pensions. This will also depend on maintaining the
soundness of the financial sector, ensuring social
fairness, including by stronger promotion of labour
market participation in the social protection
system, and success in implementing a range of
other structural reforms. Key reform areas include
addressing challenges related to ageing, the
adequacy of skills, quality of the public
5
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1. Economic situation and outlook
administration, and functioning of state-owned
enterprises (see Section 3 and Box 1.1).
Price developments
Labour market
The period of consumer price deflation has
come to an end, but price pressures are set to
remain subdued.
The deflation that started in
mid-2014 came to an end in late 2016, with
inflation standing at 0.9 % in December 2016.
Recent price developments were to a significant
extent driven by swings in global prices of energy
commodities. In 2017 and 2018, consumer prices
are expected to pick up only moderately remaining
below 2.5 %, which reflects very limited demand
pressure, low foreign inflation, and a gradual rise
of wages.
Graph 1.4:
160
Selected stock market indices, 2012-2016
Labour market conditions continued to
improve in 2016.
Employment increased by an
estimated 0.9 %, which marked the third year of
strong job growth (Graph 1.5). Employment rates
reached record highs, while still staying below the
EU average due to the low labour force
participation of certain groups. The unemployment
rate continued to decline in 2016, reaching 5.9 %
in the third quarter, a record low since comparable
data are available. This was accompanied by rather
modest nominal wage growth of around 3 %
throughout 2015 and into early 2016. From the
second quarter of 2016 onwards, wage growth in
the whole economy increased to above 4 % in
nominal terms. However, since wages have
increased broadly in line with productivity over
recent years, Poland has experienced only
moderate growth in unit labour costs with little
effect on cost competitiveness.
Graph 1.5:
Employment, wages and unemployment rate,
2012-2016
140
120
12
10
8
Poland
Czech Republic
Hungary
Eurozone
%
100
80
60
6
4
2
0
-2
40
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
(1) Rebased, average 2010 level = 100
Source:
IHS DataInsight
Asset prices remained stable in 2016.
House
prices have remained broadly flat throughout 2016,
with both demand and supply at historically high
levels. Mortgage lending increased modestly, with
a substantial proportion of transactions financed
without the use of bank loans. In 2016, the stock
market did not recover from heavy losses in the
second half of 2015 (Graph 1.4). The weakness of
the Warsaw Stock Exchange was related to a
combination of factors, including low commodity
prices, uncertainty regarding government influence
on listed companies with a substantial share of
state ownership (see Box 1.1), uncertainty about
future fate of the open pension funds, and on future
government regulation of the financial sector, in
particular concerning foreign currency mortgages.
employment growth y-o-y
nominal wage growth y-o-y
unemployment rate
Source:
Eurostat and Central Statistical Office
Several recently introduced or announced
measures are expected to limit labour force
participation.
A lowering of the retirement age,
an increase of the school starting age, a new
universal child benefit, the abolition of the
preschool obligation for five-year-olds and a
significant increase of the minimum wage are all
expected to limit labour force participation. The
relative importance and time horizon of these
effects will differ. Work disincentives are expected
in particular for groups that already have
6
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1. Economic situation and outlook
employment rates below the EU average. This
includes the population aged 55 and over,
low-skilled people, and women including those of
child-bearing age (see Section 3.3).
Labour market tightening is expected to lead to
faster wage increases and the possibility of
labour shortages.
The combination of a falling
working
age
population,
record
low
unemployment, measures discouraging labour
force participation and skill shortages among
people who are currently economically inactive
leads to projected employment growth decelerating
further in 2017 and stagnating in 2018. This is
expected to be accompanied by faster wage
growth, as employers find it increasingly difficult
to fill vacancies with workers who have the
necessary skills and competencies. In subsequent
years, labour market trends are set to be
determined by migration flows, both outward and
inward, and the mobility of labour both across
sectors and geographically (see Section 3.3). Other
important factors are encouraging the employment
of older people and equipping people with better
skills and competencies, ranging from basic skills
in numeracy and literacy to entrepreneurial and
digital skills.
Inequality
Poland up to 2015 may be linked to the substantial
growth of employment and some wage growth in a
deflationary environment. Changes in the benefit
system (mainly a new child benefit) introduced
since 2016 are likely to have further lowered
inequality, but relevant data are not yet available
(see Section 3.3). Inequality in net wealth (
5
) was
within the range observed in several other EU
countries for which data were collected in 2013-
2014 (ECB 2016).
External position
Poland’s external position improved with a
current account close to balance in 2015 and
stable thereafter.
This was mainly driven by a
gradual increase in the services trade surplus
(Graph
1.6).
The
performance
of
telecommunications, computer, information and
business services has been particularly strong in
2015-2016. Strong merchandise exports and a fall
in energy commodity prices translated into a
positive balance of trade in goods in 2015.
Graph 1.6:
8
6
Current account balance by components,
2006-2016
Inequality has fallen below the EU average,
following several years of robust income
growth.
Income inequality has steadily decreased
since the mid-2000s to stand slightly below the EU
average in 2015 (
3
). This accompanied fast growth
of median income and the income of the lowest
10 % income group (1
st
income decile), even if in
real terms median income growth was minimally
slower than the growth of GDP per capita. The gap
between incomes in the 1
st
income decile and the
median was below the EU average. The upward
income mobility for people in the 1
st
income decile
improved substantially in 2015 (
4
). The
improvement in various inequality indicators for
(
3
) As measured by the Gini coefficient of income, as well as
by the ratio of income of high earners to low earners
(S80/S20). In 2015, the latter ratio equalled 4.9, below the
EU average of 5.2. S80/S20 is the ratio of total income
received by the 20 % of the population with the highest
income to that received by the 20 % of the population with
the lowest income.
4
( ) An upward income mobility is measured by the share of
population who were in the 1st income decile but moved
upwards over the three year period (up to 2015).
% of GDP
4
2
0
-2
-4
-6
-8
-10
Trade balance - goods
Trade balance - services
Primary income balance
Secondary income balance
Capital account (KA)
Trade balance (G&S)
Current account
Net lending/borrowing (CA+KA)
* For the year 2016 - data till Q3-2016
Source:
Eurostat
Poland’s negative net international investment
position (NIIP) narrowed visibly in 2015-2016.
The private sector’s large contribution decreased
during this period. An accumulated stock of
foreign direct investments constitutes the major
(
5
) Difference between total assets and total liabilities.
7
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1. Economic situation and outlook
part of the NIIP, amounting to close to 36 % of
GDP and more than half of the NIIP (Graph 1.7).
This limits the potential risks associated with a
highly negative position, as rapid and large swings
in international capital flows that can destabilise
markets are less likely in the case of direct
investments. The NIIP is expected to further
decline in coming years.
Poland’s export market share has continued to
rise.
Poland’s share of world exports increased by
close to 40 % between 2005 and 2015, which was
one of the fastest improvements in the EU. Cost
competitiveness was supported by the contained
growth of unit labour costs and the relative
stability of the euro-zloty exchange rate, with some
weakening in 2015-2016. Export growth gradually
decelerated during 2016.
Graph 1.7:
0
computer, electronic and optical products and
furniture products. The continuation and
intensification of this trend will be an important
driving factor for the export outlook, given that the
expected acceleration of wage growth is likely to
put pressure on cost competitiveness.
Graph 1.8:
Average quality rank in the 5 biggest
exporting manufacturing sectors to the EU28,
2010 and 2015
20%
15.4%
1.0
Average Quality Rank (1 = highest)
15%
10.8%
9.9%
7.9%
6.7%
0.5
10%
5%
Net international investment position by
components, 2006-2016
0.0
Motor
Vehicles,
Trailers And
Semi-Trailers
Food
Products
Computer,
Electrical
Electronic And Equipment
Optical
Products
Machinery
And
Equipment
N.E.C.
0%
-20
-40
2010
2015
2015 share in total manufacturing exports to EU 28 (rhs)
% of GDP
-60
-80
-100
-120
06
07
08
09
10
11
12
13
14
15
Net portfolio investment, equity and investment fund shares/units
Net portfolio investment, debt securities
Other investment and derivatives (net)
Net direct investment
Net portfolio investment, debt securities
Net int'l investment position
Marketable debt (portfolio debt instr., other invest. and res. assets, net)
Source:
European Commission calculations based on
Comext and Orbis databases
Public finances
16-
Q3
Source:
NBP, Eurostat, European Commission's calculations
Some sectors are moving towards high-tech,
high-quality exports, but overall exports remain
concentrated in low- and medium-technology
products.
Relatively low production costs in
Poland due to low labour and other input costs
imply that export gains were in general
concentrated on low- and medium-technology
products. The average quality of Polish exports in
the five sectors with the most exports to the EU
market was below the average for EU
imports (Graph 1.8) (
6
). Nevertheless, there was a
gradual move towards higher value added, higher
quality products in some sectors, such as
(
6
) The quality is proxied by an index estimated using the
methodology of Vandenbussche (2014).
The
gradual
growth-friendly
fiscal
consolidation has come to an end.
Between 2012
and 2015, Poland succeeded in significantly
reducing its structural fiscal deficit, while at the
same time ensuring a rebound and subsequent
strengthening of economic growth with a gradually
closing output gap. This appears to have come to
an end in 2016 and the winter 2017 Commission
forecast suggests a strong widening of the
structural deficit despite a stabilisation of GDP
growth rates close to Poland’s potential growth
rate (Graph 1.9).
8
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1. Economic situation and outlook
Graph 1.9:
8.0
GDP growth and fiscal balances (% of GDP)
to reach around 56 % of GDP in 2018, mainly as a
result of the increasing deficits.
Graph 1.10:
Yields of 10 year government bonds, 2015-
2017
forecast
7.0
6.0
4.5
5.0
4
%
4.0
3.0
3.5
3
2.5
2
2.0
1.0
1.5
0.0
2009
2011
2013
2015
GDP growth
2017
1
0.5
structural fiscal deficit
headline fiscal deficit
0
Source:
AMECO
BG
HR
PL
CZ
SK
HU
The pursuit of an expansionary fiscal policy in
2017-2018 comes with certain risks.
Poland’s
headline general government deficit has been
gradually decreasing for the last five years, to
stand at an estimated 2.3 % of GDP in 2016, its
lowest level since 2007. The 2016 decrease
resulted mainly from one-off revenue from the sale
of mobile internet frequencies (0.5 % of GDP) and
a significant drop in public investment
expenditure. Looking forward, based on the
Commission winter 2017 forecast, the deficit is
projected to widen to 2.9 % of GDP in 2017 and
3.0 % of GDP in 2018. This development is
expected to be driven mainly by increased social
spending (a lowering of the retirement age and a
universal child benefit). Simultaneously, the
outcome of Poland’s continued efforts to further
improve tax collection remains uncertain. The
current expansionary fiscal stance risks leaving
very limited fiscal space to absorb potential
negative shocks.
The general government debt-to-GDP ratio
continued its upward trend but remains below
60 %.
Since a drop to 50.2 % of GDP in 2014,
which was mainly due to a one-off transfer of
funds from the private pension system (
7
), the
general government debt level has continued to
rise. It reached more than 51 % of GDP in 2015
and according to Commission estimates exceeded
53 % of GDP in 2016. The public debt is expected
(
7
) Under ESA 2010 rules this statistically counted as a public
debt reducing measure.
RO
(1) monthly averages
Source:
Eurostat
Interest rates on government debt increased
relative to other EU countries with negative
implications for future debt service costs.
Interest rates on Polish debt rose substantially
relative to regional peers during the period 2015-
2016 (Graph 1.10). In late 2016, interest rates on
Polish debt were among the highest in the EU.
This appears to be partly driven by internal factors,
notably the worsening fiscal outlook.
9
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1. Economic situation and outlook
Box 1.1:
State-owned enterprises (SOEs)
SOEs form a large part of the Polish economy, are dominating certain sectors and their role might
increase even further.
Poland is among the group of EU Member States where SOEs play an important
role (
1
). During its economic transformation Poland underwent extensive privatisation. However, this
process slowed down during the 2010s and stalled in 2014. The list of companies of ‘strategic importance’
under Ministry of Treasury special surveillance includes 30 SOEs. In total there are several hundreds of
companies in public ownership. SOEs are widespread across sectors and their market value relative to GDP
is amongst the highest in the EU. Their share in total employment is sizeable but not outstanding compared
to other Member States. 18 SOEs are listed at the Warsaw Stock Exchange (WSE) and have a share of
around 57% in the WIG20 index (see Graph 1a). Some of them are among the largest firms not only in
Poland but also in Central and Eastern Europe, and are dominant players in sectors such as energy, rail and
forestry (
2
). The government intends to increase the role of SOEs even further. In the financial sector, state-
controlled institutions have been taking over banks from private investors, increasing the share of
government-controlled banks in bank assets from around 16% in 2010 to 36 % after acquiring Pekao S.A. by
PZU S.A. in 2016.
