The New Deal or the New Scam?

I have used the reverse translation method to do Nowy Ład into English, as Roosevelt’s New Deal agenda is commonly translated into Polish as such. The Nowy ład has also been immediately dubbed Nowy Wał by critics of the government, for which I use term in the title of the post.

It has taken me a few days to catch up with the document. Since the quality of media coverage in Poland is on decline, same as journalists’ grasp of economics, I have decided to take more than a glimpse at the source document, before drawing any conclusions. Despite my dislike for the government, I am trying to take an unbiased look.

The agenda is a leap forward, to keep up the support by the parliamentary election in 2023 and in the meantime to buy off some voters. People have to forget about the trauma of the pandemic and over 100,000 excess deaths the country will have reported by the time the epidemic is truly over.

The very document is just a blueprint of what PiSites want to reform in Poland by 2030, full of general catchwords, lofty intentions and bragging about recent successes. At such level and stage lacking details, but setting objectives. I shall focus on commenting just a few of them.

1.  Increasing the health care spending to 7% of GDP – a commendable goal, yet allocation of money must be wise between available resources. As three decades of not sorted out problems of the state-run health service in Poland prove, any government can sink an infinite amount of money into the system, but in order to make it operate efficiently and patient-friendly, structural problems need to be tacked.

2.  Raising the tax allowance to PLN 30,000 is a step that moves us closer to standards of taxation in the civilised world, where those earning the minimum wage pay almost no tax.

3.  The document mentions a deductible for the middle class, i.e. those whose yearly earnings are in the range from PLN 70,000 to PLN 130,000 – an interesting idea, yet without any details. This point has not appeared in the media coverage.

4.  The threshold for the second tax bracket is to be raised from PLN 85,528 (at which it has stood since 2009) to PLN 120,000 which still does not make up for accumulated inflation over the last 13 years, yet brings some relief to the middle class.

5.  Remote working in non-pandemic times should be finally governed by law (even sooner), ensuring the employee gets compensated for their house maintenance expenses related to home office – at last.

6.  I searched in the document for the provision under which the health care contribution will no longer be deducted from taxable income and have not found it. If such intention does hold true, it will offset positive effects of points 2, 3 and 4.

7.  Property purchase equity is to be guaranteed by the government. Here I am the most sceptical. All programmes aimed at the housing markets pump up property prices (making them less affordable) and benefit banks as mortgage lenders. The scheme is to include a cap on price per square metre, but it will either be sky-high or exclude most properties in large cities from the programme. I would call for a programme aimed at increasing supply of dwelling, yet in a civilised way.

8.  The state is to become an important investor and to create directly or indirectly 500,000 jobs. I am wary of this – free market allocates resources more efficiently, but in Europe and in the USA governments pursue sizeable recovery programmes, so Poland just falls into line.

9.  The tax burden for enterprises to be lower – fine, yet in Poland not the level of taxes, but the instability od regulations and extent to which they are complicated make up a problem.

10. The pension system with the current pension age (60 for women, 65 for men) is not sustainable and the document does not address that issue.

The costs of the agenda have been presented in the document, yet funding sources have not been specified. Any government before it begins to give out money has to collect it in taxes or run up debts. Do bear in mind there is no such thing as a free lunch in economics.

ZaPiSki z czasów dobrej zmiany

Heard the purport of the controversial speech of president Duda in Otwock has been manipulated by the media hostile to PiS. I advise you listen the speech and shape an opinion on it on yourselves. Has Mr president gone too far in diagnosing the ailments plaguing Poland and in insulting his opponents? Is Mr Duda president of all Poles or of one particular party? Up to you to decide…

In February Mrs Szydło’s government celebrated first 100 days of work. Out of five priorities on the government’s agenda only one has been carried through.

1. The 500 plus child allowance programme has been launched and first payouts to parents will be made in April. Undeniable credit to the government for delivering the flagship project, however a truly impressive attainment will be making ends meet in budgets for 2017 and onwards without containing the scale of the program .

2. Decreasing retirement age to 60 for women and 65 for men remains in the realm of promises. Mr Duda promised to submit a relevant draft law and kept his promise, nothing beyond it.

