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

Warsaw, 24^th August 2021

 

Statement of the Union of Entrepreneurs and Employers regarding the situation on the Polish-Belarusian border

 

Over the last week or so, the Polish public debate has been dominated by the discussion about a group of several dozen people camping on the Belarusian side of the border with Poland. It is not the task of the Union of Entrepreneurs and Employers to conduct an in-depth analysis of this difficult situation, but everything indicates that it is the result of the scenario planned and implemented by the Belarusian regime. The government of the Republic of Belarus welcomed immigrants from the Middle East and countries neighbouring with the region, and then directed them to the external borders of the European Union in order to destabilise the situation in neighbouring countries. A similar scenario was repeated in other EU member states.

As we have mentioned above, we are not experts in matters related to state security. However, the heat of the dispute along with its very nature are sources, in our opinion, of far-reaching risks for a discussion on another issue, very important from the point of view of the future of Poland. The consultations have recently ended regarding the country’s long-awaited demographic strategy indicating the main directions of institutional and regulatory changes in the field of admitting foreigners to Poland.

The Union of Entrepreneurs and Employers has repeatedly pointed out that – in the context of the ongoing demographic crisis, the effects of which will be felt in the coming decades – adopting a coherent and rational approach to the absorption of immigration is absolutely essential.

Meanwhile, the more inflamed the situation on the Polish-Belarusian border and the harsher words are spoken on this matter, the greater may be the willingness of people and entities traditionally sceptical towards immigration to link the current crisis with the state’s long-term policy towards migrants from other countries.

Regarding this subject, we want to unequivocally state that the protection of the state borders (and at the same time the external border of the European Union) along with the defence against external attempts to destabilise the political situation and the migration strategy describing the procedures and approach of state institutions to migrants coming to Poland mainly for economic purposes are two fully separate things. Any attempt to link these two completely different issues based on emotions and resentment may lead to the inhibition or a significant slowdown of works on a strategic approach to immigration, which we are in dire need of for reasons both demographic and economic.

See more: 24.08.2021 Statement of the Union of Entrepreneurs and Employers regarding the situation on the Polish-Belarusian border

Warsaw, 16^th August 2021

 

Busometr Index: Investments still at historical lows, the labour market in good shape

 

“Busometr” – the index of economic mood – amounted to 46.5 points for the 2^nd half of 2021 (up from 42.2 points in the previous half-year), which means that the entrepreneurs’ sentiment is clearly improving. Investments are still in the worst shape, while on the labour market good prospects remain.

In our last survey, we recorded the best sentiment among entrepreneurs in two years. Importantly, however, the previous two studies took place during the extraordinary economic situation sparked by the global COVID-19 epidemic. Numerous sanitary restrictions accompanying the pandemic forced a large number of enterprises to shut down, mostly in food services, tourism and event management.

“When most sanitary restrictions were waived, economic normalcy returned,” claims Cezary Kaźmierczak, President of the Union of Entrepreneurs and Employers. “Most industries and sectors now have the opportunity to recover from the prolonged lockdown. We expect a further improvement in economic mood, as long as the epidemic does not get out of hand once again.”

The analysis of the individual components of the “Busometr” index suggests that entrepreneurs’ moods vary depending on which specific part of the economic reality they are asked about.

As many as 35% of all people surveyed believe that the economic situation will worsen in the coming months. A slightly smaller group – 34% of entrepreneurs – believe that the economic situation will not change. However, there is no shortage of optimists, as 31% of respondents trust that the economic situation will improve.

The post-pandemic economic rebound is clear under the “Labour Market” component. Entrepreneurs need more workforce, which is visible in the results of the survey. As many as 16% of companies plan to increase employment, while the reduction of jobs is forecast by only 6% of enterprises. It is also important for employers to retain current employees, which is why 17% of companies plan to raise wages, while only 5% of respondents anticipate a reduction in salaries.

The reading of the “Investments” component still raises big concerns. The index increased slightly to 29.9 points, compared to 29.2 points in the previous six months. As many as 65% of enterprises declare that they do not plan to implement any investments in the foreseeable future.

“The root cause of the reluctance to invest, noted in earlier readings, was the uncertainty surrounding the COVID-19 pandemic. However, the main cause of concern among entrepreneurs remains the regulatory uncertainty, additionally exacerbated by the directions of changes proposed in the Polish Deal,” stresses Jakub Bińkowski, Management Board Member and Director of the Law and Legislation Department of the Union of Entrepreneurs and Employers. “Companies are afraid of increased fiscal burdens and growing operating costs, therefore they give up new investment projects.”

 

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Busometr ZPP – the Index of Economic Mood in the SME Sector is an economic index showcasing the level of optimism in small and medium enterprises, and their plans for the next six months.

Three components affect the index: (1) the economic situation, (2) labour market (remunerations and employment) and (3) investments.

A value within the range of 0-100 is assigned to each component.

