Memorandum of the Union of Entrepreneurs and Employers on inflation

Warsaw, 17^th June 2021

Memorandum of the Union of Entrepreneurs and Employers on inflation

Synthesis

Poland has been facing one of the highest inflation rates in the EU for many months. The realisation of deferred household demand associated with the reopening of the economy, as well as the need to utilise huge resources from the Recovery Funds will undoubtedly contribute to further fuelling the increase in price pressure in the near future. We note that certain inflationary factors are factors to which the state is able to respond with regulation.

Currently, one of the key pro-inflationary factors is the rise in fuel prices, which accounted for more than a third of inflation in May this year.

In order to curb further increases in inflation, attention could be given to those areas where price increases are de facto stimulated by regulation and can therefore also be effectively contained by regulation. For example, consideration could be given to scrapping taxes that have an impact on price increases while generating little direct revenue to the budget, modifications to excise taxes on fuel, and sensible, non-parafiscal communal waste management reform.

Introduction

The topic of rapidly rising inflation is attracting more and more attention in the public debate. According to the Central Statistical Office, CPI inflation amounted to 4.7% in May and 4.3% in April 2021. Eurostat data is worse, showing that Poland’s HIPC inflation in April reached 5.1%, the highest level in 20 years. The last time HIPC inflation exceeded 5% was in June 2001, when Poland was emerging from a period of high inflation.[1]

Although inflation is clearly rising across the EU, Poland remains one of the leaders among EU member states in this regard. In April 2021, the annual inflation rate in the EU stood at 2%, 3 percentage points higher than in March.[2] Poland achieved the second highest result, just behind Hungary, where inflation was only one percentage point higher. This is poor consolation, however, when you consider that Poland remains in first or second place in the EU on inflation since September 2020, and the domestic inflation rate is more than twice as high as the EU average.[3]

Figure 1: Inflation in April in the EU
Source: Eurostat

Rising inflation reduces the disposable income of Poles and depletes savings. The recovery from the coronavirus pandemic is generating new and additional pro-inflationary factors, such as the realisation of deferred household demand for food services and hotels, but also for products such as clothing. So we can expect inflation to accelerate further as the economy continues to open up and the holiday season begins.

What is important, in the longer term we will have to deal with a new, exceptionally important pro-inflationary factor, i.e. a significant fiscal impulse in the form of the EU Recovery Fund. In the new budget perspective, Poland will receive EUR 160 billion from EU funds, of which EUR 57 billion will come from the Recovery Fund.[4] For comparison, during the 16 years of its membership in the EU, Poland received around EUR 181 billion. The Recovery Fund is an important element of helping the economy out of the crisis, but the ‘helicopter money’ policy also has long-term consequences. The need to manage such large-scale funds in a relatively short period of time may provoke price increases and certainly will not slow down inflation.

Probably the only actor that does not suffer from rising inflation is the government. In formulating the 2021 budget, the government has assumed an inflation rate of 1.8 %.[5] Thus, budget revenues and expenditures have been calibrated according to this parameter. An increase in prices means an increase in budget revenue from VAT, one of the main sources of government revenue. For example, in 2019, VAT receipts amounted to more than PLN 180 billion, almost half of the total tax revenue collected that year.[6] More than twice the expected inflation rate means a significant increase in revenue to the state treasury and a better balance at the end of the year.

Figure 2: State budget revenues in 2019.
Source: Tax Portal of the Ministry of Finance, Revenues and expenditure

A significant interest rate increase seems unlikely in the near future, and even if it were to happen, it would also entail some negative consequences for businesses and consumers.

Inflation in Poland and UE

In May 2021, inflation in Poland rose by 4.7% year-on-year, with transport prices, including fuels, accounting for 1.65% of the increase, housing prices, including energy carriers for 1.32%, communications prices for 0.32 %, recreation and culture, and restaurants and hotels for 0.22%.

Inflation in May 2021, relative to the previous month, increased by 0.30%, with the largest contributors to this increase being, in turn, increases in food prices (0.16%), housing use, including energy carriers (0.10%). Negatively contributing to the index were decreases in the prices of transport (0.04%) and communications (0.05%).

Figure 3: CPI growth and contribution of major categories of goods and services y-o-y
Source: Own calculations based on Statistics Poland – US, Macroeconomic Data Bank, Price indices

Figure 4: CPI growth and contribution of main categories of goods and services m-o-m
Source: Own calculations based on Statistics Poland – US, Macroeconomic Data Bank, Price indices

By comparison, among eurozone countries, fuel prices are also the most volatile component included in the HICP. The fall in transport prices in November 2020 contributed -0.55% to the change in the eurozone HICP measured year-on-year to account for 0.70% of the 1.60% increase in the index in April 2021. After rising transport prices, the next largest contributor to eurozone inflation in April this year was a 0.52% increase in housing maintenance prices, a 0.12% increase in alcohol and tobacco prices, a 0.06% increase in recreation and culture prices, and a 0.5% increase in the price of food.