Graph 1:
The role of SOEs in the Polish economy by main stock market indices and sectoral performance
80
70
60
50
40
1a Share of SOEs in the main stock market
indices
1b Return on equity, 2014
AGRICULTURE, FORESTRY AND…
69
56
12*
MINING AND QUARRYING
MANUFACTURING
ELECTRICITY, GAS, STEAM AND…
WATER SUPPLY; SEWERAGE,…
CONSTRUCTION
WHOLESALE AND RETAIL TRADE;…
32
24
14
8
0
TRANSPORTATION AND STORAGE
Private
Public
30
20
10
0
SK
FR
DE
ACCOMMODATION AND FOOD…
INFORMATION AND…
REAL ESTATE ACTIVITIES
PROFESSIONAL, SCIENTIFIC AND…
ADMINISTRATIVE AND SUPPORT…
ARTS, ENTERTAINMENT AND…
CZ
IT
HU
PL*
OTHER SERVICE ACTIVITIES
* with takeover by gov.-contr. PZU of Pekao S.A.
-10
-5
0
5
10
15
20
25
1) Data on return on equity come only from entities which employ more than 49 persons
2) SOE on stock exchanges- companies, in which state has at least 10% share (directly or indirectly); companies
which belong to foreign SOE's are not perceived as SOEs
Source:
European Commission calculations based of ORBIS database for share of SOE in the main stock market
indices; the Ministry of Development for return on equity in private and public sector
While profitable overall, SOEs tend to perform slightly worse compared with their private
competitors.
Although the scope of possible conclusions is limited by comparability of circumstances,
private firms tend to somewhat outperform SOEs (see Graph 1b). Efficiency indicators suggest lower
profitability of Polish SOEs relative to their private counterparts, especially in certain sectors such as
mining, transport and manufacturing. In the banking and insurance sectors, performance of state-owned and
private entities used to be on par e.g. concerning return-on-equity (ROE) and return-on-assets (ROA) as well
as regulatory capital ratios and the shares of non-performing loans (NPLs).
_
1
) SOEs feature prominently in
some new Member States such as Poland, Croatia, Romania, Slovenia but also in
France, Italy and Sweden, whereas their role is very limited in other MSs such as the Netherlands, Estonia or the UK
(European Commission, 2016f).
(
2
) In terms of yearly turnover 17 out of the biggest 25 at the 2015 Wprost list (Wprost, 2015) and 13 out of 25 at the
2014 Forbes list (Forbes, 2014) are SOEs.
(Continued on the next page)
10
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1. Economic situation and outlook
Box (continued)
The quality of SOE governance, which ultimately determines the companies’ performance and the
scope for fiscal and financial risks, has so far been perceived as relatively good with potential for
improvement in some areas.
Although mainly driven by the capital market development and a mean of
privatisation, the SOEs listing has also contributed to improved performance and governance (e.g. better
qualified management teams being able to introduce operational efficiencies, increased disclosure and
reporting requirements). Until recently, oversight was organised with a fairly centralised role of the Ministry
of Treasury, which issued and improved guidance on corporate governance (management priorities, board
composition, etc.). It monitored annual reports, albeit at an aggregate level. However, despite positive
governance developments, access to information was perceived as low, the accountability and transparency
of non-listed companies lagged behind that of those listed, and the application of guidelines on board
member nominations (e.g. professional merits) was questioned in several cases (OECD, 2016a). Stock
market analysts give various examples of government policy objectives appearing to have prevailed over the
economic interests of SOEs and their non-state shareholders, including pension funds, and hence most of the
population. These examples include the introduction of a tax on copper and silver extraction in 2012, an
increase in the share capital of one energy company in 2016, and the involvement of the energy sector SOEs
in the restructuring of coal mining companies facing economic difficulties in 2015-2016 (Wise-Europa,
2016). The subsequent lessons for market participants include: i) fair competition in sectors with strong SOE
presence can be difficult, ii) political interests can prevail over companies’ economic interests, and iii)
private investment in SOEs is associated with high risk of loss of value with implications for SOEs
valuations.
The SOE governance in Poland is to be overhauled from 2017 onwards, which paves the way for the
government’s intention to increase the role of SOEs in the economy.
The January 2017 reform contains
two key elements: i) the transfer of final oversight rights from the dissolved Ministry of Treasury to the
Prime Minister’s Office and ii) the transfer of the supervision of SOEs to sectoral ministries (
3
). The latter
does not necessarily follow the OECD guidelines (
4
) and comes with the risk of mixing political and
economic objectives, potentially weighing on performance. The SOE Council, to be appointed by the Prime
Minister, will have a decisive vote on management and supervisory appointments and will issue opinions on
governance policies. The law also explicitly puts an end to the privatisation process, assigning to the SOEs
certain responsibility for carrying out certain tasks stemming from state's economic policies. In addition,
some uncertainty remains regarding the future fate of Open Pension Funds (OFEs) and their assets. In recent
years, market participants were concerned with the potential nationalisation of part of OFEs assets, with the
state effectively taking over control of several companies. Given the importance of SOEs in the stock
market, its recent underperformance compared with other regional indices may reflect market uncertainty
about the state's plans concerning ownership policy (Berenberg Bank, 2016). Finally, the reported intention
to investigate former privatisation cases has casted doubt on the duration and certainty of government
decisions and existing contracts (
5
).
(
3
) In the energy sector, the reallocation of the SOE governance from Treasury to the Ministry of Energy already took
place in the first half of 2016.
4
( ) According to the OECD guidelines on SOE governance, centralisation of ownership rights helps its more consistent
implementation, is beneficial for financial reporting, and is an effective way to clearly separate the exercise of the
ownership function from other potentially conflicting activities performed by the state, particularly market regulation.
(
5
) Examples are PKP Energetyka S.A., Ciech S.A. and KGHM Polska Miedź SA.
11
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1728538_0015.png
1. Economic situation and outlook
Table 1.1:
Key economic, financial and social indicators
2004-2008 2009
5.2
2.8
5.5
3.6
4.0
3.5
11.7
-2.7
9.5
-5.9
11.6
-12.4
0.0
1.5
3.7
4.0
5.9
0.3
-1.0
0.2
1.4
2.1
-5.0
-2.9
0.9
0.7
-46.5
-12.4
38.3
68.9
8.7
-3.2
1.9
8.0
50.5
19.9
30.7
0.6
22.0
-1.4
.
3.5
3.4
2.8
4.1
2.2
1.9
-1.4
5.2
4.8
27.6
25.0*
16.7
.
.
.
13.5
7.3
29.0
63.7
37.4
11.2
-3.6
34.3
.
45.8
2.2
-2.5
3.1
0.3
1.9
1.8
-4.0
-0.8
3.2
1.6
-57.3
-22.3
47.0
45.8
0.3
-1.8
2.8
4.4
67.1
31.6
35.5
5.5
23.9
-0.3
-5.3
3.4
3.8
4.0
3.4
2.4
0.9
-2.8
-20.5
-14.7
24.4
22.2
8.7
12.6
9.1
6.4
8.1
2.6
20.6
64.7
27.8
6.9
-7.3
32.0
.
49.4
2010
3.6
2.7
3.1
0.0
13.1
14.3
1.2
3.9
2.3
1.9
-0.6
0.4
1.8
1.8
-5.4
-2.1
-1.5
1.8
-65.1
-24.4
50.8
34.9
-1.7
-1.8
2.4
4.3
69.7
34.2
35.5
6.0
24.0
-1.7
-6.1
3.2
1.7
2.6
8.9
6.4
2.4
0.7
9.3
6.0
24.6
22.4
13.0
11.5
12.5
6.4
9.7
3.0
23.7
65.3
27.8
7.3
-7.3
32.3
-8.0
53.3
2011
5.0
3.1
-1.8
8.8
7.9
5.8
2.1
4.2
3.4
0.9
0.7
0.6
2.0
1.6
-5.2
-2.2
-1.5
2.0
-62.4
-25.2
54.4
25.7
-1.4
-2.6
-1.1
6.6
73.9
35.1
38.8
5.8
24.6
-3.7
-4.6
3.0
3.2
3.9
5.3
4.4
0.8
-2.3
-2.9
-2.2
24.6
22.5
4.9
11.2
13.8
6.0
9.7
3.6
25.8
65.7
27.2
6.9
-4.8
32.7
-5.9
54.4
2012
1.6
0.7
-0.3
-1.8
4.6
-0.3
0.2
3.5
0.0
-0.5
2.1
0.6
1.7
1.2
-3.7
-0.6
-1.2
2.2
-65.3
-25.9
54.3
13.6
-2.3
-1.2
-1.1
4.9
73.4
34.1
39.3
6.4
24.6
-4.0
-6.6
3.2
2.3
3.7
3.6
1.5
2.0
-0.3
-3.2
-2.4
24.7
22.7
7.6
12.0
11.7
6.4
10.1
4.1
26.5
66.5
26.7
6.9
-3.7
32.9
-3.9
53.7
2013
1.4
0.3
2.5
-1.1
6.1
1.7
-1.3
3.0
0.4
-1.0
1.9
0.6
1.4
0.9
-1.3
1.9
1.1
2.3
-68.9
-26.2
53.3
9.4
5.8
-0.8
-0.1
3.2
75.5
35.1
40.4
8.1
25.0
-2.5
-4.8
3.0
0.3
0.8
1.7
1.5
0.2
-0.1
0.2
0.2
23.7
20.8
7.1
13.4
9.7
6.0
10.3
4.4
27.3
67.0
25.8
7.2
-4.1
32.8
-3.3
55.7
2014
3.3
2.4
4.1
10.0
6.7
10.0
-1.1
3.0
4.1
0.5
-1.3
0.6
1.6
0.8
-2.1
1.4
1.9
2.4
-69.1
-25.6
55.1
13.2
5.1
-2.4
-0.5
4.6
78.1
35.6
42.5
6.8
25.3
-3.1
1.1
3.0
0.5
0.1
2.2
1.5
0.6
0.1
0.4
1.0
23.8
21.0
0.5
13.2
8.6
5.4
9.0
3.8
23.9
67.9
24.7
7.3
-3.4
32.9
-2.7
50.2
2015
3.9
3.2
2.3
6.1
7.7
6.6
-0.2
3.0
3.5
-0.2
0.6
0.5
1.7
0.9
-0.6
3.1
2.4
2.4
-62.5
-23.9
54.2
12.07
2.5
-2.1
-1.0
3.4
78.8
36.1
42.7
8.1
25.8
-3.0
2.9
3.1
0.6
-0.7
1.1
2.4
-1.2
-1.8
-3.8
-2.1
23.9
21.2
3.7
14.0
6.4
5.0
7.5
3.0
20.8
68.1
23.4
6.9
-2.6
33.3
-2.4
51.1
2016
2.8
3.6
3.7
-5.5
7.3
7.9
-0.2
2.7
1.7
1.1
-0.1
0.4
1.3
1.0
.
.
1.5
.
.
.
.
.
.
.
.
.
.
.
.
6.9
25.1
-2.5
.
.
0.7
-0.2
3.9
.
2.0
1.3
-2.7
-3.5
.
.
.
.
.
.
6.3
.
18.2
.
.
.
-2.3
34.0
-2.6
53.6
forecast
2017
3.2
3.9
2.4
2.7
6.0
6.4
0.2
2.8
3.2
0.0
0.0
0.3
1.3
1.2
.
.
-0.8
.
.
.
.
.
.
.
.
.
.
.
.
7.6
25.1
-2.7
.
.
1.6
2.0
4.7
.
1.8
0.2
0.8
-1.2
.
.
.
.
.
.
5.6
.
.
.
.
.
-2.9
34.3
-3.1
54.5
2018
3.1
2.9
2.5
5.3
6.4
6.9
0.4
2.9
3.2
0.0
0.0
0.3
1.3
1.3
.
.
-0.1
.
.
.
.
.
.
.
.
.
.
.
.
7.7
25.3
-2.6
.
.
2.1
2.1
5.3
.
2.1
0.0
0.3
.
.
.
.
.
.
.
4.7
.
.
.
.
.