The Union of Entrepreneurs and Employers along with Maison&Partners conduct the research among a representative group of small and medium enterprises (up to 250 employees). Busometr ZPP is published every six months. The sample size is N = 600 respondents from the SME sector.

The survey is carried out since 2011.

 

See more: 16.08.2021 Busometr Index by the Union of Entrepreneurs and Employers: Forecast for the 2^nd half of 2021

Warsaw, 12^th August 2021

Memorandum of the Union of Entrepreneurs and Employers on European climate policy

The Union of Entrepreneurs and Employers recognises the need for concern about climate and environmental protection. However, we express our opposition to the model of combating climate change proposed by the European Commission. The instruments used are often ineffective, and the European climate policy is full of internal contradictions. Some of the recently proposed changes are of a purely political nature, and embedding them in pro-environmental rhetoric by the European Commission is an example of plain green washing. Ultimately, the implementation of the changes proposed in the Fit for 55 package may lead to a significant deterioration of the European economy and impoverishment of Europeans, to which we cannot agree. We believe that it is necessary to look for alternative and reliable ways to combat climate change, instead of blindly following the path of politically set goals.

Concern for the climate must not come at the expense of reducing the competitiveness of European companies or decreasing the quality of life of Europeans. The European Union is responsible for a relatively small percentage of greenhouse gas emissions, so unilateral actions based on the introduction of stringent norms and standards within the Community will not lead to a radical improvement in the state of the global environment. In the meantime, there is no doubt that Europe is losing its economic momentum – what we need are deregulatory initiatives and support for entrepreneurship rather than proposals for further self-limitation which often turn out to be counterproductive.

Lack of effectiveness of the instruments used

The European Emissions Trading Scheme (ETS) is considered one of the greatest successes of the European climate policy. Its actual impact on reducing greenhouse gas emissions remains very limited. Extensive literature and various studies seem on the surface to confirm the effectiveness of the ETS. However, if we look at these studies, we see that the vast majority of them are ex ante models, not empirical ex post studies. This conclusion was reached by Professor Jessica Green of the University of Toronto, who conducted a literature review on the topic of ETS and found fewer than 40 empirical studies of their effects. On the EU-ETS, Green concludes: “Despite the extensive human and financial resources invested in developing and managing the EU-ETS, annual emissions reductions (i.e. across all sectors) range between 0% and 1.5% per year.”[1]

At the same time, the system is burdened with serious flaws that allow it to be used as a speculative tool. It is therefore surprising that the European Commission has decided to extend the ETS to cover buildings as well as air transport. On the one hand, extending the ETS to buildings may lead to widespread energy poverty in Europe. The Union of Entrepreneurs and Employers has serious doubts as to how this effect can be reconciled with another strategic EU objective – namely a Europe with a strong social dimension. On the other hand, applying the ETS to air transport, which at the moment has no viable low-carbon alternatives, will increase flight prices and reduce the mobility of Europeans, hitting the core of the EU: the single market. Reduced demand for flights, in turn, could significantly reduce the sector’s projected ETS revenues – after all, the purpose of the ETS is to provide funds for green investments.

Internal contradictions in European climate policy

As our Union has previously warned, EU climate goals are being achieved at the expense of deforestation while having little real impact on greenhouse gas emissions. This is because EU law recognises bioenergy (including biodiesel and biomass) as climate-friendly and imposes on member states the need to achieve an appropriate share of renewable energy in final energy consumption. However, the original assumption about the “greenness” of bioenergy is due to an incorrect estimate of the greenhouse gas emissions that arise from its use. This error has been acknowledged by the European Commission itself in two reports on alternative land use cost (known as ILUC). These studies showed that when ILUC is taken into account, palm and soybean oil-based biodiesels have three and two times the emissions of traditional fossil diesel, respectively.

Worse even, the increased use of biofuels is leading to massive and unsustainable land conversion. A report by Transport & Environment found that EU’s demand for soybean and palm oil biodiesel required 4 million hectares of land, while demand for palm oil alone required the conversion of 1.1 million hectares of mature land in Southeast Asian countries into new palm plantations.[2] According to Euractiv, the deforested area is equivalent to the size of the Netherlands. To make matters worse, the forests converted are orangutan habitats.[3] T&E estimates that the EU’s increased demand for palm oil biodiesel is responsible for the destruction of 10% of the world’s remaining orangutan homes.

Politically motivated changes embedded in pro-environmental rhetoric

The carbon border adjustment mechanism (CBAM for short), or simply the EU carbon duty, is an example of green washing by the European Commission. The EC embedded this protectionist tax in pro-environmental rhetoric, even though its introduction is not supported by any rational evidence.

According to the EC, the introduction of the carbon duty is necessary to prevent the phenomenon of the so-called carbon leakage. This theory assumes that when emissions are taxed (see: ETS), high-emission production will be moved outside the EU, to countries where emissions are not taxed and therefore cheaper. In order to prevent production in areas with cheap emissions and the import of non-environmental products into the EU, CBAM is necessary. Unfortunately, there is no substantial evidence to support this theory.