3. In progress is the law setting up free-of-charge medicines for elderly people aged 75 or more. Needless to say the list of medicines will not be endless and only some medications will qualify for 100% reimbursement. According to some estimates, an average pensioner will save no more than 20 zlotys monthly thanks to generosity of PiS government. Wonder whether administrative expenses will be higher or lower than gains of all entitled old-aged citizens.

4. CIT rate cut to 15% for micro enterprises looms far on the horizon. A few PiS politicians brought up the topic, but right now the government is preoccupied with putting out other fires.

5. Raising tax allowance to PLN 8,000 per year also stands no chance of being accomplished in 2016 and feasibility of such move in 2017, given foreseen shortfall of budget revenues, is up in the air.

The festival of traducing Mr Wałęsa was rather short-lasting, but I am sure this has not been the last word. The game is up…

The former CEO of Bank Zachodni WBK has unveiled the Responsible Development Plan, a roadmap for Poland to catch up with the Western Europe and a set of measures to move Poland forward. It is beyond all doubt Poland badly needs a long-term development strategy, yet the strategy must be viable from cover to cover, i.e. it should identify what problems need to be overcome and with what means.

The diagnosis Mr Morawiecki sets is spot-on, but hang on… How do the notions underlying the plan square with PiS’ economic agenda? It is claimed public debt is a drag on Poland’s development, but PiS’ spending spree will sooner or later have to contribute to rising public debt. Demographics is bound to decrease labour force in Poland and to counteract it PiS deputies put forward decreasing retirement age and have raised schooling age from 6 to 7.

Besides, being familiar with specifics of some sectors (e.g. shipyards, automotive, transport, capital goods), I fear goals in the programme might be to beautiful to be realistic. Harnessing banking and corporate sectors’ over-liquidity to boost investment smacks of central planning. All in all, the plan makes a good impression, but I do not believe the government “knows better” than thousands of enterprises. Lending a helping hand and setting strategic objectives for the development should remain the core areas of government’s involvement in the economy. Let’s not go beyond them and let the free market do its job.

The cursed soldiers, for years forgotten, in the days surrounding 1 March were glorified more avidly than veterans of the Home Army (not to mentioned those out of luck to join the Home Army). I have not against commemorating victims of Stalinism, tortured and murdered between 1945 and 1956, they do deserve our remembrance, but the cursed soldiers are not a uniform group and historians (other than IPN-affiliated) vary in their assessments of cursed soldiers’ deeds after the Home Army was dissolved in January 1945. In 1945, as Poland became subjugated to the Soviet Union, warfare was officially over. Some people came to terms with the fact Poland could be at best a satellite country of the Soviet Union and under those circumstances began to rebuild the country from ruins, combat illiteracy, electrifying countryside, while others did not lay down guns. The problem I have with them is that they did not fight the Soviets, but they killed their compatriots, not only the ardent functionaries of the new systems in MO, UB, PPR uniforms, but also representatives of the ethnical minorities, Jews and civilians who did not resist the new order or benefited from it, e.g. peasants granted land as part of the agrarian reform.

Romuald Rajs “Bury” and Józef Kuraś “Ogień” are two most glaring examples of bandits venerated today. I would strongly prefer the whole truth is told about those people. Locals in Podhale or near Białowieża, especially ancestors of civilians killed by brigades of “the stalwart” put up the biggest resistance when IPN- and PiS affiliated , yet their voices are rarely audible.

Besides, come to think of it with cool head. Imagine someone hiding in a forest. What would they live off? How would the procure nutrition? How would they survive harsh winters in the second half of 1940s? Locals tired of six years of privations of war did not need to embrace the idea of helping out the forestmen by offering them board and lodging…

A tyre popped. Had it happened in an ordinary Pole’s passenger car, it would have passed unnoticed. But the tyre popped in a BMW carrying president Duda; consequently the vehicle went into a skid and landed in a roadside ditch. Fortunately, the head of state came of the accident safe and sound and after the voices of conspiracy theorists (assassination could not be ruled out) and vulgar haters faded, it transpired the tyre had been produced in 2010 and should have long been out of use. Jaw drops open. Within four months PiS have managed to replace most officials in ministries and state-controlled companies and launched several opening audits to reveal irregularities and havoc wreaked by their incompetent predecessors, but they have failed to inspect fleet of vehicles carrying the statesmen.