-3.0
34.3
-3.3
55.8
Real GDP (y-o-y)
Private consumption (y-o-y)
Public consumption (y-o-y)
Gross fixed capital formation (y-o-y)
Exports of goods and services (y-o-y)
Imports of goods and services (y-o-y)
Output gap
Potential growth (y-o-y)
Contribution to GDP growth:
Domestic demand (y-o-y)
Inventories (y-o-y)
Net exports (y-o-y)
Contribution to potential GDP growth:
Total Labour (hours) (y-o-y)
Capital accumulation (y-o-y)
Total factor productivity (y-o-y)
Current account balance (% of GDP), balance of payments
Trade balance (% of GDP), balance of payments
Terms of trade of goods and services (y-o-y)
Capital account balance (% of GDP)
Net international investment position (% of GDP)
Net marketable external debt (% of GDP) (1)
Gross marketable external debt (% of GDP) (1)
Export performance vs. advanced countries (% change over 5 years)
Export market share, goods and services (y-o-y)
Net FDI flows (% of GDP)
Savings rate of households (net saving as percentage of net disposable income)
Private credit flow, consolidated (% of GDP)
Private sector debt, consolidated (% of GDP)
of which household debt, consolidated (% of GDP)
of which non-financial corporate debt, consolidated (% of GDP)
Corporations, net lending (+) or net borrowing (-) (% of GDP)
Corporations, gross operating surplus (% of GDP)
Households, net lending (+) or net borrowing (-) (% of GDP)
Deflated house price index (y-o-y)
Residential investment (% of GDP)
GDP deflator (y-o-y)
Harmonised index of consumer prices (HICP, y-o-y)
Nominal compensation per employee (y-o-y)
Labour productivity (real, person employed, y-o-y)
Unit labour costs (ULC, whole economy, y-o-y)
Real unit labour costs (y-o-y)
Real effective exchange rate (ULC, y-o-y)
Real effective exchange rate (HICP, y-o-y)
Tax rate for a single person earning the average wage (%)
Tax rate for a single person earning 50% of the average wage (%)
Total Financial sector liabilities, non-consolidated (y-o-y)
Tier 1 ratio (%) (2)
Return on equity (%) (3)
Gross non-performing debt (% of total debt instruments and total loans and
advances) (4)
Unemployment rate
Long-term unemployment rate (% of active population)
Youth unemployment rate (% of active population in the same age group)
Activity rate (15-64 year-olds)
People at risk of poverty or social exclusion (% total population)
Persons living in households with very low work intensity (% of total
population aged below 60)
General government balance (% of GDP)
Tax-to-GDP ratio (%)
Structural budget balance (% of GDP)
General government gross debt (% of GDP)
(1) Sum of portfolio debt instruments, other investment and reserve assets
(2,3) domestic banking groups and stand-alone banks.
(4) domestic banking groups and stand alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and
non-EU) controlled branches.
(*) Indicates BPM5 and/or ESA95
Source:
European Commission, ECB
12
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2.
PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS
Overall, Poland has made limited progress (
9
) in
addressing the 2016 CSRs.
Except for some
progress achieved in improving tax compliance, no
progress was made in addressing recommendations
related to public finance. Additionally, a new
challenge to the long-term sustainability of the
pension system due to lowering of the retirement
age is in striking contrast to the CSR. At the same
time, no progress was made on increased
participation in the labour market. What is more,
several measures in this area go in the opposite
direction. There was limited progress on removing
obstacles to investment in infrastructure and on
spatial planning coverage.
(
9
) Information on the level of progress and actions taken to
address the policy advice in each respective subpart of a
CSR is presented in the Overview Table in the Annex. This
overall assessment does not include an assessment of
compliance with the Stability and Growth Pact.
Progress
with
implementing
the
recommendations addressed to Poland in
2016 (
8
) has to be seen as part of a process
which started with the introduction of the
European Semester in 2011.
Poland corrected its
excessive fiscal deficit and the corresponding
excessive deficit procedure was closed in 2015.
The country also strengthened its fiscal framework
by enacting a permanent expenditure rule in 2013.
It didn't, however, establish an independent fiscal
council. Although efforts were made to tackle the
long-term sustainability of public finances with a
gradual increase of the statutory retirement age to
67 years (reversed in 2016, see below), only
limited action was taken to reform special pension
regimes, but not for miners and farmers. No
measures were put in place to limit the extensive
use of reduced VAT rates.
Poland took action to tackle labour market
segmentation.
Its measures included an
amendment to the Labour Code to reduce
flexibility in the take-up of temporary contracts, an
increase of social security contributions connected
to certain civil law contracts and most recently the
introduction of a minimum hourly remuneration
for those working under civil law mandate
contracts. Poland increased the availability of
childcare to foster the labour market participation
of women, although recent measures (see Section
3.3) may have the opposite effect. Some steps were
taken to address the recommendations related to
vocational education and training. The lifelong
learning strategy was adopted in September 2013,
but subsequently there has been limited progress in
increasing participation. Finally, in recent years
Poland was successful in liberalising several
professional services.
Progress was made on infrastructure.
Thanks to
massive EU investments over the past decade,
Poland has significantly upgraded its transport
networks, while progress was more limited in
railway projects. Progress was also observed in the
development of transmission and distribution
networks.
(
8
) For the assessment of other reforms implemented in the
past, see in particular section 3.
13
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2. Progress with country-specific recommendations
Table 2.1:
Assessment of country-specific recommendations for 2016
Source:
European Commission
14
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2. Progress with country-specific recommendations
Box 2.1:
Contribution of the EU budget to structural change in Poland
Poland is the largest beneficiary of the European Structural and Investment Funds (ESI Funds) with an
allocation of EUR 86.1 billion until 2020. This is equivalent to around 2.7 % of GDP annually (over 2014-
2017) and 54% of public investment (
1
). Out of the EU financing EUR 3.4 billion is planned to be delivered
via financial instruments, which is a three-fold increase compared to the 2007-2013 period. By 31
December 2016, an estimated EUR 18.9 billion, which represents about 22 % of the total allocation for ESI
Funds, have already been allocated to concrete projects. The contribution of the ESI Funds to the
development of public investment is discussed in Section 3.3.
Financing under the European Fund for Strategic Investments (EFSI), Horizon 2020, the Connecting Europe
Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Poland has
signed agreements for EUR 3.8 billion for projects under the Connecting Europe Facility. The EIB's Group
approved financing under EFSI amounts to EUR 1.4 billion (infrastructure and innovation windows), which
is expected to trigger nearly EUR 4.9 billion in total investments (as of end 2016). As regards SME
financing under EFSI, the European Investment Fund approved 5 agreements with financial intermediaries
(e.g banks and funds) in Poland. The financing totals EUR 44 million and is expected to trigger EUR 707
million in investments.
ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante
conditionalities (
2
) and targeted investment. Examples include the transposition of the public procurement
directive, preparation of the maps of healthcare needs which has laid down the basis for improved efficiency
of healthcare investments and the development of the transport plan which has facilitated the development
of mature road and railway projects. These reforms have prepared the ground for better implementation of
public investment projects in general, including those financed from national sources and from the other EU
instruments mentioned above. The fulfilment of ex-ante conditionalities is on track, except in the areas of
waste and water. Administrative reforms support is also available through targeted financing under the
European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical
assistance.
The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020
programmes. These included improving the business environment for SMEs via improving investment
conditions and easing registering business (see section 3.6), reducing obstacles to railway investment by
improving the administrative and technical capacities in the sector, and improving labour market access and
promoting social inclusion. The latter is done by enhancing education and training to improve the
employability of vulnerable groups. Poland has also received support from the Youth Employment Initiative
to combat youth unemployment. To date 79 000 young people have benefited from it and 70 000 young
people are in employment, education or training after the support from this initiative has ended. Details on
implementation progress in those fields in chapter 3.3.
In addition to challenges identified in the past CSRs, ESI Funds address wider structural obstacles to growth
and competitiveness. The funds support infrastructure investments increasing the coverage of fast broadband
internet (target of 100 % of households in 2023); they will improve transport accessibility through almost 3
900 km of roads and 2 450 km of railway lines expected to be built, reconstructed or modernised; 36 500
enterprises are foreseen to carry out investments using financial instruments created through ESI Funds. ESI
Funds are expected to generate 25 % of investments to reach the 2020 target of R&D expenditure increasing
to 1.7 % of GDP, to
increase the participation of children aged 3-4 in pre-school education (target
of 81 % in 2020) and to increase adult participation in lifelong learning.
(
1
) National public investment is defined as gross capital formation + investment grants + national expenditure on
agriculture and fisheries.
(
2
) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities,
which aim at improving framework and conditions for the majority of public investments areas. For Members States
that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the
temporary suspension of all or part of interim payments.
15
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3.
REFORM PRIORITIES
3.1. PUBLIC FINANCES AND TAXATION
Tax system
The Polish tax system underwent many changes
in 2016.
Two new sectoral taxes, on assets of
certain financial institutions and on retail sales,
were introduced with the aim of increasing budget
revenues. The application of the higher VAT rates
(previously legislated to expire at end-2016) has
been extended for 2017-2018 to limit the fiscal
deficit. The tax on assets of certain financial
institutions entered into force in February 2016
and is levied on assets of mainly banks and
insurance companies whose assets value exceeds a
certain threshold. The tax on retail sales was
suspended before it was actually levied (see
below). Simultaneously, Poland implemented and
legislated several changes to the value added tax
(VAT) and corporate income tax (CIT). They
aimed at reducing tax fraud and at improving tax
collection. Additionally, Poland reduced to 15%
from 19% CIT rates for the smallest taxpayers and
the taxpayers in the first year of their activity.
Finally, tax free allowance in personal income tax
(PIT) was amended and works to reform PIT and
social contributions were launched.
The high number and rapid pace of these
changes may lead to increased uncertainty for
businesses.
Some business stakeholders point to
increased uncertainty about the stability and
credibility of the Polish tax system, given that
changes are often introduced quickly and without
broad consultations (see Section 3.6). Data from
the National Bank of Poland show that since 2015
in enterprises' assessment, taxes and regulations
have advanced from fifth to second place on the
list of barriers to their development (NBP, 2015;
NBP, 2016a). At the same time, according to the
Global Competitiveness Report 2016-17, tax
regulations were the most problematic factor for
doing business in Poland in 2015 and 2016 (World
Economic Forum, 2016). The number of changes
introduced to the tax laws (including VAT, CIT,
excise duties and others) and the pace of their
implementation are the most likely reasons for the
increased uncertainty and are ultimately likely to
indirectly influence also the propensity to invest.
They may also impact on the quality of the
corresponding laws and of their effective outcome.
For example, in the case of the retail sales tax, the
legislative process from its submission to the
parliament to its signing into law by the President
lasted 1.5 months. However, the tax featured a
progressive rate structure based on turnover with a
tax-free threshold and two different brackets and
rates. Therefore it might breach the EU
competition rules as it favoured companies with
low turnover. Consequently, the European
Commission opened an in-depth investigation and
Poland suspended the tax before it was actually
levied.
Foregone revenues resulted from the continued
application of reduced VAT rates on an
extensive number of goods and services.
Reduced VAT rates limit the efficiency of the
VAT system and, as pointed out in the 2016
Commission Country Report for Poland, are not an
efficient social policy instrument. According to an
EU wide study, in Poland 15.9% of potential VAT
revenue was foregone in 2014 due to an
application of reduced rates (CASE/IAS, 2016).
This was the second highest loss in the EU, three
times higher than the EU average. Nonetheless,
despite
the
repeated
country
specific
recommendations in this area, at the current stage
Poland has announced no intention to change the
system of reduced VAT rates.
Fighting tax fraud remains a challenge.
The
VAT gap results from a combination of many
factors that require a systemic response. Part is due
to organised criminal activity and part to
undeclared revenues, overstatement of VAT
invoices, tax optimisation, bankruptcies and errors.
There was a very slight decrease of the VAT
compliance gap in 2014 compared to 2013.
However, the 2014 VAT compliance gap of 24 %
of the theoretical VAT liability remained
significantly above the EU average of 14 % (Graph
3.1.1). Authorities' own estimations do not suggest
a decrease of the VAT gap in 2015. However, the
authorities expect a significant decrease of the
VAT gap as from 2016, due to the introduction of
a number of measures focused on fighting VAT
16
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3.1. Public finances and taxation
fraud (
10
). Poland also faces significant fraud
related to excise products. Ernst and Young
estimated the size of the shadow economy at
18.6 % of the total use of gas oil in 2013 and 24 %
of tobacco consumption in 2015 (EY, 2016).
CASE/IAS (2016) assessed that the smuggling of
excise goods accounted for 6 % of the VAT gap in
2014.
Graph 3.1.1:
VAT gap in Poland and in EU-27
30
introduction of fines in cases of lowering the
payment of VAT. To fight excise duties and VAT
fraud, additional reforms are being prepared: a so-
called alcohol package focusing on trade in
denatured alcohol as well as a so-called tobacco
package. Criminal sanctions are expected to be
introduced for VAT fraud and the relevant draft
law is at final stages of the legislative process.
Simultaneously, the implementation in 2016 of a
general tax anti-avoidance rule aims at limiting tax
avoidance.
Recent reforms may increase tax compliance
costs.
Poland has made strong efforts to strengthen
its legal framework to curb tax evasion and
avoidance. However, patterns of tax fraud are
constantly changing as fraudsters adapt to new
rules, exploit loopholes and move to new sectors.
Stricter rules and numerous changes to legislation
can disproportionately affect compliant and
smaller businesses. This is particularly important
in the context where Polish businesses already face
high costs of compliance with their tax obligations
(World
Bank,
2016a).
Simplifying
and
strengthening voluntary compliance, also by means
of a more efficient and customer-oriented
administration, is an important element to
complement actions on tackling tax fraud. In late
2016, the authorities presented a number of
proposals under the Strategy for Responsible
Development with a number of tax simplification
measures and an exemption from social security
contributions for new entrepreneurs.