A study by Frédéric Branger, Ph.D. and Philippe Quirion, Ph.D. of the Centre International de Recherche sur l’Environnement on the EU ETS has yet to find any significant evidence of carbon leakage.[4] Furthermore, a team led by Antoine Dechezleprêtre Ph.D. of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics used Carbon Disclosure Project data covering 2007-2014, which tracks the declared emissions of multinational corporations. In theory, it is these companies that should be affected by carbon leakage because, unlike, say, the SME sector, corporations have sufficient resources to move factors of production to another country. Meanwhile, Dechezleprêtre and his team found no evidence that the ETS has led to carbon leakage outside the EU.[5] In 2019, the World Bank agreed with these conclusions and concluded that there is little evidence of carbon leakage.[6] There is a plausible explanation for this phenomenon – the cost of the ETS is lower than the cost of moving factors of production.

At the same time, the EC is aware of the protectionist nature of the CBAM and the consequences that may result. This is evidenced by the fact that designing a World Trade Organization-compliant carbon adjustment mechanism has become an important item on the agenda of the EU institutions.[7] To make things worse, the continued pursuit of CBAM shows that the EC is decisively and consciously moving away from its longstanding work and commitment to multilateralism and liberalism, the strategies that has allowed the EU to gain its current global position.

Deterioration of the European economy

The proposals contained in the Fit for 55 package will lead to a worsening of the condition of the European economy, and consequently to the impoverishment of Europeans. The EU’s unilateral climate action will not achieve the intended climate goals for several basic reasons. First of all, the energy transition requires investment at the industry level, and economic regression will make this impossible. Secondly, for consumers to embrace new climate-neutral technologies, they need the resources to do so. It is obvious that burdening Europeans with additional taxes will reduce their disposable income, which they could spend on green investments. Third, the EU accounts for only a small portion of global emissions. Unilateral actions, although they may give a political impulse, are not able to generate real benefits for the climate. At the same time, these actions undermine international rules of cooperation and may make it harder, not easier, to reach a global consensus. Ultimately, the EU, at its own behest, becomes the world’s guinea pig for the “green” transition. In this situation, other countries may use the EU as a model, and implement only proven solutions themselves sometime after their introduction.

Conclusions

The Union of Entrepreneurs and Employers recognises the need to respond to the challenges of climate change. We are also in favour of reliable and reasonable actions motivated by concern for the future of the planet. However, taking into account the enormous costs for entrepreneurs and consumers, as well as the serious risks associated with political green-washing at the international level, we strongly oppose the actions of the European Commission.

In view of the above, in the discussion on climate regulations we appeal for honesty and fairness, respect for the needs of entrepreneurs and consumers, as well as genuine concern for the climate.

We appeal to the Polish government to oppose plans that will lead to a loss of Europe’s competitiveness in the global economy and to the mass impoverishment of its citizens. The issue is extremely serious – we need to build a coalition of countries, industry, consumers and stakeholders to stop these plans. We will support the government’s activities in this regard.

***

[1] https://iopscience.iop.org/article/10.1088/1748-9326/abdae9/pdf

[2] https://www.transportenvironment.org/sites/te/files/publications/Biofuels%20briefing%20072021.pdf

[3] https://www.euractiv.com/section/transport/news/eu-biofuels-goals-seen-behind-deforested-area-as-big-as-the-netherlands/

[4] https://www.reuters.com/article/us-climate-change-eu-carbontax-explainer/explainer-what-an-eu-carbon-border-tax-might-look-like-and-who-would-be-hit-idUSKBN1YE1C4

[5] https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2019/01/working-paper-165-Dechezlepretre-et-al-July-2019.pdf

[6] http://documents1.worldbank.org/curated/en/486921568877882882/pdf/Report-of-the-High-Level-Commission-on-Carbon-Pricing-and-Competitiveness.pdf

[7] https://www.europarl.europa.eu/doceo/document/A-9-2021-0019_EN.html

See: 12.08.2021 Memorandum of the Union of Entrepreneurs and Employers on European climate policy

Warsaw, 26^th July 2021

Position of the Union of Entrepreneurs and Employers on the draft Polish Export Policy

In the opinion of the Union of Entrepreneurs and Employers, the draft Polish Export Policy (hereinafter referred to as “PEP”) presented for pre-consultation is a document of strategic importance, aiming to shape an orderly system of support and promotion of exports, addressed to, among others, domestic companies from the SME sector. In our view, the consistent increase in the strength of Polish exports is an essential activity in the context of contributing to the wealth of the country and its citizens. As a rule, the increase in exports also causes an acceleration of economic growth and a decrease in unemployment, therefore a positive trade balance is one of the most important economic indicators.

The Union of Entrepreneurs and Employers generally agrees with the Ministry of Development, Labour and Technology as to the direction of the proposed solutions in the field of supporting domestic exports, however, we would like to present a number of postulates, the inclusion of which will significantly improve the effectiveness of the proposed strategy.