Why did this happen? The technical conditional of the vehicle is one side of the coin, the driving style of BOR being the other. Many doubt the column of vehicles, including with Mr Duda on board, was moving within the speed limit of 140 kmph, witnesses speak of the speed of 170 kmph or even 200 kmph. BOR vehicles according to the Polish law enjoy the status of privileged vehicles, just like ambulances, fire engines and police cars. This means they do not need to follow traffic regulations. Let’s have a glance at how the column of vehicles moved at National Road DK5 before turning into A4 motorway where the accident took place. 

I know the road well, its surface if flat, has not ruts, but the road is narrow, winding, hilly and on many sections visibility is poor. Does such way of moving around contribute to safety of Mr Duda (or whoever is a passengers) and other innocent road participants?

Last Sunday a supplementary election to the upper house was held in Łomża – Suwałki constituency. Anna Maria Anders, backed by PiS won the seat in the parliament, but if you bear in mind three facts:

1. Mrs Anders’ score (47%) was mere 6 percentage points ahead of PSL-affiliated, PO- and Nowoczesna-backed Mr Baginski’s result,

2. the turnout in the election was 17%, meaning only 8% of citizens entitled to vote cast their votes for Mrs Anders,

3. Mrs Anders had been endorsed by all prominent PiS politicians involved in her campaign, while PO, PSL and Nowoczesna had not lifted a little finger to support their candidate (shame on you, Mr Schetyna, Mr Petru and Mr Kosiniak-Kamysz),

the victory is anything but swingeing and should rather be interpreted as a warning sign than as declaration of strong support.

The VeniceCommission has issued a report on recent changes in law pertaining to the Constitutional Tribunal. The final document is somewhat toned down in comparison to the draft which had leaked to the media in February. The Commission blames both the previous and the current governments for paralysing the Tribunal and urges the Polish government to rectify the wrongdoing. Commentators keep on talking about the political compromise to be worked out to reverse the unfortunate legislation. This twaddle fills me with dread. There is no room for give-and-take, politicians from all parties present in the parliament have to make a concerted effort to bring the laws in line with constitution. The PiS government is slowly realising it cannot mess with everyone around. Hope the opposition realise this time for the benefit of Poland they will need to collaborate with the government, not to reach any compromise, but to restore the legal framework spoilt in two stages by PO-PSL, PiS and president Duda.

PiS-owska economic agenda

Judging by the timing of my postings and delay with which I refer to topical problems, it may seem I am slow off the mark. So instead of writing about mounting Ukrainian crisis, which gets closer to the verge of military conflict, I will refer to the headline-hitting, newly-published agenda of the leading oppositional party.

The document sets out to diagnose the current state of Poland as the utter downfall, to which Poland was plunged under the feckless rule of prime minister Tusk and names the current misery as “system Tuska” and then delineates how, when PiS headed by its leader, JarKacz, take over power, to lift Poland up from this misery and make the country thrive.

I am generally wary of all quick fixes – sort of easier-said-than-done solutions that would turn the country around within mere a few years, make it a land of milk and honey, inhabited by prosperous people, with expanding economy and well-run, efficient government. As a matter of principle, I give such diagnoses a miss. It takes little to make out what is wrong, it takes more wits to pertinently identify reasons why something does not work properly and the biggest challenge is to come up with feasible ideas to set things right.

I deliberately leave out what has been said by numerous critics of the agenda, i.e. PiS politicians promise to spend billions of zlotys, but fail to show how it is going to raise the money for: allowances for families, decreasing pension age, huge investments, health service, tax credits for entrepreneurs and in the meantime reduce public debt. I do not believe in policy of working miracles, because only a miracle could make ends of this agenda meet and I suppose no economically literate recipient of this document (or JarKacz’s speeches) would put stock in hollow promises as his whole story does not even appear to hang together. Even advocates of PiS policies admit widespread giving-out smacks of populism, but over-promising is an ordinarily used tactics even in mature democracies.