Work is ongoing in the area of tax
administration reform to increase flexibility
and efficiency.
The European Commission
assessment highlighted structural weaknesses in
the Polish tax administration which limited its
efficiency and effectiveness (for instance European
Commission, 2016a). To tackle this issue,
regulations establishing the National Revenue
Administration were passed in late 2016. They will
enter into force in March 2017. The objective of
the changes is to improve tax collection and
simplify tax obligations for taxpayers via
consolidation of tax and customs administrations.
The law implies a profound change to the
functioning of the tax administration and requires
careful transition to avoid uncertainty and
instability. It is crucial for the modernisation of the
Polish tax administration to i) ensure that
authorities' actions are coordinated and ii) focus on
25
20
15
10
5
0
2010
2011
2012
EU-27
Poland
2013
2014
(1) percent of theoretical VAT liability
(2) EU-27 excl. Cyprus, data for Croatia available only for
2014
Source:
CASE/IAS (2016)
A number of reforms aimed at tightening the
tax system with a view to tackling tax fraud
were undertaken in 2016.
Amendments to several
laws, called the "fuel package", which entered into
force in August 2016, changed the rules on VAT
chargeability for intra-EU acquisitions of fuels and
is supposed to fight tax fraud in the fuel sector. It
was accompanied by changes in the energy law
regarding fuel licences. It is expected to be
complemented by a so-called transit package
which has been approved by the government in
early 2017. This package would require the
registration of excise products transiting through
Polish territory. Furthermore, many changes to
VAT legislation entered into force as from 1
January 2017. They include a number of tools to
tackle VAT fraud, for instance an extension of the
reverse charge mechanism, the extension of joint
liability, limitation of quarterly VAT returns and
(
10
) PwC in its recent analysis (PwC, 2016) expects the 2016
VAT gap in Poland to decrease to 2.5% of GDP, as
compared to 2.8% of GDP in 2015.
17
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3.1. Public finances and taxation
fraudsters while facilitating tax compliance for
honest taxpayers.
Labour taxation remained broadly unchanged
in 2016.
The degree of progressivity of labour
taxation in Poland is limited (European
Commission, 2016b). Poland was considering a
major reform of its labour taxation that would have
seen an introduction of a single progressive tax
combining
personal
income
tax,
social
contributions and health insurance premium.
Ultimately, the government decided not to
implement the reform. In parallel, a reform of the
tax-free allowance in PIT was voted on in late
2016 and entered into force in 2017. It followed
the 2015 judgement of the Constitutional Tribunal.
The reform increased the tax-free allowance for
the lowest income earners (with annual earnings
equivalent to below 50 % of the minimum wage).
For the small group of taxpayers with the highest
revenue, the allowance was removed.
Long-term sustainability
country report for Poland, the key challenge for
improving fiscal sustainability is to contain the
projected increases of age-related expenditure.
This issue has gained further importance with the
recent law to lower the statutory retirement age as
from late 2017. This change (lowering the legal
retirement age to 60 years for women and 65 years
for men from a gradual increase to 67 years for
both sexes) will increase age-related expenditure
and have negative consequences for the labour
market (see Section 3.3). The direct impact of the
bill will require additional fiscal means for
supporting the pension system equivalent to
around 0.4 % – 0.9 % of GDP per year up to 2050.
Hence, unless effective measures are taken to
encourage people to extend their careers above the
statutory retirement age, the recent change will
worsen the sustainability of public finances. The
law lowering the statutory retirement age did not
include any measures going in this direction.
Graph 3.1.2:
Medium-term public debt scenarios
80
75
70
65
60
55
50
45
40
% of GDP
No major risks to fiscal sustainability have been
identified in the short term; risks are more
pronounced over a longer-term perspective.
According to the recent Commission analysis,
Poland does not face significant short-term fiscal
sustainability risks (European Commission, 2017).
However, the debt sustainability analysis in line
with the Commission framework indicates high
risks over the medium term. This reflects the still
increasing debt ratio at the end of the projections
under the various scenarios considered (Graph
3.1.2). The S1 sustainability gap indicator points to
medium risks, reflecting mainly the unfavourable
initial budget position but also age-related
expenditure. Long-term fiscal sustainability risks
are also identified, according to the Commission
framework (the S2 sustainability gap indicator
points to medium risks, also driven by the
unfavourable initial budgetary position and age-
related expenditure (
11
)).
The lowering of the statutory retirement age
will have a negative impact on the sustainability
of public finances.
As discussed in the 2016
(
11
) Based on European Commission projections which do not
take into account the lowering of the statutory retirement
age entering into force in 2017 (European Commission,
2015).
Standardized (permanent) negative shock (-1p.p.) to the short- and long-
term interest rates on newly issued and rolled over debt
Baseline no-policy change scenario
Standardized (permanent) positive shock (+1p.p.) to the short- and long-
term interest rates on newly issued and rolled over debt
(1) The no-policy change scenario assumes that during 2019-
2027 the level of the structural primary balance remains at
the level forecast for 2018 in the Commission winter 2017
forecast adjusted by the costs of ageing that are taken from
European Commission (2015). For more details see European
Commission (2017).
Source:
European Commission
Fiscal sustainability risks are exacerbated by a
projected fall in pension adequacy ratios.
The
projected pension replacement rate in the long run
is very low. The amount of the projected pension
in 2050 does not exceed one fourth of a person's
last salary (see Section 3.3). Transposing these
assumptions into today's framework, suggests that
the pension benefit of those earning the average
salary (around PLN 4,600 gross in December
2016) would be close to the minimum pension of
18
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3.1. Public finances and taxation
PLN 1,000. Simultaneously, according to the latest
official data (GUS, 2016), 66 % of employees
earned salaries lower or equal to the national
average (
12
). This suggests that the government
may have to support the pension system for about
half of beneficiaries in order to avoid their pension
benefits falling below the minimum level. This
would result in additional fiscal costs. Moreover, it
cannot be ruled out that such a low replacement
rate may be perceived as unsustainable – requiring
either the statutory retirement age to be increased
sharply or the pension system to be supported by
significant additional fiscal means.
No material changes were made to special
pension regimes in 2016.
The special pension
regime for farmers (KRUS) continues to benefit
compared to the general pension regime (ZUS).
This not only constitutes a fiscal burden (currently,
the KRUS subsidy amounts to around 1 % of
GDP), but may also hamper labour mobility (see
Section 3.3). Similarly, Poland has not yet tackled
the issue of the special pension regime for miners.
Fiscal framework
The credibility of fiscal rules has been affected
by their frequent past changes.
The most recent
modification of the expenditure rule (December
2015) adjusted the expenditure ceiling to the
medium-term inflation target of the central bank
and allowed for increased expenditure in the event
of one-off and temporary revenue measures. These
changes significantly raised the expenditure ceiling
given current inflation levels. This created
additional space for higher expenditure in the 2016
budget, as also underlined by the National Bank of
Poland (NBP, 2016b).
The Polish fiscal framework lacks a fully-
fledged, independent fiscal council.
Currently
Poland remains the only EU country (
14
) that has
not adopted a legal basis establishing a dedicated
fiscal council or assigned such a role to an existing
body. Some of the typical tasks of fiscal councils
are being carried out by various institutions, but
they are scattered and some are not covered. As a
result, amendments to the fiscal framework or
fiscal implications of important policy measures go
largely unnoticed even though they have
significant consequences for public finances (
15
).
In 2016, Poland announced plans to strengthen
its budgetary process.
These plans aim at
improving medium-term budgetary planning by
reforming the medium-term budgetary framework,
more closely linking annual budgeting to medium-
term planning, redefining the role of the
government and ministries, reforming the budget
classification of expenditure and incorporating
spending reviews in the budgetary process. Given
the current situation in which an effective and
efficient management and reallocation of funds
poses challenges, the reform has a potential to
substantially improve public finance management.
In particular, it may allow a better control of the
budget, including an earlier identification of
inefficient spending and facilitating the
reallocation of funds.
(
14
) In the Czech Republic the parliament works on the relevant
legislation.
15
( ) This is even more important in the context of the limited
parliamentary and public debate on the key fiscal measures,
as illustrated by the process of adopting the 2017 budget
law and the law lowering the statutory retirement age.
Numerical fiscal rules are robust, while the
medium-term planning plays a limited role.
Fiscal rules (debt and expenditure rules for almost
the entire general government as well as individual
spending limits for local governments) are the
strongest part of the fiscal framework in Poland.
One of the fiscal rules – limiting government debt
to 60 % of GDP – is embedded in the Constitution
which ensures its stability (
13
). The rule is
supplemented by so called prudential thresholds
specified in the Public Finance Act, defining
specific actions to be undertaken when the public
debt exceeds the thresholds of 55 % of GDP and
60 % of GDP. There exists also a medium-term
budgetary framework (called the Multiannual State
Financial Plan, MSFP). However its effectiveness
as an instrument for long-term planning is limited,
for example the budget for a given year can
include a deficit higher than the one specified in
the most recent MSFP.
(
12
) Data covering companies with more than nine employees,
with microenterprises generally paying lower salaries.
(
13
) National definition, lower by around 3pps than ESA
definition.
19
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3.2. FINANCIAL SECTOR
The banking sector remains stable, liquid and
profitable.
Over the past 18 months, system wide
capital continued to rise. The regulatory Core
Equity Tier 1 capital – a ratio that shows banks'
readiness to face shocks – reached 15.8 % at the
end of the first half of 2016, up by over 2
percentage points from end-2014. The loan-to-
deposit ratio of Polish banks continued to decline
and stood at 98.5 % at the end of June 2016
(3.2.1). Polish banks are funded mostly through
domestic deposits and benefit from a balanced
funding mix of retail and corporate deposits, which
made up over 58 % of the balance sheet total.
Longer-term wholesale funding reliance through
senior and subordinated bonds is low, at about 5 %
of the banks' aggregated balance sheet. The
profitability of the sector declined in 2015 but
broadly stabilised thereafter. Looking forward,
challenges to profitability include low interest rates
environment, the possible revision of the bank tax
and a proposal to deal with foreign currency
mortgages (currently under discussion).
The new tax on financial institutions has not
affected sector stability.
The asset tax on
financial institutions was introduced in February
2016 and is one of the highest bank sector levies in
Europe. To date, the tax is calculated on the basis
of an end-month value of taxable assets, which, in
the case of banks, excludes own funds and Polish
sovereign bond holdings. Although receipts from
the tax are not meeting budgeted revenue, the
feared economic and financial stability effects of
the levy are so far limited. Nevertheless, at the turn
of 2015 and 2016 banks have substantially
increased their holdings of Polish sovereign bonds,
a by-product of the bank levy. As a result, local
lenders have overtaken foreign investors as the
biggest holders of PLN denominated bonds, for the
first time since 2010.
The ongoing discussion on foreign currency
mortgages is nearing a conclusion.
Foreign
currency mortgages do not generate systemic risks
for the banking sector in Poland. At system level,
these loans represent about 8 % of the aggregated
balance sheet and account for less than 40 % of the
mortgage loan book. However, some banks still
have a sizeable mortgage loan book denominated
in foreign currency, which has dual consequences.
On the one hand, some banks are exposed to
valuation and compensation losses should their
loan book be converted into the domestic currency,
either through legislation or court judgement. On
the other hand, a sizeable foreign currency-
denominated position forces lenders to rely either
on a foreign parent bank, foreign currency bonds
or the derivative market for funding. The absence
of foreign currency deposit funding is apparent
from the loan-to-deposit ratio in foreign currency,
which reached a level of 250 % at the end of June
2016, more than twice the same ratio for the
domestic currency.
Table 3.2.1:
Financial soundness indicators, all banks in
Poland
2014
5.4
64.1
98.3
13.7
9.4
1.0
2015
5.0
61.6
97.2
14.5
7.7
0.9
2016Q2
5.0
62.0
96.8
15.1
-
-
(%)
Non-performing loans
Coverage ratio
Loan to deposit ratio
Tier 1 ratio
Return on equity
Return on assets
Source:
ECB
Ownership changes see an increasing role of the
State in the shareholding of domestic banks.
As
in all four Visegrad countries, the development of
the Polish economy over the past two decades was
based on attracting foreign direct investment (FDI)
to support economic growth and the development
of various industries. Foreign investors brought
capital, increased access to funds and financial
intermediation in an economy that is still catching
up with the core EU economies. In Poland, the
ratio of foreign-owned banks amounted to about
65 % between 1998 and 2008. After the outbreak
of the crisis in 2008, this share gradually decreased
and reached 49 % in 2016, taking into account the
acquisition of Pekao SA shares by PZU SA. On the
one hand, this trend is a natural result of the
growing importance of domestic enterprises
increasingly able to compete on international
markets. On the other hand, the government has
signalled its readiness to purchase foreign-owned
credit institutions. As a result a growing proportion
of lenders is controlled by the Polish State. With
the acquisition of Pekao SA by PZU SA, the share
of direct and indirect state-controlled banks has
increased to 36 % of the sector's total assets. In
addition, the two largest banks will be under direct
or indirect state control. It remains to be seen how
the state ownership will influence the sector (see
Box 1.1 in Section 1).