1. Diversifying the geographic structure of exports

First and foremost, the Union would like to indicate the fact that exports largely focus on markets within the EU. According to the information provided in the PEP, exports to EU member states currently account for approximately 76% of all Polish exports. Moreover, according to the data of the Polish Economic Institute, Germany is the market of highest significance for Polish goods, as it accounts for 27.5% of all Polish exports.[1] Strong focus on trade with Germany has made us globally the fourth largest supplier of goods to our western neighbour and the second largest in Europe. Only the Netherlands exported more to Germany, while only China and the USA did so from outside of Europe.

It is natural that neighbouring countries or those located nearby are responsible for the largest volume of exports and imports. The above-mentioned concentration also results from the single European market, and as a consequence, follows a significantly lower number of barriers to the movement of goods within the European Union. However, one should not disregard the negative aspects of such high concentration of exports solely to European markets.

First of all, one must mention the vulnerability of domestic exports to economic fluctuations in European countries. As things stand, Poland remains largely dependent on local economic conditions, which in the event of a recession in EU member states will have negative consequences for the Polish economy.

Therefore, in our view, the PEP should pay particular attention to the above-mentioned aspect, and as part of measures counteracting dependence on the economic situation in the EU, a greater emphasis should be placed on supporting exports to countries Poland has marginal trade with, as well as destinations oof significant export potential.

We believe that, while searching for new markets, Poland should look to, for instance, Asian countries whose significance on the international area has been steadily growing and thus also play an increasingly important role in the context of global trade. Currently, Poland’s largest trade partner from the Far East is the People’s Republic of China which only receives as much as 1.1% of all Polish exports.

It is our opinion that the geographical diversification of exports will help maintain the business security of domestic companies, as due to a de-concentration of exports, they will be less dependent on local economic conditions.

2. Public authorities reacting to protectionist measures in other countries

In the SWOT analysis presented in the PEP, the authors of the draft defined protectionist actions by other countries as a barrier to the internationalisation of enterprises. However, no instruments were introduced to prevent or respond to such behaviour by third countries.

In the report prepared by the Union of Entrepreneurs and Employers “Problems of Polish entrepreneurs in France”, we identified a number of measures undertaken by the French public administration against Polish entrepreneurs. These should clearly be classified as restricting the rights and freedoms embedded in the single market. Basing on examples cited in that report, one could argue that French authorities allow their local companies to build their position in violation of European law, to the detriment of consumer safety, and against the interests of entrepreneurs from other member states.

Therefore, in our opinion, it is important to strengthen the role of economic diplomacy, as its importance presently seems to be underestimated by bodies of the public administration. We call for a proactive diplomatic stance supporting Polish entrepreneurs in the context of overcoming protectionist barriers imposed by individual states. Both public administration, embassies, consulates, as well as Foreign Trade Offices of the Polish Investment and Trade Agency should be involved in any and all cases regarding Polish entrepreneurs experiencing difficulties in running a business abroad, providing them with all the necessary legal and diplomatic assistance.

In our view, an equally important element missing in the PEP project is an educational campaign and other activities addressed to exporters, aimed at increasing their awareness of legal instruments at their disposal in disputes with authorities in other EU member states. In this place, the SOLVIT system should be mentioned as the first instance when a government agency of another EU country does not respect the rights of individuals or companies under EU law. Unfortunately, due to the low awareness of entrepreneurs, SOLVIT is of marginal use when it comes to out-of-court dispute resolution with the administration of another EU country.

3. Necessity to complete the catalogue of industries covered by Sectoral Promotion Programmes

As part of the Sectoral Promotion Programmes (pp. 13 and 14), support is to be provided for various sectors of the economy relevant to exports, but – as is usually the case with closed catalogues covering a list of specific industries – it seems that this list too should be re-analysed and supplemented accordingly. One could point out, for example, that support for producers of household chemicals was not included in the Sectoral Promotion Programmes. It is noteworthy that the importance of the domestic detergent sector has grown as a result of the COVID-19 pandemic, resulting in increased demand for biocidal products. Meanwhile, worldwide demand for detergents remains increased due to sanitary requirements and restrictions still in force – it seems that this could be the right moment to boost the position of Polish producers on the global market. Bearing in mind such a shortcoming as this one, the list of industries covered by promotion programmes should be re-examined and supplemented considering the export potential of individual sectors.

4. No link between the strategic goals of PEP and the assumptions of the Polish Hydrogen Strategy

According to the contents of the presented document, the Polish Export Policy aims to create forms of support for industries that are most prospective in terms of export and, at the same time, have the greatest potential to build a positive image of the Polish economy. The current wording of the export strategy does not mention the opportunity resulting from the emerging global megatrend: the use of hydrogen as an energy source. The PEP refers to the Polish Industrial Policy numerous times, indicating that both strategies are correlated with each other. However, no actions are foreseen to consolidate the Polish Hydrogen Strategy with the Polish Export Policy.

