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Commentary of the Union of Entrepreneurs and Employers (ZPP) on the necessary reduction of expenditure on social and welfare programmes in hard economic times



Warsaw, 10 November 2022 

 

Commentary of the Union of Entrepreneurs and Employers (ZPP) on the necessary reduction of expenditure on social and welfare programmes in hard economic times

  • Due to the increasingly difficult situation of public finances, the government should aim to redefine the direction of its social policy. The abolition of benefits such as the thirteenth and fourteenth pension, the launching of the “Dobry Start” (Sure Start) programme and the reorganisation of the “Rodzina 500 plus” (Family 500 plus) programme could contribute to a significant reduction in budget spending and constitute a key source of desired savings.
  • Returning to the original form of the “Rodzina 500 plus” programme, excluding the payment of the benefit for every first child without setting an income threshold, could reduce the budget costs of the programme by about PLN 20 billion per year.
  • The abolition of the so-called thirteenth and fourteenth pension can lead to a direct reduction of expenditures related to the pension system by almost PLN 25 billion a year.
  • Moreover, the effectiveness of any other social and welfare programmes should also be thoroughly assessed.

Rising inflation and the instability of the economic environment caused by the negative economic consequences of the pandemic and Russia’s armed aggression against Ukraine and the related energy crisis should force the government to redefine the direction of its fiscal policy.

Although the Ministry of Finance reported a budget surplus for the period from January to September 2022 in the amount of PLN 27.5 billion, it should be remembered that a significant proportion of expenditures is charged to non-budgetary funds. And thus, based on Poland’s fiscal notification presented by Eurostat, the general government deficit in 2022 will be approx. PLN 141.4 billion compared to approx. PLN 48.195 billion in 2021. The deficit of the central government subsector will increase from PLN 49 billion in 2021 to PLN 135.9 billion this year. The local government surplus will also be lower – PLN 6.52 billion in 2022 compared to PLN 14.92 billion in 2021. The deficit of the social security funds subsector is expected to be PLN 12.84 billion. The cost of aggregate debt servicing for the public finance sector will also be high and will amount to 1.75% of GDP, i.e. almost PLN 53 billion.

The government seems to assume that adjustments to fiscal policy should involve instruments that have as little direct impact on the sphere of social benefits as possible. According to reports, the Prime Minister issued a working order for the introduction of a programme of budget cuts in ministries, which is expected to result in savings of about PLN 10-15 billion – it is still a negligible amount with respect to real needs. Reducing expenditures on social programmes seems to be the most natural and desirable response today, which should be reflected in the decisions of state authorities, especially given the fact that the most important social programmes have cost us around PLN 250 billion since 2016.

In February 2022, even before Russia’s invasion of Ukraine, the Union of Entrepreneurs and Employers (ZPP) urged the decision-makers to adopt a “conservative turn in social and budgetary policy” in the face of potential economic risks that make it much more difficult to stimulate economic growth with consumption, which is misguided in its nature. Already at that time, ZPP warned that, in the near future, high expenditure on social benefits could become cumbersome from a budgetary point of view. Cuts in spending on social programmes are today the surest way to restore the sustainability of the public finance sector. Plans to redefine the policy directions in other areas are subject to considerable risk resulting from uncertain estimates and forecasts, which are made in times of pandemic and war.

“Rodzina 500 plus” programme

As far as social spending is concerned, the flagship programme of Zjednoczona Prawica – “Rodzina 500 plus” (Family 500 plus) has been the biggest strain on the budget for years. By the end of 2021 alone, it cost us about PLN 180 billion. As at today, the annual cost of the “Rodzina 500 plus” programme is PLN 41 billion. This is more than twice as much as the cost of the programme in its original version – at the time, the then Ministry of Family, Labour and Social Policy reported that the cost of the programme would be PLN 21 billion.

In this context, it is worth recalling that in the original version of the “Rodzina 500 plus” programme, benefits were provided with respect to the second and each subsequent child to recipients whose income per household member did not exceed PLN 800 or PLN 1,200 in the case of a child with a disability.  In the second half of 2019, the income threshold was abolished, and the benefit was extended to every child, which led to an increase in expenditure on the programme to PLN 41 billion per year.

Restoring the original version of the programme, i.e. restoring the income threshold and excluding every first child from the benefit, would result in savings of about PLN 20 billion per year and a more targeted flow of funds under the programme.