Credit institutions support the country's
economic performance through balanced loan
20
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3.2. Financial sector
growth.
The pace of loan growth to the private
sector has been broadly in line with nominal GDP
growth. The increase in loans to non-financial
corporations has decelerated during 2016 possibly
reflecting investment slowdown (see Graph 3.2.1
and Section 1). The ratio of non-financial
corporation loans to GDP remained stable at about
51 %. Many firms finance working capital needs
and smaller operations either through own funds or
the use of some alternative means of funding
business (intercompany loans, leasing, factoring).
Poland’s capital market is the largest and most
developed in central Europe.
Total market
capitalisation amounts to EUR 150 billion, about a
quarter of Poland's GDP. The Warsaw Stock
Exchange has become a hub for foreign
institutional investors targeting equity investments
in the region. In addition to the equity market,
Poland has a special wholesale market dedicated to
the trading of treasury bills and bonds – Treasury
BondSpot Poland. This treasury market is an
integral part of the Primary Dealers System
organised by the Finance Ministry and part of the
pan-European bond platform. All wholesale
treasury bonds and bills denominated in PLN and
some securities denominated in EUR are traded on
the Treasury BondSpot market, while most non-
government bonds, now worth about EUR 18
billion, are traded on Catalyst, a Warsaw Stock
Exchange managed platform.
The capital market is an important source of
funding for Polish companies.
Companies raise
slightly more funds on the stock market (17 % of
GDP) than they receive from bank loans (16 % of
GDP). The role of corporate bond issuance is also
relatively high compared to other countries in the
region, with the total value of outstanding bonds
corresponding to 5 % of GDP. Yet, Polish non-
financial corporations are in general less leveraged
than all companies on average in the EU. Also, the
venture capital market is lagging behind, with total
investment of this type reaching only one fifth of
the EU average level. Besides financial market
funding, the annual gross operating surplus of
Polish firms (26 % of GDP) is higher than on
average in the EU, suggesting that companies have
the capacity to finance investment from retained
profits.
Graph 3.2.1:
Annual credit growth rates
16
14
12
10
8
6
4
2
0
-2
%
(1) Index of notional stocks, only transactions are taken into
account, the results of revaluations, reclassifications are
excluded
Source:
ECB
Poland is a large insurance market in the
region.
With over EUR 13 billion in underwritten
premiums and close to EUR 1.3 billion in profits
the Polish insurance sector represents nearly 40 %
of the Central and Eastern European market. The
top five insurers represent about 58 % of the life
insurance market, dominated by the publically-
owned PZU Zycie SA. The concentration ratio of
the top five insurers in the non-life segment is
slightly higher at 70 %, with PZU SA occupying
34 % of the market. Competition in the market is
high and profitability levels are forecast to be low
in 2016-2017. The sector performed well in the
recent stress test carried by the European Insurance
and Occupational Pensions Authority and remains
stable and profitable.
Bank supervision and macro-supervision may
be merged.
Over the crisis years Poland's financial
supervision proved to be prudent and forward
looking, ensuring a stable banking sector (see
above). Discussions continue on some form of
merging financial supervision with the NBP. The
reasons given for this are synergies between the
micro-supervision of banks and macro-supervision
of the banking sector. A continuous, efficient and
independent supervision function is key, also in
light of the ongoing restructuring process in the
financial sector.
21
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Loans private sector
Loans to households
Loans to NFC
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3.3. LABOUR MARKET, EDUCATION AND SOCIAL POLICIES
Labour market
Labour market conditions have improved
significantly but labour force participation
remains low for some groups.
Following a
substantial and steady improvement over the last
decade the employment rate stood at 69.7 % in Q3-
2016 (for the 20-64 age group) slightly below the
EU average of 71.5 %. The gap is mainly due to
the significantly lower participation rates of
specific groups (see Section 1). As outlined in the
previous country report for Poland, the lower
labour market participation of older workers is
linked to low skills and educational attainment
levels (European Commission, 2016a). The
employment rate of disabled people has hardly
changed in recent years, further widening the gap
with the gradually increasing employment rate of
people without disabilities. Barriers to geographic
mobility also reduce employment and activity.
A gender gap in employment is related to early
retirement, limited access to care facilities, and
disincentives in the tax and benefit systems.
Female participation and employment rates
continued to rise in 2015 and 2016, and for the 55-
64 age group both increased faster than they did
for men. Still, the gender employment gap
widened and, at 14.5 pps. for the 15-74 age group
in Q3-2016, was 3.5 pps. above the EU average.
This was driven by women’s longer participation
in formal education and earlier retirement.
However, the gender gap also widened and was
particularly high in the 25-29 age group, a
situation that is likely to be linked to young
mothers’ prolonged periods of labour market
withdrawal. The low participation of women and
notably mothers may be related to insufficient use
of childcare (see education subsection) and a fully
transferable parental leave, which encourages
women, as second earners, to stay out of the labour
market. Another important factor is the design of
financial support for families that provide
long-term care to family members; in practice, it
discourages the taking up of any paid employment.
Migration plays an increasingly important role
in the Polish labour market.
Following
significant emigration, especially in the years after
EU accession, the number of Polish citizens
residing temporarily abroad remains high
(estimated at around 2.4 million at the end of 2015
(
16
)). There is little evidence of emigrants returning
in significant numbers. At the same time,
temporary immigration, mostly from Ukraine, and
to a lesser extent from Belarus and other countries,
is an increasingly important phenomenon (
17
).
The special pension regime for farmers has had
an impact on labour mobility and undeclared
work.
The special social insurance system for
farmers (KRUS) is among the reasons for low
labour mobility and hidden unemployment in
agriculture. Some KRUS design features, e.g. the
conditions of transitioning from KRUS to the
general pension system, discourages farmers
working on low-productivity farms to take up
registered employment in other sectors. Average
old-age and disability benefits from KRUS are
close to the poverty threshold and often constitute
the main source of income, especially for single
beneficiaries. This limits the anti-poverty function
of KRUS and explains the geographical
concentration of at-risk-of-poverty households in
rural areas. At the same time, no durable systemic
solutions are in place to exclude high-income
farmers from the scheme (European Commission,
2016a).
Several recent measures may further reduce
labour force participation.
Lowering the
statutory retirement age in late 2017 is expected to
lead to some older workers withdrawing from the
labour force. The new child benefit may have a
negative effect on the labour market participation
of parents, mostly women. This applies
particularly to the low-skilled because of two
factors: first, the means-testing applicable to the
benefit for the first child may make some
households choose to reduce working hours to
lower their labour income and, second, the
increase in household income may tilt some
parents’
preference
for
leisure
time.
Microsimulation modelling results suggest the
incentives to work can decrease the strongest for
parents of two or more children and single
(
16
) An indicative measure: the number of people who retained
their registration in Poland but reside abroad for more than
3 months.
(
17
) The majority of immigrants work on the basis of the so-
called simplified procedure, which requires them to return
to their country of origin after 6 months, making the exact
assessment of the number difficult. Indirectly, the number
of issued visas could be used as an indicator. In 2015,
925 000 visas type D with working permit were issued,
while 2016 saw another sharp increase in this number.
22
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3.3. Labour market, education and social policies
mothers (
18
). Surveys on intentions to work also
confirm the risk of inactivity (Work Service,
2016). The government’s
ex-ante
impact
assessment of the programme did not address this.
From September 2016 the obligation for
five-year-olds to attend preschool was removed.
This could induce some parents to stay at home
with their children for one more year; in particular
in families with low incomes (see also European
Commission, 2016a).
A significant increase of the minimum wage
may reduce in-work poverty and have a small
negative effect on employment.
The minimum
wage increased by 8 % in nominal terms in
January 2017, up to PLN 2000 per month. For
recent graduates taking up their first job, the
increase was as high as 35 %. The minimum wage
rise was higher than what was originally proposed
by social partners. The ratio of minimum to
average wage is now at around 47-48 % and some
10-15 % of employees earn close to the minimum
wage. Its increase may have a small negative effect
on employment for vulnerable groups and could
trigger shifts to non-standard labour contracts
(Kaminska and Lewandowski, 2015). On the other
hand, it could contribute to poverty reduction, in
particular in-work poverty.
Job creation in 2015-2016 was driven by hiring
on permanent contracts, but the proportion of
temporary employment remains high.
At 27.3 %
in the third quarter of 2016 (for the age group 15-
64) Poland continues to have a very high
proportion of fixed-term employment (
19
). This is
particularly true for young people aged 15-24. A
significant proportion of all temporary workers
have civil law contracts, rather than usual labour
code contracts. As highlighted in the previous
country reports for Poland, high levels of labour
market segmentation can hamper productivity and
human capital accumulation (see European
Commission, 2016a). However, since early 2015
permanent employment has been rising strongly.
(
18
) Tax-benefit microsimulations conducted by the European
Commission Joint Research Centre using the Euromod
model. See also Myck (2016).
(
19
) The temporary employment category covers a broad range
of agreements, from fixed-term regular labour code
contracts, to various civil law contracts, to informal work
without a written contract.
Measures have been taken to reduce
segmentation, but the use of open-ended
contracts remains discouraged.
Obstacles to
wider use of permanent contracts include in
particular high implicit costs associated with
lengthy and uncertain dispute resolution
mechanisms, the special protection against
dismissal for certain categories of workers (
20
), the
heavy reinstatement obligations in case of unfair
dismissal and the lack of differentiation in
protection against dismissal in large and small
firms. Two codification committees, which include
representatives of the government, experts and
social partners, were set up to prepare new draft
individual and collective labour codes by early
2018(
21
).
Some features limit the overall high flexibility
of the labour market.
Non-EU nationals can be
employed on a temporary basis with very limited
formalities. The ease of arranging atypical work
contracts, i.e. other than open-ended contracts
based on the labour code, also contributes to
flexibility. On average, Poland also appears to
have not very strict employment protection
legislation (Box 2.2.1 in European Commission,
2016a). However, the use of part-time employment
arrangements is limited (only 6.9 % of all
employed in 2016-Q3, one-third of the EU
average). This limited flexibility in terms of
working time arrangements may be particularly
problematic for older workers or people with care
obligations (often women).
Education
Educational performance has remained strong
over recent years.
Poland is one of the best EU
performers on reducing the number of early school
leavers at 5.3 % in 2015, compared to the EU
average of 11 %. Overall performance in basic
skills remains strong in comparison to other EU
countries (OECD, 2016b). Following a substantial
improvement in average results of the Programme
for International Student Assessment (PISA)
between 2000 and 2002 and then again between
(
20
) Including older workers with less than four years until
retirement age, but also e.g. workers during their absence
(leave or sick leave, pregnancy and maternity/paternity
leave), trade union activists and other particular categories.
(
21
) In addition, the Social Dialogue Council has been operating
since October 2015 and can create an opportunity for social
partners to play a bigger role in shaping the labour code.
23
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3.3. Labour market, education and social policies
2009 and 2012, in 2015 the performance of Poland
in PISA worsened somewhat in all fields, and
especially in science. However, the country still
scored above both the EU and OECD averages in
all areas tested. The impact of socioeconomic
status on performance was rather limited and has
continued to fall since 2006 (OECD, 2016b).
The school system overhaul from September
2017 onwards raises a number of concerns
among stakeholders.
The key change phases out
lower secondary schools, practically returning to
the pre-1999 structure. This policy change has
raised concerns among many stakeholders,
including teachers, local governments, and
educational researchers. Two main risks have been
indicated. First, earlier tracking into either the
general or the vocational stream could negatively
affect the basic literacy and numeracy skills of the
most disadvantages students (IBE, 2014).
Evidence suggests that extending common general
education in 1999 played a role in improving the
performance of the weakest students in the PISA
survey between 2000 and 2012 (Sitek, 2016;
Jakubowski et al. 2016). Second, significant
changes in the organisation of the schools are
likely to have disruptive and long-lasting effects
on the organisation of education provision. In
particular, a strong variation in the size of school
cohorts is projected, especially at the upper
secondary level (Graph 3.3.1). There is also a risk
of suboptimal use of certain past investments in
lower-secondary schools. Changing the school
system does not appear to address the underlying
weaknesses of Poland’s education system and its
rationale does not seem to be based on
recommendations stemming from existing research
and comprehensive evaluation.
Participation in early childhood education and
care has increased but challenges remain in
quality and inequalities of access.
Since 2008,
the number of pre-schools has increased by around
40 %. At present, all four- and five-year-olds are
entitled to a preschool place and from September
2017 this right will also be extended to three-year-
olds. Abolishing the preschool obligation for five-
year-olds may weaken the educational chances of
children from socially disadvantaged backgrounds.
Formal childcare enrolment for children under the
age of three remained among the lowest in the EU.