I will do my best to dissect all agendas of all political parties whenever they appear, and they should spring up in abundance before 2015 parliamentary elections. As PiS came up with its agenda first, its file came under fire first. I make no claims to be an expert in all areas of life, I generally know little about health service or military forces, but have some notion of economics and as a banking sector employee, am quite well-versed in its workings and limitations, therefore in my analysis I will focus only in the “Economy” section and drill down only some of those paragraphs I am capable of assessing.

The general diagnose on the current state of Polish economy (pages 73 – 74) is that it is stuck in low-growth trap, from which it can break out by unleashing the untapped development resources, with the help and co-ordination of the government, which should pro-actively engage in pursuit of economic policies.

The growth resources are simple and complex. The former are money Poland will receive from the EU funds and… (page 76)

Poza funduszami unijnymi maksymalnie uruchomimy znaczne środki własne i oszczędności przedsiębiorstw państwowych oraz wykorzystamy nadpłynność banków.

What are the „own funds” and how are they [PiS] going to make use of state-run enterprises’ savings and banks’ overliquidity? This all reminds me of acquisition of Lithaunian Mozeiku refinery by PKN Orlen in 2006, the purely political (buy it to spite the Russians) decision, taken, as with hindsight proven, without properly carried out due diligence. The refinery was purchased for 2.34 billion USD in 2006, while in 2013 PKN Orlen was weighing up whether to divest of the Lithuanian operations for 125 million USD. In the meantime, between 2007 and 2011 the oil producer recognised massive impairment losses, reflecting the fact the refinery was purchased well above its fair value. The business failure came to a pass also because, in the act of revenge, Russians cut off the pipeline running to the refinery due to a breakdown in July 2006, while negotiations regarding the purchase were still under way. This did not dissuade Polish decision-makers from pressing ahead with the purchase. Then, in 2008, Lithuanian railroads ripped off tracks running to the refinery, rendering it useless for months, as there was no infrastructure between the facility and the port in Klaipeda. The Lithuanian business began to break even in 2012. The estimated loss to the Polish taxpayers, counting in purchase of assets above their fair value, operating losses, costs of debt service and missed opportunities is estimated at 20 billion PLN, more than 2% of Poland’s general government debt. There are ample examples of flawed decisions on acquisitions made in the private sector, but there costs of management’s inflated ambitions (chief driver of such transactions) are borne mostly by the company’s shareholders, not by taxpayers.

I dread to think how the PiS government intends to crack down on overliquidity in the Polish banking sector. Is it going to coerce banks to lend money?

Zastosujemy także pozabudżetowy mechanizm inwestycyjny z zaangażowaniem aktywów spółek Skarbu Państwa, w tym spółki Polskie Inwestycje Rozwojowe i Banku Gospodarstwa Krajowego, a także specjalistyczne mechanizmy wspierania inwestycji, np. na wzór LTRO (Long Term Refinancing Operation – program Europejskiego Banku Centralnego) i programów proinwestycyjnych na Węgrzech.

Does the author know what LTRO consists in? The definition provided towards the bottom of page 76 does not closely match what I found through search engine. This is not an investment-supporting programme, but a liquidity-enhancing measure and is aimed at helping out banks having too many illiquid, poor-quality assets. Polish banks neither struggle liquidity squeeze, nor have portfolios of badly-performing assets, what is then the reason for application of such measure? As it was rightly noted, Polish banking sector has a problem of excess liquidity, totalling to 30 billion PLN.

When it comes to the banking sector, credit expansion towards SMEs is to be facilitated by guarantees issued by the state-owned bank (BGK, page 77)

Wzmocnienie możliwości gwarancyjnych polskiego BGK w granicach od 65 do 100 mld zł w latach 2015 – 2021 będzie rozwiązaniem bezpiecznym, niewymagającym nakładów ze strony państwa i neutralnym dla budżetu.