Due to an adequate promotional support, hydrogen technologies or public transport vehicles that are being developed in Poland stand a great opportunity to enter foreign markets. We are aware of the fact that the Sectoral Promotion Programmes provide support for sectors such as the automotive sector or the rail transport sector, however, in our opinion, there is concern that, under these programmes, the export potential of hydrogen-related goods will not be fully utilised whereas the aid will be allocated to, for example, the promotion of vehicles using traditional fuels. Therefore, we recommend distinguishing the hydrogen sector as a separate category for which additional promotional support would be provided.

5. Significance of e-commerce

We share the diagnosis made by the Ministry, according to which there is a chance to increase the share of Polish exporters in the dynamically growing global e-commerce market. The development of on-line sales through export to foreign markets is a real opportunity for Polish companies from the SME sector. Owing to the relatively low employment and production costs, they have the possibility of competing with Western companies in terms of price, and additionally – thanks to the highly developed digital competences of Polish employees – they also have a chance to compete in terms of the quality of customer services, no matter where the customer is from.

However, according to the results of the study commissioned by the Union of Entrepreneurs and Employers about e-commerce in Poland[2], a significant number of companies trading via the Internet are not present on foreign markets. According to the results of the survey, from all the surveyed companies that sell online 53% are exclusively or only present on foreign markets. This percentage is higher among manufacturing companies, larger ones, and those that have longer been on the market.

The arguments above indicate an enormous potential that lies dormant in Polish enterprises that have not yet decided to expand abroad. Indeed, one of the barriers to entering foreign markets is the lack of knowledge how to develop sales outside the Polish jurisdiction, especially among representatives of companies from the SME sector. Therefore, in our opinion, the PEP should provide support in the field of increasing competences in the use of the e-commerce channel.

Moreover, we suggest analysing the major barriers to digital internationalization of Polish SMEs – that are largely of a technical and organisational nature, as well as focusing on defining tools and methods for their removal. One of the barriers that we observe are, among others, the lengthy and complicated customs and tax processes in exports, and thus – the need to devote the limited resources of companies from the SME sector to administrative activities, instead of focusing on effective foreign expansion.

At the same time, we call for the processes of exporting goods to non-EU markets to be simplified and digitised. One possible solution would be to create a national platform facilitating formalities regarding exports, which would enable a completely new approach to international trade, while giving the National Revenue Administration full control over this process. We would definitely see the development of the concept of such a tool and its implementation as an element of the Polish Export Policy. Perhaps more detailed solutions could be developed within working groups composed of representatives of business and administration.

6. Summary

Impacted by the global COVID-19 pandemic, the world finds itself in the midst of major economic changes. Broken supply chains in the era of the greatest sanitary restrictions or problems with transporting goods to Europe have caused companies to look for alternatives to products and raw materials from Asia. Polish producers, who are able to compete with producers from Asian countries in terms of prices, can take over some of that production and orders that have so far been sent to the East. To do this, however, it is necessary to quickly enforce the solutions provided for in the Polish Export Policy in order to take advantage of the moment at hand, while supply chains are still being redefined.

To sum up, we call for the introduction of solutions and instruments that will simplify export processes. Without a doubt, complex and bureaucratic procedures affect smaller companies, whose human and financial resources are significantly limited, the most.

The cornerstone of the strategy under construction should be the pro-entrepreneurial approach of the authorities and institutions aiding exports. Their effectiveness largely determines whether entrepreneurs will more often and more willingly decide to export goods to other countries, instead of focusing only on the local market.

We also point to the need to diversify the sales markets, as this will limit the impact of a potential economic crash in individual countries on the situation of Polish exporters. A strong focus on trade relations with only one partner may generate significant business risks for companies, also due to the protectionist measures undertaken by some countries.

***

[1] “The transformation of Polish exports – 30 years of growth and what next?” („Transformacja polskiego eksportu – 30 lat wzrostu i co dalej?”), Polish Economic Institute, December 2020

[2] “Survey on companies selling online” („Badanie firm dot. sprzedaży on-line”), Maison & Partners commission by the Union of Entrepreneurs and Employers, April 2021

 

See more: 26.07.2021 Position of the Union of Entrepreneurs and Employers on the draft Polish Export Policy

Warsaw, 28^th July 2021

Memorandum of the Union of Entrepreneurs and Employers on alternative solutions for entrepreneurs in the Polish New Deal

The Union of Entrepreneurs and Employers postulates to resign from burdening entrepreneurs with the National Health Fund premium proportional to income or revenue, and to abandon the possibility of deducting the NHF premium from the personal income tax paid by entrepreneurs.

We propose that only three forms of running a business in the system be left in the system, all of which are simple from a tax point  of view:

1. a small one-person business activity (sole proprietorship) for those with revenues up to PLN 120 thousand annually;
2. flat tax on the current terms;
3. lump sum on revenues with revised tax rates.