Graph 3.3.1:
Projected size of student cohort starting the 1st
grade of general upper secondary schools
400
thousand
350
300
250
200
150
100
50
0
2016 2017 2018 2019 2020 2021 2022 2023 2024
(1) Simulations based on the assumption that the share of
students choosing this type of school (liceum) remains at the
average level observed during the period 2015-2016.
Source:
European Commission's calculations based on
Education Information System (SIO) data
The government has launched consultations on
the higher education reform to improve quality
and labour market relevance.
The tertiary
education attainment rate has increased rapidly
over the last 15 years. In 2015, it stood at 43 % in
the 30-34 age group, above the EU average of
39 %. A new algorithm for financing higher
education institutions will be implemented from
the academic year 2017/2018, with an aim to
strengthen the incentives for teaching quality.
Wide-ranging consultations on the planned broader
reforms have started including with academics and
researchers (see Section 3.5). The new law on
higher education is expected to enter into force in
the 2018/2019 academic year.
The average level of older adults’ basic skills is
low, hampering their employability.
In the
OECD Survey of Adult Skills (PIAAC), scores
testing the numeracy of Polish adults were on
average lower than for their OECD peers (OECD
2016c). In terms of basic digital skills, Poland
ranks only 26
th
among EU-28 Member States,
though slightly better for advanced digital
skills (European Commission, 2016c). Various
employers' surveys indicate increasing difficulty to
fill in vacancies (e.g. Manpower, 2016; NBP,
2016a). Migration also affects skill distribution in
the labour force, given that Polish emigrants are on
24
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3.3. Labour market, education and social policies
average better educated than the rest of the
population. At the same time, many immigrants to
Poland work below their qualifications.
Adults rarely engage in job relevant learning
and every third adult does not see the need for
further education or training.
In 2015, only
3.5 % of those aged 25-64 reported participation in
education and training in a month before the
survey, down from 4 % in 2014. The percentage of
adults (aged 25-59/64) who in 2014 reported
having learned to improve their competences in the
previous 12 months was at 31 %, only minimally
increased from 2012 (PARP, 2016). Participation
is lowest among people who could benefit the
most, i.e. those with basic levels of education,
those aged over 50 and those who are inactive. The
results of the recent initiatives such as the National
Qualifications Register and the Database of
Development Services remain to be seen.
The labour market relevance of vocational
education is still limited.
Vocational education
and training (VET) often does not provide students
with basic skills and key competencies. The OECD
PIAAC survey revealed that graduates of basic
vocational schools have insufficient literacy and
numeracy skills. At the same time, the results for
technical secondary schools are considerably better
than for basic vocational schools. Employment
rates of recent vocational school graduates were
still slightly below the EU average in 2015. Local
governments are often unsuccessful in putting in
place strategies linking VET with sectors of
strategic importance for regional development
(Brandt, 2016). The organisation of vocational
schools will change as part of the overhaul of the
school system in September 2017. The potential of
this change to address shortcomings of the VET
system remains unknown.
Poverty and social assistance
poverty is concentrated on those with fixed-term
employment contracts.
Social benefits provide little incentives to take
up work.
The social protection system, due to its
limited resources, used to have little impact on
poverty reduction (European Commission, 2016a).
It also did not sufficiently promote social
integration through take-up of economic activity,
although the extension of child tax credits in 2015
and the tapered withdrawal of family benefits from
January 2016 (‘zloty for the zloty’ rule) improved
the situation to some extent. Still, the system
provides few incentives to take up work, especially
for second earners (Kurowska et al, 2015).
The universal child benefit programme is
expected to reduce poverty and inequality but
raises questions in terms of cost-effectiveness.
It
is estimated that the benefit could reduce
inequality as measured by the Gini coefficient by
0.02 and the at-risk-of-poverty rate by 5.2
percentage points. In particular, the reform is
expected to considerably reduce poverty among
households with three or more children and among
single parents (
22
). The cost of the programme is
substantial, at around 1.2 % of GDP in 2017. Its
size and limited means-testing leads to overlaps
with other social benefits offsetting limited work
incentives built into these programmes, and raises
questions of cost-effectiveness. The government
has announced an impact assessment of the
programme in 2017.
Pensions currently provide an adequate
protection against poverty, but the change in
statutory retirement age will further cut future
benefit levels.
The relationship between pensions
and average wages was projected to fall steeply
even if the statutory retirement age was increased
to 67 years (Graph 3.3.2). The legislated reversal
of the retirement age increase will further erode
future pensions. Women would be most affected if
they choose to retire close to the new retirement
age of 60, which seems likely in light of
international evidence. For women retiring from
2040 onwards, the statutory retirement age will be
reduced by seven years compared to the current
situation. This will have major implications on
(
22
) The analysis is based on the tax-benefit microsimulations
conducted by the European Commission Joint Research
Centre using the Euromod model.
Poverty is declining fast but making work pay
remains a challenge in Poland.
The rate of
people at risk of poverty or social exclusion has
decreased significantly in recent years. At 23.4 %
in 2015 it was slightly below the EU average of
23.7 %. At the same time in-work poverty for
those above 18 stayed at 11.2 % in 2015 (1.7 pps.
above the EU average). This is true mostly for self-
employed people and in the agriculture sector.
Among employees, the incidence of in-work
25
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3.3. Labour market, education and social policies
pension levels given that retiring just two years
below 67 is projected to result in pensions that are
lower by around 10 % (
23
). A significant
proportion of women would then receive only a
minimum pension that - depending on its
indexation over the years - is likely to fall below
the poverty threshold. The government announced
also plan to introduce auto-enrolment into
occupational pension schemes.
Graph 3.3.2:
Projected pension replacement rates – the
impact of lowering of the retirement age
50
45
40
35
30
%
Healthcare
25
20
15
10
5
0
2010
2020
2030
2040
2050
2060
statutory retirement age gradually increasing to 67
Health outcomes stand below the EU average
with a potential impact on labour market
participation and poverty.
Life expectancy for
men and women and healthy life years for men are
below the EU average while infant mortality and
both amenable and preventable mortality are above
the EU average. Poland faces challenges to further
improving the cost-effectiveness of healthcare
spending. These challenges include strengthening
primary care, further development of co-ordinated
care, curbing the excessive use of specialist care,
improving cost-efficiency within the over-supplied
hospital care, improving governance including by
developing health-technology assessment for
medical equipment, and developing more
comprehensive public health policies (European
Commission/Economic Policy Committee, 2016).
Access to healthcare services remains an issue.
The system is characterised by low public
spending and few medical staff. In 2015, 7.8 % of
the population self-reported unmet healthcare
needs due to cost and distance, compared to the
EU average of 3.6 %. The authorities are trying to
improve access, for example by fast-track waiting
lists for cancer patients introduced in 2015 (
24
).
Staff shortages are particularly perceptible in some
regions and for some specialisations, hence
regional and sub-sectoral differences in care
availability are significant. The Ministry of Health
intends to increase public health expenditure up to
6 % of GDP by 2025.
Efforts are being made to tackle some existing
challenges.
The Ministry of Health has started a
mapping exercise of healthcare needs with an aim
to improve the efficiency of resource allocation.
Other plans such as the liquidation of the National
Health Fund, if implemented, could facilitate
governance but could lead to conflicts of interest
between different roles (regulator, payer and
provider) fulfilled by the same institution. It
remains to be seen whether changes in hospital
financing rules do not slow down the process of
hospital restructuring, impeding the needed
consolidation of the sector.
(
24
) Diagnostics and treatment within specified times is now
guaranteed, with no financing limits. Healthcare providers,
who ensure the timeliness and comprehensiveness of
healthcare services, face no financing ceilings.
reform reversal - return to 60/65 retirement age
(1) The replacement rate is a ratio between a first pension of
those retiring and an economy-wide average wage at the
retirement age.
Source:
Based on AWG (2013).
The system of long-term care has a number of
weaknesses.
Long-term care is predominantly
provided by family members who receive limited
institutional support and who are effectively
discouraged from reconciling employment and
care responsibilities. Formal care provision is very
low, reaching only 4.6 % of the dependent
population for home care and 3.4 % for residential
care. At 0.8 % of GDP, funding for formal care is
half the EU average (1.6 %). There is no efficient
integration between healthcare and social care
systems with regard to long-term care. With an
old-age dependency ratio expected to double from
22 % in 2015 to 45 % in 2045, long-care needs are
bound to increase substantially and securing
sufficient institutional support will be a challenge.
23
( ) Calculations based on scenarios developed in European
Commission and Social Protection Committee (2015).
26
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3.4. INVESTMENT
In 2016, the investment-to-GDP ratio fell below
the EU average.
This was driven by a significant
contraction of public investment activity (see
Section 1). However, private investment-to-GDP
ratio also declined in 2016, widening the gap to the
EU average. The outlook for only a gradual
investment recovery (see Section 1) implies a
projected widening of this gap (Graph 3.4.1).
Graph 3.4.1:
Public and private investment, 2006-2018
private investment activity appears to be related to
increased uncertainty (see Section 1), but this
factor could be transitory. Finally, there are several
structural barriers to investment (see Box 3.4.1).
Graph 3.4.2:
Investment by components as a % of GDP,
2006-2016
10
9
% of GDP
8
7
6
25
% of GDP
20
15
10
5
5
forecast
4
3
2
1
0
2006
2008
2010
2012
2014
2016
0
PL dwellings
PL other construction
PL equipment
PL other
EU28 dwellings
EU28 other construction
EU28 equipment
EU28 other
Source:
European Commission
PL public investment
EU28 public investment
PL private investment
EU28 private investment
Source:
European Commission
Several factors can explain the relatively low
private investment-to-GDP ratio.
In terms of the
composition of investment expenditure, Poland
differs markedly from the EU average (Graph
3.4.2). Housing investment is significantly lower
than the EU average, possibly reflecting different
preferences concerning current consumption
versus housing investment and existing barriers to
the development of the private rental market. In
addition, as compared with other EU countries,
low labour costs encourage a predominantly
labour-intensive development model for the
business sector, limiting investment. However, this
factor seems to be more than compensated by the
still low capital stock in Poland compared with the
EU average, which encourages investment.
Equipment investment is well above the EU
average reflecting the high share of industry in
gross value added and on-going technological
catching-up. Investment in intangible assets
(software, intellectual property rights and R&D) is
particularly low in comparison to the EU average
and to some other Member States that are in the
catching-up process (Graph 3.4.3). A recent fall in
Key determinants of future investment are
identified in the government's responsible
development strategy.
The government has
outlined its objective to raise the investment rate to
above 25 % of GDP by 2030, yet its sources
remain to be determined. The key enabling factors
include improving the investment climate, also for
foreign investors, a stable macroeconomic and
regulatory environment, high-quality corporate
governance, including in state-owned enterprises.
The government also explicitly acknowledges the
important role of the capital market. However, as
highlighted in various parts of this report Poland
faces significant challenges in many of these areas
and some policy measures taken in 2016 may
worsen the investment climate. These include the
threat to the rule of law (see Section 3.6),
instability of the regulatory environment, e.g. for
the renewable energy sector (see Section 3.5), risks
from fiscal sustainability and the governance of
SOEs (see Section 1).
Local governments play an important role in
public investment and their capacity matters
for effectiveness and efficiency of spending.
Around half of gross fixed capital formation by the
public
sector
is
undertaken
by
local
27
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3.4. Investment
governments (
25
) and investment expenditure stood
at around 20 % of their total expenditure in the five
years preceding 2016. In terms of share of GDP,
Polish local governments manage much higher
funds than the EU average (Graph 3.4.4). They
carry out large, infrastructure projects, which
requires relevant coordination, processing and
oversight.
Hence,
local
governments'
administrative, operational and management
capacity largely determines efficiency and value
added by investment projects.
Graph 3.4.3:
Gross investment in intangible assets as a %
share of total investment (2013-2015 average)
9%
8%
7%
much more private investment and focus on
smart specialisation strategies.
This change of
approach is expected to strengthen impact on
productivity growth and innovation in the
economy. It is expected that support will reach
nearly one third of Polish SMEs (excluding micro-
firms), cumulatively responsible for the creation of
one third of added-value and jobs in the Polish
economy. Poland started inducing further
investment through a complementary use of the
ESIF and the European Fund for Strategic
Investments (EFSI). The capacity of authorities, in
particular at regional level, to identify more value-
added projects and to embrace higher risks will be
important for this to maximise possible positive
effects. Generally, the administrative capacity of
managers handling infrastructure projects will be
critical to their successful implementation.
Graph 3.4.4:
Local government investment
6%
5%
3.5
4%
% of GDP
3
3%
2.5
2%
1%
0%
LV
LT
HU
PL
SK
EE
CZ
EU*
2
1.5
1
0.5
0
(1) EU* is a simple average for 21 countries for which data
are available. For some countries a shorter period is taken
for calculations
Source:
European Commission calculations
Structural funds strongly affect overall
investment performance.