When making such move, you should be aware of two facts. Firstly, a bank which lends to a business against a guarantee issued by BGK bears effectively credit risk of BGK, because if a customer defaults, the bank has a claim on the guarantor. This means commercial banks need to have credit limits for BGK, which although not regulatory capped, are in practice limited by ceilings will be imposed by banks’ internal policies. Secondly, issuing guarantees necessitate raising equity to meet capital adequacy requirements, what, assuming BGK stays 100% state-owned, means the government would need to inject money to pay-in the capital, thus making the sentence above from the PiS agenda true, only if current own funds of BGK give enough headroom to issue guarantees in aforementioned amounts. On pages 77 and 78, the document says…

Polscy przedsiębiorcy prywatni ulokowali na rachunkach bankowych (w postaci lokat długoterminowych) środki rzędu 200 mld zł. Jest to znaczny zasób rozwojowy, a państwo ma obowiązek działać na rzecz jego uruchomienia poprzez stworzenie systemu zachęt inwestycyjnych w systemie podatkowym. W przygotowanym Prawo i Sprawiedliwość projekcie ustawy o podatkach dochodowych (PIT i CIT) znalazły się rozwiązania pozwalające na 100-procentową amortyzację nakładów inwestycyjnych w roku ich poniesienia, a w przypadku wydatków na badania i rozwój – nawet na podwójne odliczenie. Szacuje się, że po wejściu tych rozwiązań w życie w ciągu najbliższych 6–7 lat wspomniana kwota 200 mld zł będzie przeznaczona na inwestycje.

During my 3-years’ career I have never seen any company which put its excess money on bank deposits with term longer than 3 months. And mere tax credits are not a cure for businesses’ reluctance to invest. I could argue with more of the statements above, but as both the author of this part of the agenda as I lack strong backing in favour of our assertions, such argument would get us nowhere. Let’s turn to page 79 then.

Kolejnym instrumentem kumulowania złożonych zasobów rozwojowych będzie udomowienie banków. Będziemy wspierać działania upowszechniające polską własność w sektorze bankowym. (...) Pierwszym jest przyrost organiczny, czyli szybszy rozwój banków krajowych poprzez rozwijanie akcji kredytowej i zwiększanie depozytów. Drugi sposób polega na zakładaniu i rozwoju nowych instytucji opartych o kapitał krajowy. W tym celu muszą zostać wprowadzone preferencje dla małych instytucji, w tym spółdzielczych. Trzecim sposobem jest przejęcie banków opartych o kapitał zagraniczny przez podmioty krajowe zaliczane do sektora finansowego, w których Skarb Państwa ma znaczące udziały. Udomowieniu banków będzie towarzyszyła rozbudowa polskiej bankowości o zasięgu lokalnym typu hipotecznego, spółdzielczego lub kas oszczędnościowo-kredytowych. Udomowienie banków zwiększy zaangażowanie polskiego sektora finansowego w rozwój gospodarczy, szczególnie poprzez akcję kredytową, w tym udzielanie kredytów inwestycyjnych.

„Domesticating” the banks is not an entirely new concept. Of course, proportions of capital ownership can be changed by organic growth, but in line with previously mentioned capital adequacy requirements, in order to extend more loans, you need to shore up banks’ equities. How would it be ensured that holders of such equity would be only Polish entities? In order to overtake the risk-averse banks run from their head office abroad, lending standards would also have too be loosed, running the risk of severe losses in the economic downturn. Takeovers executed by state-owned banks are the most controversial idea. Firstly, it decreases competition and even without effective merger which could be blocked by competition watchdog (recall incomplete merger of Pekao and BPH in 2007?), control over the banking sector could be concentrated in one pair of hands. Secondly, it would cost billions of zlotys and if political goals are set above sound business reasoning, state-owned banks are likely to pay over the odds for their targets.

These are just a few examples of flawed or undoable concepts from the economic agenda of PiS. Apart from them it contains several questionable ideas, transferring free-market mechanism of economic self-regulation to the hands of the government and several good ideas, which, if properly implemented, could unleash potential of Polish small and medium companies and make business environment in Poland more friendly. Nevertheless, the approach to the economy is too statist for me. Too many control and co-ordination mechanisms are put forward. The government, whose areas of control or regulation are too wide, is unlikely to be lean, i.e. cheap and efficient.

I am looking forward to newly-released economic agendas of main political parties in Poland. When they are published, I promise to pick out incongruities and share them with you.