Furthermore, we propose a gradual increase in the basis on which health insurance premiums are calculated and paid by entrepreneurs to the level of 90% of the average wage.

The following concepts may help supplement the budget revenues that were to come from the solutions described in the Polish New Deal:

1. a uniform VAT rate of 18.75% (for the least wealthy, we propose a compensating solution in the form of a social card);
2. a minimum CIT rate of 1% of the revenues generated in a given tax year.

 

See more: 28.07.2021 Memorandum of the Union of Entrepreneurs and Employers   on alternative solutions for entrepreneurs in the Polish New Deal

Warsaw, 22^nd June 2021

Opinion on demography of the Chief Expert of the Union of Entrepreneurs and Employers on Political Economy

It has been known for more than a dozen years that Poland is at risk of a demographic tsunami. Pursuant to that, the Union of Entrepreneurs and Employers has touched upon this subjects numerous times. The drastic decrease in fertility rate and the (quite obvious) dramatic decrease in the number of births accompanying it began in the final years of the Polish People’s Republic and lasted at least until the beginning of the 21^st century. This decrease and the subsequent stabilisation of the number of births translate into the fact that nowadays almost 2 times fewer children are born than in the early 1980s and approximately 30% less than at the threshold of the economic transformation. The time of the pandemic has shown how important a factor influencing the decision to parentage today is the issue of confidence and security. That period of uncertainty at the beginning of the pandemic brought about a sharp – though probably temporary – drop in births (an interesting case that remains to be seen is whether the next waves of the pandemic or how the right to abortion was exploited in the current political disputes will also affect the number of births this autumn).

Furthermore, the high migration wave after the accession to the EU brought about serious consequences. Although Poland has almost always been a region people migrated away from, the last wave of emigration has contributed to the deepening of the growing birth crisis. For a short period, politicians accepted it with a feeling of relief, as it resolved tensions on the labour market at the beginning of the 20^th century. This way, however, a significant part of the last numerous generation of Poles decided to leave the country forever, and often also to have kids abroad.

The declining pressure on the labour market, as well as the decreasing burden on the education system were viewed as benefits, or at least not as threats. After the problems on the labour market from the 1990s, Poland entered a period when it simultaneously benefited from European integration and a demographic premium (a decrease in the demographic dependency ratio resulting from decreasing cohorts of children and still small cohorts of retirees). The outflow of migrants helped further, relieving another of the costly welfare state systems: unemployment benefits. Economic growth was fuelled by the inflow of European development funds and the unchanging relatively low labour costs. However, as time passed, that demographic premium began to lose its significance and the cost of functioning of the state began to rise. Today, it is evident that we are on the verge of a major demographic crisis.

It is also worth adding that the actual fertility rate in Poland is difficult to determine – which is surprising, because the knowledge of what it really is should be the foundation of modern evidence-based policy (EBP). The above-mentioned wave of pre- and post-accession emigration is not properly registered in official statistics. As a result, in the calculation of the total fertility rate (TFR), we do not know the precise divisor. Many women aged 18-30 left Poland between 2004 and 2011, most probably never to come back. This generation still determines the Polish TFR. A fertility rate, in which the absence of a significant group of women in Poland is ignored, is certainly underestimated. And who knows by how much – is it 5, 10 or more percent? (Independent estimates put that number between 5 and 10%.) In fact, the administration, as well as all of us, are not able to compare the fertility level of Poland and – for example – Hungary, Slovakia or Austria. We only know what the situation looks like superficially.

And the situation of Poland is not an exception to the rule – a decline in the TFR below replacement-level fertility is a problem for the entire developed West, and Europe in particular. And some countries begin suffering from it too early, or at least quicker than the developed countries of the West – before they become wealthy enough and stabilise their prosperity. This is being said about China, but Poland and South Korea are equally good examples. Economic success translates into a decline in fertility rates, and the demographic premium is replaced by growing burdens from the growing cohorts of retirees. Labour costs followed by a workforce shortage grow regardless of productivity increases (because the labour market becomes unequivocally and fully the employee’s market). If there are no good solutions, the demographic crisis will translate into a decline in labour supply (actually, the symptoms of this problem are already visible, see below) and – with a high probability – a loss of competitiveness, and, consequently, a slowdown in economic growth and convergence processes with Western economies. One may hope that the increase in productivity will compensate for the decline in workforce, but this is most probably a false hope.

The economy is already feeling the falling labour supply. Admittedly, ministers are proud to report that we have passed the pandemic crisis safe and sound also with regard to unemployment. But I believe that the very low unemployment at the end of a deep crisis is not so much due to great aid and anti-crisis programmes, but rather is a serious warning bell that problems with labour supply are on the rise. The still low productivity of the Polish economy is compensated by the low level of wages and the availability of a (cheap) labour force. It looks like this model of economy is coming to an end, but unfortunately the structure of the economy changes more slowly than the demographic structure. This is due to one unexpected factor.