Potential plans to index the benefit in its current form should also be abandoned. The Pollster research institute asked Poles in a survey commissioned by se.pl in October this year whether the government should increase the “Rodzina 500 plus” benefit to PLN 800. Fifty-one per cent of the respondents answered unequivocally “no”, 12 per cent answered “hard to say”, and 37 per cent of the respondents were in favour of an increase in the benefit. The results of the survey show a change in the way Poles think about budget spending. The majority of the respondents are aware of the fact that the costs of indexation of the “Rodzina 500 plus” programme would be borne by everyone, and that any attempt to “catch up with inflation” by indexing social benefits is too costly and counterproductive from the point of view of an already strained state budget. The results of the survey are also a signal for the ruling party, which should not see an increase in this benefit as an opportunity to extend the electorate – this is particularly important in the context of next year’s parliamentary elections.

Allowance for pensioners

The desire to maintain the so-called thirteenth and fourteenth pension is an incomprehensible move from the point of view of the difficult economic situation in recent years. It is worth recalling that the second pension was originally intended to be a one-off allowance, but – according to the government’s announcement – it is also to be paid in 2023 at an indexed, higher rate. According to the Ministry of Family, Labour and Social Policy, in 2022 alone, the cost of the fourteenth pension is expected to be PLN 11.4 billion. In 2023, it will be higher, as the minimum pension rate will also be adjusted. The popular thirteenth pension will cost us about PLN 13.1 billion in total in 2022.

In October 2022, inflation in Poland stood at 17.9 per cent and was the highest from December 1996. Despite regular increases, instead of reforming the ossified pension system, the government has only exacerbated its problems in recent years. The introduction of the thirteenth and fourteenth pension and the increase in the retirement age have dramatically increased costs generated by the pension system. It is also difficult to find an economic justification for further transfers. We should still consider them in the context of purely politically motivated actions.

According to the Union of Entrepreneurs and Employers, the “belt-tightening” policy should largely apply to the pension system. From the outset of the discussion on the introduction of additional allowances in the form of the thirteenth and fourteenth pension, we believe that they unnecessarily strain the budget and are used to achieve political goals with respect to an arbitrarily designated group of the electorate; therefore, once again we emphasise the urgent need to abolish both allowances, namely the thirteenth and fourteenth pension. It should be noted that compared to the group of OECD countries, the Polish pension system is one of the most expensive systems, consuming more than 10% of GDP annually.

“Dobry Start” programme

“Dobry Start” (Sure Start) or “wyprawka” (school starter kit) or “300 plus” is another social programme that is excessively costly from the point of view of budgetary burdens. The essence of the programme is the annual payment of a one-off benefit to parents of school-age children up to 20 years of age or up to 24 years of age in case of children with disabilities.

The annual cost of the programme is almost PLN 1.45 billion, amounting to a total of almost PLN 7.5 billion from the start of the programme until the end of 2022. Based on the latest data on the condition of the public finance sector, it would be reasonable to abandon the programme in subsequent editions, which would give real savings of around PLN 1.45 billion per year.

Other relevant social and welfare programmes

The “Rodzinny Kapitał Opiekuńczy” (Family Care Capital) programme, which is a new benefit proposed in the Polish Deal, costs the budget PLN 3.15 billion per year. Moreover, parents of children aged between 12 and 35 months are entitled to a benefit of PLN 12,000 for their second and subsequent child. The allowance is paid in monthly instalments. The aim of the benefit is to encourage parents to return to the labour market, but it is difficult to determine its effectiveness due to the short duration of the programme. However, the introduction of an income threshold should be considered, which could significantly reduce the amounts of the payments and relieve the state budget.

“Mama 4 plus” (Mother 4 plus), the tourist voucher and other similar programmes represent a relatively small budgetary burden.

Conclusions

Abandoning some of the budgetary burdens associated with spending on social programmes or changing the criteria for some of the existing programmes will make it possible to save funds in the short term, which is necessary in light of the current crisis. If we return to the original version of the “Rodzina 500 plus” programme and give up the thirteenth and fourteenth pension, as much as PLN 40 to 50 billion per year will remain in the budget.

The government should also make every effort to change the tax system in order to give entrepreneurs a sense of stability and ensure an increase in the level of investment. The savings of PLN10-15 billion achieved by the government’s policy of cuts in ministries is a significant value but insufficient in the face of current challenges – after all, the anti-inflation shield alone is worth three times as much.

 

More: 10.11.2022 Commentary of the Union of Entrepreneurs and Employers (ZPP) on the necessary reduction of expenditure on social and welfare programmes in hard economic times

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