Poland has fully used
the available funding for 2007-2013. At EUR 68
billion, EU transfers to Poland were among the
largest in Europe as a share of GDP (22 % of 2007
GDP). These funds significantly accelerated the
convergence processes by stimulating domestic
demand, boosting technological absorption and
improving connectivity. It is estimated that, in
2015, investment supported by Cohesion Policy
have increased the GDP level by around 4.3 %
compared to the counterfactual scenario of the
absence of the funding (Altus Consortium, 2016).
The 2014-2020 European Structural and
Investment Funds (ESIF) envisage mobilising
(
25
) In recent years, this ratio fluctuated between 45 % and
52 %.
European Union (28 countries)
Poland
Source:
European Commission (Eurostat)
The preparations for launching projects in the
2014-20 programming period are progressing
quickly.
By the end of January 2017 the value of
contracts signed amounted to EUR 18.8 billion
(EU share) representing about 22 % of the total
ESIF allocation for Poland. Poland’s Action Plan
for increasing effectiveness of EU funds envisages
higher volumes of certification in the coming
years. This creates the basis for future growth of
investment (see Section 1).
28
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3.4. Investment
Box 3.4.1:
Macroeconomic perspective
Investment challenges and reforms in Poland
The length of investment cycles in Poland appears to have shortened in recent years. After falling in 2012-
2013, investment activity rebounded strongly in 2014-2015 before falling again in 2016. These swings were
driven by a combination of factors, including changing overall macroeconomic conditions and outlook, a
changing perception of uncertainty and risks, and peaks and troughs of using EU structural funds. A
recovery in investment is expected from 2017 onwards, but its pace remains uncertain. Public investment is
expected to rebound more strongly as the calendar of the EU funds programming perspective puts pressure
on Poland to accelerate spending. In contrast, the rebound of private investment will hinge on the
development of expectations concerning macroeconomic stability and the policy and regulatory
environment. For more information on the investment trends in Poland, please see Section 3.4.
Assessment of barriers to investment and ongoing reforms
Regulatory/ administrative burden
Public administration
Public
administration/
Public procurement /PPPs
Business
Judicial system
environment
Insolvency framework
Competition and regulatory framework
Labour
market/
Education
Legend:
EPL & framework for labour contracts
Wages & wage setting
Education
CSR
Sector
specific
regulation
Financial
Sector /
Taxation
R&D&I
Financing of R&D&I
Business services / Regulated professions
Retail
Construction
Digital Economy / Telecom
Energy
Transport
CSR
CSR
Taxation
Access to finance
Cooperation btw academia, research and business
No barrier to investment identified
CSR
Investment barriers that are also subject to a CSR
No progress
Limited progress
Some progress
Substantial progress
Fully addressed
In addition to macroeconomic conditions, Poland's investment climate is also affected by a number of
barriers in various policy areas. Some reforms were adopted in the areas of regulated professions, public e-
services for companies and skills mismatch. However, some barriers remain and reform measures to address
them are still to be taken. These are:
1. Inefficiencies and low stability in the regulatory environment. These include changes in the field of
taxation (e.g. fast-track introduction of sectoral taxes, on-going discussions on and implementation of
measures related to VAT, corporate and personal income taxes), lack of an updated, long-term strategy for
the energy sector, and regulatory changes (legal amendments significantly changing the conditions for the
renewable energy sector) or lack of spatial development plans in many areas. Some of these obstacles may
be addressed by ongoing legislative work (see Sections 3.5 and 3.6).
2. Deficiencies in the quality of existing infrastructure, such as railway, roads and energy networks diminish
potential investment gains. The last few years witnessed a rapid improvement in the quality of roads, and to
a lesser extent also railways, but bottlenecks in the implementation of investment projects persist. The strong
support of EU funds, however, offers an opportunity to speed up the development of infrastructure to match
investment needs (see Section 3.5).
3. Weak links between academia and the business sector and the quality of science are crucial barriers to e.g.
the development of in-house R&D activities and for investment in knowledge-intensive areas. The
government has launched a revision of the legislative R&D framework (see Section 3.5).
29
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3.5. SECTORAL POLICIES
R&D and innovation
Highly-cited publications , 2013
(2;3)
Poland’s research and innovation performance
has marginally improved over the last decade.
R&D intensity increased from 0.6 % of GDP in
2007 to 1 % of GDP in 2015, which is still below
half of the EU average. The government is
committed to reaching the EU2020 national R&D
intensity target by 2020 (1.7 % of GDP). Poland´s
performance in all dimensions of the European
Innovation Scoreboard remains below the EU
average (EIS, 2016). R&D investment in Poland
currently relies predominantly on public financing,
with important support provided by the European
Structural and Investment Funds (ESIF).
Boosting innovation in the business sector
remains a key challenge for Poland.
Despite
recent increases, business enterprise expenditure
on R&D (BERD) remains one of the lowest in the
EU, although non-R&D expenditures significantly
exceed the EU average. R&D outlays of foreign
firms accounted for a large part of the rise in the
overall BERD in Poland. BERD dynamics in
recent years does not match the increases in
availability of public co-funding, as distributed by
NCBiR. (
26
). The 2016 ‘White Paper on
Innovation’ sets out legislative and organisational
proposals to improve the business environment for
innovation (MNiSW, 2016). Two new laws on
innovation will be entering into force in 2017 and
2018. As from 2016, companies benefit from new
R&D tax incentives. Although it is too early to
assess the uptake of these incentives, their
availability and size have been already extended in
2017, when the first Act on Innovativeness entered
into force (see Box 3.6.1 on Selected highlights).
A limited commercialisation of research results
and weak science-business links limit the
innovative capacity of the economy.
Recent
counts of joint patent applications and co-
publications are insignificant, as is the number of
enterprises declaring cooperation with scientific
organisations. The share of R&D expenditures in
higher education and research institutions funded
by business enterprises is also subdued (EIS 2016).
Poland is catching up in numbers of business
enterprise researchers. Work is on-going to
(
26
) Given the recognised issue of the BERD underreporting,
the data do not allow for full analysis of the public R&D
support effectiveness; for more details see: Klincewicz et
al. (forthcoming).
introduce a new legal framework to better adapt
academia to market needs (see Section 3.3. on
education).
Graph 3.5.1:
Highly-cited publications vs public R&D
intensity
16
UK
14
BE
12
IE
LU
AT
DE
SE
FI
EU
10
NL
DK
FR
CY
EL
IT
ES PT
8
MT
SI
CZ
HU
LV
SK
RO
PL
HR
LT
EE
6
4
BG
2
0.2
0.4
0.6
0.8
1.0
1.2
Public R&D intensity,
2013
(1)
(1) Values of public R&D intensity for Ireland and Sweden
are estimated or provisional;
(2) Scientific publications within the 10 % most cited scientific
publications worldwide as % of total scientific publications of
the country;
(3) Fractional counting method;
Source:
European Commission (European Innovation Survey)
Despite measures taken, strengthening the
quality of science and its internationalisation
remains a key challenge.
The quality of scientific
activities in Poland is still far below EU standards.
With only 5.0 % of Polish scientific publications
among the 10 % most-cited worldwide Poland
ranks 24th in the EU (Graph 3.5.1). Only two
Polish universities were included in the 2016
Academic Ranking of World Universities (and
both were in the last five hundred). Poland ranks
26th and 27th in the EU in terms of the number of
PhD graduates and non-EU PhD students,
respectively. Recent initiatives (e.g. Pact for
Horizon
2020)
are
to
support
the
internationalisation by e.g. moving the evaluation
focus from the quantity to the quality of
publications. Moreover, The Strategy for Science
and Higher Education comprises three key pillars
of reforms, focusing on higher education and
science system (‘Law 2.0’), science's links with
business and its societal impact. The first elements
of the reforms came into force in October 2016.
Reform of the Higher Education Sector is being
30
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1728538_0034.png
3.5. Sectoral policies
prepared with the Horizon 2020 Policy Support
Facility (
27
).
Although R&D is increasingly regarded as an
engine of long-term economic growth, the
effective design and implementation of policies
remains challenging.
The government has
launched a comprehensive revision of the whole
strategic and legislative R&D framework, as
presented in the Responsible Development Plan.
The Plan identifies the economy’s limited capacity
to innovate as one of five major growth barriers in
Poland and includes a number of measures to
overcome barriers to innovation. It proposes a
stronger thematic focus of R&D investment by
prioritising national and regional smart
specialisations. The delivery of this complex
revision of the whole R&D framework, will be
challenging in terms of avoiding discrepancies
between
policy
concepts
and
their
28
implementation ( ) and limiting overlaps between
numerous support measures.
Infrastructure and network industries
transport in cities is characterised by a very high
share of vulnerable users like pedestrians and
cyclists among all fatal victims of road accidents.
In 2015, pedestrians and cyclists accounted for
42 % of all people killed in road accidents, both in
and outside cities, much above of the EU average
of 29 %.
Despite the significant availability of EU funds,
the railway sector continues to face major
bottlenecks
in
project
implementation.
Significant agglomeration railway lines are still
awaiting modernisation to allow more passenger
traffic. Rail freight remains uncompetitive, with a
daily average speed as slow as 27 km/h, and main
modernisation projects are being further delayed.
Infrastructure (track access) charges remain
relatively high and cover the entirety of the rail
network, while only a fraction of road network is
subject to them. Cumbersome legal, financial and
administrative procedures linked with bottlenecks
within the railway infrastructure manager (PKP
PLK S.A.) still persist and lead to project delays
and insufficient investment.
Structural challenges in the rail sector remain.
Compared to the road sector, problems with
national co-funding for EU railway projects seem
to remain systemic. Equally, the effectiveness of
the railway infrastructure manager remains
subdued despite numerous restructuring attempts.
All this contributes to a very slow progress on
using the 2014-2020 EU funds in the railway
sector, with key contracts still to be concluded. In
light of these deficiencies, the timely spending of
earmarked budget and avoiding investment
bottlenecks at the end of the programming period
might be challenging. In addition, ensuring the
long-term effects of the current investment is
uncertain due to a lack of clarity if the long-
awaited multi-annual railway infrastructure
maintenance programme is introduced.
Energy
The road network continues to develop with the
strong support of EU investments.
In 2015-2016,
115.8 km of new or modernised motorways and
expressways were built. The EU funds allocation
for Polish roads in 2014-2020 is EUR 15 billion.
Moving further from public funding towards new
financial schemes remains challenging. Mobilising
additional private financing would enable Poland
to concentrate public funding on the parts of the
network that are key to ensuring territorial
cohesion and cross-border connections.
Poland’s road fatality rate remains well above
the EU average and is of a particular concern
for vulnerable users in urban areas.
Currently,
with 77 deaths per million inhabitants against 51.5
on average in the EU as a whole, addressing road
fatalities is a pressing challenge in Poland. At
municipal level, the high rate of road accidents and
fatalities is accompanied by increasing congestion,
which is due to the development of individual
motorised transport. The preference for such
transport also generates negative safety loopbacks;
(
27
) Policy
Support
Facility
website,
https://rio.jrc.ec.europa.eu/en/policy-support-facility
(
28
) For example the recent amendments in the Act on Research
Institutes withdraws, among others, the requirement of
open procedures for the directors' post.
Poland is among the most energy-intensive EU
economies, but improvements in energy
efficiency have also been among the fastest.
Strong economic growth over the last decade
implied that, despite reduction of primary energy
intensity, Poland was among few Member States
that did not reduce their final energy consumption
since 2005. The energy intensity remains high in
31
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1728538_0035.png
3.5. Sectoral policies
all final energy consumption sectors. Potential for
significant energy efficiency gains exists in
residential buildings (some 70 % of houses are
poorly insulated) as well as in the transport sector,
with Poland having one of the oldest passenger
cars fleets in Europe.
Polish power generation is heavily coal-reliant,
ageing, and risks being insufficient to match the
projected growth of electricity demand.
Still,
around 60 % of the installed fossil fuels capacity is
older than 30 years implying significant
investment for modernisation and extension of the
power infrastructure in coming years. Around,
80 % of power generation is still coal-fired. The
use of domestic coal has benefits for the security
of supply but ensuring economic sustainability
remains challenging. Poland is currently
restructuring its mining sector but a number of
mines may prove to be unprofitable in the context
of low global coal prices. Several Polish generators
have plans for new coal-fired generation units (up
to over 3GW of capacity). In the long term, this
may expose the sector to volatility of allowances
prices under the EU Emissions Trading System
(ETS). An update of the long-term vision for the
Polish energy system is missing.
Achievement of the binding national 2020 target
for renewable energy is at risk.
According to
government plans, 4 GW of additional capacity (as
compared to 2014 data) are to be installed in the
electricity sector by 2020 (
29
).The remaining
investment demands legal certainty and a stable
investment framework. In 2016, framework
conditions have, however, worsened as a result of
a long delayed revision of the Renewable Energy
Law introducing first auctions for new capacity
and a new law on investment in on-shore wind.