In recent years, Ukrainians and Belarusians have come to aid the Polish economy, seeking, like we had a few years earlier, a better life and a more normal world. They turned out to be a bit of an unexpected rescue – for employers, for the economy, for economic growth, and therefore (indirectly) for the government. However, unlike in the case of policies of many Western countries, it is difficult to indicate any action of government to encourage them to stay. All the while these are immigrants who are culturally close to us, who will potentially easily integrate with us, and are competent and educated. Many speak Polish well. It will be difficult to find “better” migrants in the future…

For the past dozen or so years, since the future consequences of growing demographic programmes have become more and more obvious, increasingly bold attempts have been made to remedy them. Tax breaks for parents as well as a large family card were introduced. The last of these attempts is the 500+ project, a financial support mechanism for people with children, which is also intended to be a stimulus to have children. However, quite quickly, even in official statements, the goal of this project began to evolve – and it became a symbol of the effective(?) social policy of the ruling party, Law and Justice. The topic of demographic or pro-family policy has been returning several times, for example when extending the 500+ programme to the first child. Thus far, regardless of official propaganda, all attempts have produced moderate results. The increase in the number of births after the introduction of 500+ from today’s perspective should be interpreted as an effect of accelerating the decision to have a child, and only to a small extent as an actual increase in the number of births. However, in order to find out the actual effects of the programme and the current fertility rate, it would be necessary to determine the actual number of women of childbearing age – hopefully the ongoing Census will help (and if it does not help, why do we need one at all?).

And only in this context, one must look at the new ideas of demographic policy in the Polish Deal. Unfortunately, they often boil down to promises regarding pro-family policy – as unwise as they are often redundant or long late considering the current situation on the labour market (such as incentives to create nurseries in each gmina, or commune). Basically, however, financial incentives (caring capital) are to be supplemented and a few privileges are to be added, which raises the question of why they are addressed only to families with children. Maybe the amount of 500+ will also be indexed.

Up until now, similar instruments have worked poorly (although no one intends to seriously conduct evidence-based policy and check which instruments are truly effective and only then support them). Perhaps, then, we need to look more actively for better solutions? Interestingly, politicians see the low effectiveness of the current policy and accept it with a certain amount of indifference or melancholy.

If we want the “golden age” of Poland’s development to last for the next years and decades (and this is what Law and Justice politicians are promising us), then we need an effective pro-family policy. And apart from the costly, but important and necessary (as long as they are properly designed) demographic policy programmes, we are also in need of a well-thought-out emigration policy. Two promises were made in the New Deal with regard to this. One empty and devoid of content: Poland will become an attractive country for specialists, thanks to government support mechanisms. And these specialists will pay taxes in Poland, not because it will be financially attractive, but because we will offer a better quality of life, conditions for integration, and security. The current level of salaries in Poland, the quality of public institutions (compared to our Western neighbours), and often the manner of conducting internal and international policies do not add any credibility to these words. Especially if it were to be supplemented with the second idea from the New Deal: a tax relief for returning emigrants (most probably, it will not have extravagant results either). And if, from their perspective, returns need to be made more attractive, then how can we expect that the same legal and tax order will be attractive for immigrants?

Much criticism has been directed towards “the gang in power”. I do not agree with all of it. However, one of their greatest sins will be the neglect of policies on family, demographics, and migration, because they may (though hopefully not) weigh on the next decades of Poland’s development.

Piotr Koryś, Ph.D.
Chief Expert of the Union of Entrepreneurs and Employers on Political Economy

See more: 22.06.2021 Opinion on demography of the Chief Expert of the Union of Entrepreneurs and Employers on Political Economy

Warsaw, 14^th July 2021

Polish entrepreneurs are hoping that the CJEU will recognize the so-called „VAT paid sooner” (PL: szybki VAT) on intra-Community acquisitions of fuel, which is a pillar of the government’s regulatory package known as the “fuel package”, as compliant with EU law

Fuel industry organizations (Polish Chamber of Liquid Gas – PIGP, Polish Chamber of Liquid Fuels – PIPP, Polish Petroleum Industry and Trade Organization – POPiHN, Polish LNG and BioLNG Platform – PPLNG ) and Union of Entrepreneurs and Employers – ZPP, took a position in a case pending before the CJEU, regarding the compliance of Polish VAT-14 regulations with EU law (C-855/19). The case is pending at the request of the Supreme Administrative Court in the case of G. Sp. z o.o. v Director of the Tax Chamber in Bydgoszcz. The reason for the joint motion was the opinion of the Advocate General of the CJEU, who found the regulations under review to be inconsistent with EU law.

The letter to the CJEU was agreed with the companies most widely using the existing rules. The signatories work for a competitive, customer- and business-friendly market, ensuring the safe and sustainable development of the economy, taking into account EU standards and European values. Following the amicus curiae* tradition of Roman law, these organisations submitted a position paper to the CJEU to assist the CJEU in deciding the case before it.

