Polish government unveils increased social spending and tax reform in pandemic recovery plan

The Polish government has unveiled its long-awaited “Polish Deal” (Polski Ład), an economic package for recovery from the pandemic – but also an opportunity for the government to set out a programme ahead of the next parliamentary elections.

The package, previously referred to as the “New Deal” (Nowy Ład) before its unveiling was postponed in March, includes plans for higher healthcare spending, extended support for parents, homebuyers and pensioners, as well as large-scale infrastructure investments.

It also features an overhaul of the tax system that will lessen the burden on 18 million lower-paid Poles but increase rates for top-earners and some businesses.

This will “build a middle class for all, not for the few” and allow Poles to have a “dignified life at the European level”, says the prime minister, Mateusz Morawiecki. But it has sparked a wave of criticism from some liberal and libertarian commentators.

The government’s proposal is divided into 10 chapters spanning 160 pages. A cornerstone of the recovery plan will be to boost public healthcare spending from the current 4% of GDP to 6% by 2023 and 7% by 2027.

Poland’s health system has among the lowest levels of public funding in the European Union and the lowest number of doctors in relation to population. It has struggled to cope amid the pandemic, with Poland last year recording the highest excess death rate in the EU.

To counter Poland’s tumbling birth rates, the package includes increased support for parents. In addition to its existing child benefits, the government now intends to offer parents up to 12,000 zloty (€2,650) towards the care of their second and each subsequent child aged between 12 and 36 months.

The Polish Deal also aims to boost home ownership by helping to secure and pay off mortgages, as well as easing building permits for family homes. This will include subsidies amounting to tens of thousands of zloty for individual families (with amounts increasing based on how many children they have).

The plan also mentions large infrastructural projects – including the Solidarity Transport Hub (CPK) mega-airport, on which work is already underway – which the government claims will together create 500,000 new jobs.

Saturday’s announcement will be followed by a tour of the country by senior politicians to explain the plan to the public. It is then expected to be adopted by the government in September.

It will also include an increase in the tax-free income allowance to 30,000 zloty (€6,624), up from the current threshold of 3,091 zloty (€683), for most taxpayers. The threshold for entering the highest income tax bracket of 32% will also be raised to 120,000 zloty (€26,500).

Moreover, there are plans to exempt those with lower pensions from tax, which the government estimates will raise pay-outs for 65% of retirees.

These will, however, be balanced by an increase in the social security and health insurance contributions of high earners, and especially the self-employed, whom the changes are expected to push towards full employment contracts.

The ruling camp has, however, provided scant details about funding for the entirety of its new spending plans. Development minister Jarosław Gowin admits that higher earners will pay more tax.

There are also hopes that post-pandemic growth will help offset some of the costs to the state budget of the planned tax cuts, which are estimated at around 7 billion zloty (€1.5 billion) each year, according to the Financial Times.

A large chunk of the financing will also come from €58 billion in loans and grants from the EU’s Covid recovery fund. During Saturday’s presentation, Morawiecki hailed his government’s success in negotiating “the highest possible budget [for Poland] with the EU”.

Piotr Arak, head of the Polish Economic Institute (PIE), argues that the tax reform is meant to bring Poland more in line with European standards of progressive taxation.

“Our contributions are still very linear, which is an unusual phenomenon in the OECD,” said Arak. “We have a system that favours the rich.”

The new tax design is meant in part to dissuade people from switching to sole proprietorship to pay lower business taxes. While this has disgruntled entrepreneurs taking advantage of the flat tax plan, Arak argues that the end goal is worthwhile.

“This will change the ownership structure of companies,” he said. “The aim of companies is to make a profit, rather than to fulfil the professional dreams of one person. Entities with sole proprietorship are too small, they do not develop and do not invest.”

Analysts at Grant Thornton Polska, an accountancy firm, estimate that companies earning 20,000 zloty (€4,420) per month would lose around 14,000 zloty (€3,090) annually. As a result, there has been growing interest from Polish businesses in relocating to the neighbouring Czech Republic or Slovakia, reports Money.pl, a financial news website.

The unveiling of the Polish Deal led to a wave of criticism from some commentators and parts of the opposition, who claim that the package will create greater burdens on the middle class and businesses.

Radosław Sikorski, a senior figure from centrist Civic Platform (PO), condemned the plan as an “alliance of National Socialists” (referring to the ruling national-conservative Law and Justice party) “with International Socialists” (referring to The Left, an opposition group that last month helped the government pass the EU recovery fund).

“Both of them despise the independent, entrepreneurial and hardworking Polish middle class, which built the success of [post-communist] Poland,” wrote Sikorski, a former foreign and defence minister now serving as an MEP.

Much of the criticism coming from the centrist and left-wing opposition has focused on the credibility of the government in keeping past promises.

“Parts of the proposal…sound good, parts terrible,” wrote Krzysztof Gawkowski, who leads The Left’s parliamentary caucus. “But for now, these are just slogans and promises. We are waiting for legislation.”

Ahead of Saturday’s publication, the main opposition group, Civic Coalition (KO), which is led by PO, unveiled a media campaign in which it presented previous promises of the ruling party that it claims the government has failed to keep.

Main image credit: Pisorg/Twitter

Maria Wilczek

Maria Wilczek is deputy editor of Notes from Poland. She is a regular writer for The Times, The Economist and Al Jazeera English, and has also featured in Foreign Policy, Politico Europe, The Spectator and Gazeta Wyborcza.