The latter creates prohibitive conditions for
establishing new wind farms, new burdensome and
costly administrative requirements for existing
installations, and a high degree of legal uncertainty
concerning several new provisions (notably
taxation). Consequently, the law entails significant
losses for generators engaging in new projects and
the banks underwriting them.
(
29
) 2015 update of the Polish National Renewable Energy
Action Plan. In 2010-2014, 2.7 GW wind capacity was
installed, but this dynamic development has now come to a
halt.
Securing energy interconnectivity remains
crucial.
Following the launch of the LNG
terminal, Poland has significantly improved its
security of gas supply. The country also developed
its national gas transmission and distribution
network. However, work on gas interconnectors of
regional importance has not advanced according to
the timetable (
30
). For the electricity sector, in 2016
the interconnection level was 4 % — the lowest in
the EU, exposing Poland to a risk of supply
shortages. The LitPolink electricity connection
with Lithuania became operational in 2016 and
improved the situation, but reaching the goal of
10 % of production capacity by 2020 seems
challenging. The current national arrangements for
congestion management and bidding zone
definition in central Europe do not necessarily
reflect actual congestion accurately. This is leading
to increasing limitations on cross-border flows of
electricity and there is no joint regional solution
agreed by all affected neighbouring countries.
Polish energy markets are becoming more
competitive, although progress is uneven.
In
recent years, the Polish electricity wholesale
market has become increasingly competitive, but
the gas wholesale market remains relatively
closed. Wholesale electricity prices are slightly
higher than in most neighbouring central European
countries. In 2015, wholesale gas prices were
comparable to those of neighbouring central
European countries, but higher than in Germany
and Austria. On the retail markets, Poland
continues to regulate electricity and gas prices for
households and gas prices for companies. The gas
retail market is dominated by the incumbent
company. On the retail electricity market, the
supply is dominated by regional power suppliers
with low competition pressures between and
within the regions.
Climate and environmental issues
Poland is well on track to deliver on the target
for greenhouse gas (GHG) emissions in sectors
outside the Emissions Trading System.
In 2014,
Poland’s non-ETS emissions increased by 2 %
compared to 2005 and the country already
(
30
) Notably the gas interconnector Poland – Lithuania (GIPL)
and the gas interconnectors Poland – Czechia (Stork II) that
are critical for the establishment of the North-South gas
corridor, are delayed.
32
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1728538_0036.png
3.5. Sectoral policies
performed better than the interim target for 2014
(+10 %). According to national projections, Poland
will reach its 2020 target by a wide margin,
achieving only a 6.5 % increase against a +14 %
target. Transport emissions in Poland still remain a
source of major concern, as emissions and energy
consumption from transport have increased in
recent years.
Poland does not yet use environmental taxes to
stimulate a more efficient energy usage and a
reduction of GHG emissions.
The implicit tax
rate on energy and fuels remains comparatively
low in Poland. There is a number of tax
exemptions (e.g. agriculture and energy-intensive
industries) and environmental taxes are not
automatically indexed. Vehicles' taxation in
Poland is not linked to environmental performance
(CO2 emissions).
Air quality continues to be a major concern,
with air quality standards among the lowest in
the EU-28.
Poland has not yet taken sufficient
measures to limit the emission of pollutants from
its main sources, which include heating of
individual houses by obsolete boilers and low-
quality coal. In 2014, the EU air quality standards
were often severely breached by pollutants mostly
emitted via the combustion of solid fuels,
including, e.g. emissions of particulate matter and
benzo[a]pirene limits (Graph 3.5.2). The recent
evidence confirms a further deterioration, with an
increasing number of premature deaths per year
associated with bad air quality in Poland (EEA,
2016).
Graph 3.5.2:
Annual average concentrations of
benzo[a]pirene (BaP) in 2014 in ng/m³
≤0.12
0.12-0.4
0.4-0.6
0.6-1
1-1.5
>1.5
no data
1
Source:
European Environment Agency
Waste management has improved, although the
separate waste collection system for all
municipalities is not yet launched.
In 2014, at
16 % the incineration rate almost doubled in
comparison with the previous year. Also the
recycling rate increased to 21 % (from 16 % in
2013) though still remains well below the EU
average of 28 %. The recently adopted Ministry for
Environment regulation setting out common
requirements for the collection of five waste
streams (paper, glass, metal, plastic and biowaste)
for all municipalities is expected to significantly
improve the quality of recyclables and their
economic value.
Box 3.5.1:
Selected highlights in Poland
In the years 2012- 2014, the country-specific recommendations for Poland recommended increasing the
intensity of private research and development (R&D) expenditures via the introduction of R&D tax
incentives. The Polish government addressed this challenge in a series of legislative measures. As from
January 2016 a new system of R&D tax incentives operates in Poland which has increased the deduction
rates for labour cost and other R&D costs. As of 1 January 2017, a further significant change to the design of
R&D tax credits was made, which increased their availability and size, (according to the first Act on
Innovativeness), expanded the deduction period, proposed new eligible cost categories and proposed
additional incentives for start-ups like cash refunds for start-ups conducting R&D activities. Currently, a
second innovation law is being prepared on the basis of the White Paper of innovation (published in
September 2016). This was developed by representatives of science, business and public administration, in
view of proposing more attractive tax incentives as from 1 January 2018. To date, the more R&D-friendly
tax regulations have been already been appreciated by the business sector and are expected to trigger
proportional increases in BERD.
33
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3.6. PUBLIC ADMINISTRATION
Regulatory business environment
The ease of doing business in Poland has been
gradually improving.
The country ranked 24
th
in
the 2017 World Bank ‘Doing Business’ report, an
improvement of one position compared to 2016.
This is mainly due to the introduction of the new
insolvency law, faster procedures for property
registration, and amendments to the construction
law. Poland fell in the 2017 World Bank report
rankings on setting-up firms (from 84
th
to 107
th
place) and protection of minority shareholders
rights (World Bank, 2016a). The government has
plans to further simplify certain business
procedures with a range of proposals put forward
within the Strategy for Responsible Development.
The quality of the regulatory framework
continues to be a weak element in the otherwise
generally favourable business environment.
This positive environment has been supporting
strong economic growth over the last years.
International rankings, such as the Global
Entrepreneurship Index identify key strengths
including export performance, human capital
development, delivering innovative products and
the size of the capital market (Global
Entrepreneurship Development Institute, 2016). In
contrast, the quality of various regulations and
institutions brings Poland's ranking down. For
instance, the top five most problematic factors for
doing business as identified in the Global
Competitiveness Report are all regulatory in nature
(World Economic Forum, 2016).
Uncertainty related to the regulatory
environment is increasingly weighing on
business confidence.
In 2016, policy instability
became the third most problematic factor for doing
business, from a previous ranking of 10
th
(World
Economic Forum, 2016). Business confidence may
be affected by the limited public consultation on
several new laws. In contrast to the situation in the
two previous terms of Parliament, since November
2015 almost half of all laws passed were formally
initiated by parliamentarians from the ruling party
and not the government and hence were not subject
to the typical consultation process (Graph 3.6.1).
In addition, changes to the government’s rules of
procedure, introduced in June 2016, reduced the
requirements concerning preparations for an initial
outline of new legislation and regulatory tests. This
in fact limits the extent of consultation on legal
changes initiated by the government.
Graph 3.6.1:
Legislative practice: number of laws passed in
the first year of subsequent governments by
the promoter of the draft
180
160
140
120
100
80
60
40
20
0
two previous parliaments -
average
government
group of MPs from the ruling party / coalition
current parliament
(1) data for the first year since formation of the government
in subsequent parliaments
Source:
Obywatelskie Forum Legislacji - Fundacja Batorego
(2017).
Multiple business inspections add to the
administrative burden for businesses.
The
mandates of numerous non-tax inspection services
are not always clearly delineated, which may lead
to an unnecessary number of controls. For
example, Polish food retailers, caterers and
restaurants are inspected more often than in some
other EU countries for which data are
available (
31
). A relatively weak point of the
inspection system is the limited availability of
guidance on how to comply with the existing
regulations, which particularly impacts small- and
medium-sized enterprises (SMEs).
Weaknesses in spatial planning increase
administrative burden related to the need for
construction permits.
Land-use plans cover
limited part of Poland’s territory and are often of
low quality. In areas without them, construction
permits are granted on the basis of one-off
administrative decisions on land development
conditions. The extensive use of these acts,
(
31
) In 2014/2015 the inspections ratio (number of
inspections/number of firms) in Poland amounted to 0.82,
compared to 0.45 in the Netherlands and 0.64 in the UK.
The differences may be partly explained by differences in
market structures (World Bank, 2016b).
34
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3.6. Public administration
combined with limitations on local authorities’
capacity to handle the necessary procedures within
regulatory deadlines, creates uncertainty and
financial burden for investors obliged to document
their land rights (NIK, 2016). Poland recently
initiated a reform of its spatial planning legislation.
The draft construction code, currently under
revision, entails fundamental changes aimed at
consolidating spatial planning processes and
easing the burden for investors. While this reform
offers the chance for significant improvement, its
benefits depend on the code's final details.
Furthermore, the implementation may take several
years due to the complexity of revising some 120
legal acts and introducing transitional rules.
There continues to be a systemic threat to the
rule of law in Poland and the Polish justice
system suffers from lengthy proceedings and
contract enforcement.
The recent events in
Poland have led the European Commission to
adopt two Rule of Law Recommendations in order
to ensure that Poland's Constitutional Tribunal is
able to fully carry out its responsibilities under the
Constitution. This ongoing crisis undermines trust
in the Polish legal system. In addition, the length
of proceedings remains a challenge. In first
instance courts, the average length of civil
litigation proceedings is 10 months, while
commercial cases take over 13 months. The
clearance rate of civil cases is below 93 %, while
the EU average is over 103 % (MS, 2016) (
32
). The
time needed to deal with insolvency cases is
among the highest in the EU — Poland ranks 32
nd
in a worldwide comparison, with insolvency
proceedings taking up to 36 months on average.
The length of contract enforcement also remains a
challenge, with 685 days needed to enforce a
contract.
Despite recent progress in public procurement,
the limited administrative capacity of local
governments remains a source of concern.
Local
governments undertake a large share of public
infrastructure projects (see Section 3.3), yet they
often lack the relevant administrative capacity to
ensure efficiency (OECD, 2016d). The central
authorities do not support local governments with
structured technical assistance to carry out and
implement large procurement projects. The July
(
32
) 100% clearance rate is when the number of incoming cases
equals the number of cases closed.
2016 amendment of the public procurement law
could improve the efficiency of public
procurement, transposing two EU procurement-
related directives and implementing a number of
measures aimed at facilitating the procurement
process and cutting red tape. The changes include,
inter alia, authorities’ obligation to consider
splitting of works and non-price criteria to gain
more importance. The law is set to trigger public
procurement procedures that were put on hold
before its entry into force.
Significant
progress
was
achieved
in
deregulation of professions, but some restrictive
barriers remain.
Poland has undertaken ambitious
reforms of regulated professions in recent
years (European Commission, 2016a) and some
positive results can already be seen in terms of
employment and entrepreneurship for certain
professions (Rojek and Masior, 2017). However,
the recent Commission study covering seven
professions shows that differences between
professions exist. For example, the level of
restrictiveness is higher in Poland compared to the
EU weighted average for lawyers and tax advisers,
while it is significantly lower for tourist guides and
real estate agents (European Commission, 2016e).
In turn, for nearly all the reviewed sectors,
business churn rates in Poland are similar to the
EU average (
33
). This may indicate relatively high
dynamism and competitive pressure within
regulated professions in these sectors in Poland.
Digitalisation of public administration
Online interaction between public authorities
and citizens remains one of the lowest in the
EU.
With 26.6% of citizens using e-government
services, Poland ranks among the worst performers
in the EU. In contrast, e-services for business were
used by 92% of enterprises in 2015. The
fragmentation, complexity and at times unstable
operation of e-government services are still the
main obstacles to their effective use by citizens.
The updated Programme of the Integrated
Digitalisation of the State aims to enhance policy
coordination and strategic planning and addresses
a number of challenges, including fragmentation,
user-friendliness and public visibility of e-services
(
33
) Business churn rate is calculated as the ratio of the sum of
newly founded and closed enterprises to the total number
of enterprises in a given year.
35
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3.6. Public administration
(Ministerstwo Cyfryzacji, 2016). It is currently at
the initial state of implementation.
36
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1728538_0040.png
ANNEX A
Overview Table
Commitments
2016 Country-specific recommendations (CSRs)
CSR 1:
Achieve an annual fiscal adjustment of 0.5
% of GDP towards the medium-term budgetary
objective in 2016 and in 2017. Strengthen the fiscal
framework, including by establishing an
independent fiscal council. Improve tax collection
by ensuring better VAT compliance, and limit the
extensive use of reduced VAT rates.
Achieve an annual fiscal adjustment of 0.5 % of
GDP towards the medium-term budgetary objective
in 2016 and in 2017.
Strengthen the fiscal framework, including by
establishing an independent fiscal council.
Improve tax collection by ensuring better VAT