On the other hand, the high April increase in HICP inflation for Poland showed that the structural features of our economy and the model of recovery from the pandemic crisis, which relies more on generating consumer demand than stimulating investment, put Poland on the path of stronger price increases than among the eurozone countries. Under current market conditions, the service sectors in Poland are more freely imposing higher prices on their products to compensate for the cost of fuel price increases.

Main stimulants of inflation – factors not sensitive to interest rates

In its announcements, the Monetary Policy Council stressed that the March and April 2021 increases in inflation were caused by factors that are not sensitive to interest rates. These are, above all, the prices of fuel raw materials determined on global markets, energy prices determined by the high rate of CO₂ emission allowances and prices regulated administratively by local governments, such as the price of waste collection services.

International experience shows that attempts to administratively limit price increases are ineffective. This also turned out to be the case in Poland, where the government decided to temporarily freeze energy prices in 2020, so that they could rise with double force in the year of recovery from the crisis. Hence, the increase in the price of housing and premises contributed to a 1.24% rise in the CPI with regard to April 2020.

Indirect taxes can be a tool to influence the price level. Based on Figure 2, we can conclude that fuel prices are the most volatile factor influencing monthly fluctuations in the level of inflation. Therefore, it is worth considering a modification of excise tax on fuel which, while respecting the minimum values set by Directive 2003/96 restructuring the Community framework for the taxation of energy products and electricity, would allow for a reduction in fuel prices. Another important factor is the price of such services as waste disposal. Work is currently underway to implement important EU waste management projects, including extended producer responsibility and the so-called SUP Directive. Sensible reform of a not a parafiscal character is necessary in this area. Ultimately, recently introduced taxes that have driven up prices while generating little direct revenue to the budget should be reduced, suspended collection or even abandoned. The sugar tax is an example of such a levy. Expanding such levies to new product categories should also be avoided.

Another significantly price-influencing channel is the policy of responsible minimum wage formation. Since wage-price adjustments occur over a longer period of time, the public usually does not perceive a direct link between wages and prices. A 15% increase in the minimum wage has little effect on the 0.1% increase in household consumption, while we could see it to a greater extent in the increase in prices of services, starting from January 2020.

Conclusions

High inflation is a hidden form of tax, which will be distributed partly to businesses and partly to consumers, generating higher budget revenues. High price levels in Poland hit industrial sectors in particular, causing a decline in the competitiveness of Polish exports. These sectors are unable to impose a price on their products, unlike the service sectors, and foreign demand for Polish products depends on the competitiveness of our goods abroad. Meanwhile, exports are one of the most important growth factors for the Polish economy.

In order to avoid further inflationary growth and weakening of the Polish economy, we propose to discuss how we can curb price increases by limiting costs resulting from regulation. In the face of rising raw material prices, a modification of the fuel excise tax seems to be a worthwhile idea. At the same time, taxes that have an impact on price increases, such as the sugar tax, should be abolished and levies on new product categories should be avoided. A sensible reform of a non-parafiscal nature of waste management is also necessary.

***

[1] Bankier.pl, Eurostat: Inflation in Poland above 5%. Higher only in Hungary, available at: https://www.bankier.pl/wiadomosc/Eurostat-inflacja-w-Polsce-w-kwietniu-2021-r-powyzej-5-proc-8115788.html.

[2] Eurostat, Annual inflation up to 1.6% in the euro area, available at: https://ec.europa.eu/eurostat/documents/2995521/11563095/2-19052021-AP-EN.pdf/6bd163f8-7551-3b07-a874-ddc78c9ad93d?t=1621412809290.

[3] Rekin Finansów (Finance Shark), Eurostat: Inflation in Poland reaches 5.1%, highest in 20 years, available at: https://rekinfinansow.pl/najwyzsza-inflacja-od-20-lat-polska/.

[4] Union of Entrepreneurs and Employers, The effects of the introduction of the retail tax from 1^st January 2021, available at: https://zpp.net.pl/wp-content/uploads/2021/01/12.01.2021-Raport-ZPP-Skutki-wprowadzenia-podatku-od-sprzeda%C5%BCy-detalicznej-od-1-stycznia-2021-r..pdf.

[5] Forsal, 4% GDP increase and 1.8% inflation. Government adopted the assumptions for the draft budget for 2021, available at: https://forsal.pl/gospodarka/pkb/artykuly/7784463,budzet-2021-wzrost-pkb-4-proc-inflacja-18-proc-rzad-przyjal-zalozenia-do-projektu-budzetu-na-2021-rok.html.

[6] Tax Portal of the Ministry of Finance, Revenues and expenditure, available at: https://www.podatki.gov.pl/z-twoich-podatkow/dochody-i-wydatki-z-twoich-podatkow/.

See more: 17.06.2021 Memorandum of the Union of Entrepreneurs and Employers on inflation