The scale of illegal fuel trading in Poland in 2015 reached over 20% of the legal market. One of the most popular models used by criminals was the importation of fuel by so-called “disappearing taxpayers”. The proposal to accelerate VAT prepayments on intra-community fuel acquisitions was proposed by fuel companies even before 2015. Such a solution, although it had a negative impact on the liquidity of entrepreneurs, was nevertheless necessary to combat organized crime.

Changes in regulations, especially the acceleration of the deadline for paying VAT advance on fuel purchases and the monitoring of transport, developed in cooperation with the fuel industry, resulted in a large increase in recorded sales. According to POPiHN calculations, tax revenues paid by the fuel industry in 2015 from VAT, excise duty and fuel surcharge were PLN 50 billion, and in 2019 ca. PLN 74 billion. Most of this increase was due to a reduction in the activities of criminals.

A formal and legal analysis may also support the conclusion that the mechanism of „VAT paid sooner” (PL: szybki VAT) is compatible with the EU law. The argumentation used by the Advocate General a contrario when comparing the scope of Articles 273 and 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax raises key doubts.

According to Krzysztof Rutkowski, legal counsel – The Advocate General of the CJEU presented a biased opinion that omits arguments for Poland’s position. In particular, there are doubts as to the interpretation of Article 273 of the VAT Directive according to which the demand for payment by way of future tax may concern only ‘net’ amounts and must therefore relate to the ‘result’ of the amount of VAT due for a given period, and not to the ‘gross’ amount of VAT. In my view, AG Saugmandsgaard’s view that under Article 273 of the directive Member States may impose only such ‘additional obligations’ which would be fully (i.e. 100%) compatible with the other provisions of the VAT directive is also incorrect. Such an interpretation deprives Article 273 of its substance and meaning.

Adoption of the Advocate General’s position may undermine the assumption of rationality of the EU legislator and should not be acceptable in the current legal system. At the same time, the position draws attention to the fact that the adoption of such an interpretation by the CJEU would means that national law would have to be amended in the contested area. In other words, one of the pillars of tax sealing, which significantly contributed to reducing gigantic pathologies in the liquid fuels market sector, will be undermined. 

Polish entrepreneurs hope that the CJEU will acknowledge the compliance of the “VAT paid sooner ” with the EU law. The adoption by the CJEU of the position of the Advocate General could undermine the confidence of legal business in EU law and EU institutions, and would also entail the risk of an increase in illegal fuel trading in Poland – said Marcin Nowacki, Vice-President of ZPP.

All members of the aforementioned organizations hope that the Court will take advantage of the benefit from the institution of amicus curiae and will accept the interpretation that Polish legislation on „VAT paid sooner” is consistent with EU law.

* Amicus curiae – a person or organization that is not a party to the litigation and voluntarily, on its own initiative, offers the court a legal or other opinion concerning the subject matter of the litigation.

See: Polish entrepreneurs are hoping that the CJEU will recognize the so-called „VAT paid sooner” (PL: szybki VAT) on intra-Community acquisitions of fuel, which is a pillar of the government’s regulatory package known as the “fuel package”, as compliant with EU law

Warsaw, July 13, 2021

 

Warsaw, 24^th June 2021

ZPP Report: Proposals of measures to end the abuse of pre-trial detention in Poland

In many countries, including Poland, the abuse of pre-trial detention is a severe problem. At any given moment, over 3 million people are held in pre-trial detention centres around the world. Disgracefully, in terms of the number of pre-trial detainees, Poland is among the leaders of this ranking. Per 100,000 citizens, there are 195 pre-trial detainees in Poland, while the EU average amounts to approximately 100. At the same time, there are three times as many people detained on a pre-trial basis in Poland than in Sweden, Finland or the Netherlands.

According to Cezary Kaźmierczak, President of the Union of Entrepreneurs and Employers: “Pre-trial detention should be limited to high-risk crimes involving violence only. Such a solution will bring great benefits to our society, and as the political struggle intensifies, this issue should also be in the interest of all politicians.”

The Union of Entrepreneurs and Employers (ZPP) published a report dedicated to the analysis of the legal systems of six selected European countries. Therein, the Union proposes a number of recommendations that would put an end to the abuse of pre-trial detention in Poland. Amongst the most important recommendations, there are the idea to limit pre-trial detention to high-risk violent crimes and the introduction of a statutory limitation of the maximum duration of pre-trial detention, with various maximum periods for minor and major offenses.

“Following the example of Finland, we propose to introduce of a burdensome system of fines based on the income of a given person as well as the so-called “summary penal fee”, which allows you to convert the sentence of up to 6 months imprisonment for minor offenses into a pecuniary penalty,” adds Kamila Sotomska, Deputy Director of the Department of Law and Legislation at the Union of Entrepreneurs and Employers.

The abuse of pre-trial detention violates fundamental rights and causes enormous harm to both the wrongful detainee and society as a whole. The proposed solutions will help curb this problem.

Find out more: 24.06.2021 Report by the Union of Entrepreneurs and Employers: The abuse of pre-trial detention