Warsaw, 25th September 2019
POSITION OF THE UNION OF ENTREPRENEURS AND EMPLOYERS ON THE
DRAFT STATE BUDGET FOR 2020
The draft budget act for the year 2020 is definitely a historical project. For the first time after 1989, the government proposed a balanced budget, i.e. one in which the sum of revenues is equal to the sum of expenses. The lack of a planned budget deficit is an unprecedented phenomenon that should be assessed definitely positively. Thus far, a deficit amounting to tens of billions of zlotys was an almost certain element of every subsequent state budget. It is admirable, therefore, that with such extensive social policy, the government managed to balance revenues and expenses. This is also important because in the last few years, which were a period of excellent economic situation, subsequent budgets were characterised by relatively small, albeit still deficits.
At the same time, other European countries, such as Germany, were generating budget surpluses. We clearly assess the break up with this kind of “tradition” of having a budget deficit positively, and consider it a great step in the right direction in the general discussion on national financial management. By respecting the rule of expenditure and preparing a budget without a deficit, the government sent a clear signal, also crucial from the point of view of subsequent teams in power, that we should spend as much as we “earn” from taxes and other sources, or at least minimise the deficit. At the same time, at least a few sources of budget revenues that have helped formulate a balanced budget remain dubious. Some aspects of it may be of concern to entrepreneurs.
The planned abolishment of the so-called 30-fold limit has to be assessed negatively. Until now, an employee who generated an income higher than 30 times the forecasted national average remuneration over the course of a year, after reaching this ‘ceiling’, stopped paying social security contributions. This construction has two reasons. First of all, we can assume that people who earn relatively well will be more likely to save their own funds for retirement on their very own. Among other things, the 3rd retirement pillar in the form of Individual Retirement Accounts or Individual Retirement Security Accounts serves as a tool to realise this potential. The current 30-fold limit allows one to generate a certain amount of funds that can be allocated to private retirement savings. Secondly, this limit is a security measure for the Social Insurance Fund, and indirectly also for the state budget. Under the system which is currently in force, the amount of pension depends on the amount of contributions paid over the years of professional activity to the system and the life expectancy forecasted by the Central Statistical Office. Thus, theoretically, the more someone has paid into the system, the higher their pension should be.
In the case of people earning relatively high sums, such a system, without the 30-fold limit, would be burdened with the risk of having to pay very high pensions in the future. This would be dangerous not only due to the financial condition of the Social Insurance Fund (especially taking into account the current financial forecasts of the Fund), but also the state budget, because in the case in which the funds accumulated in the Social Insurance Fund are not sufficient for the current payment of pensions, the Fund is ‘fed’ by the state budget. Therefore, despite the fact that it is a separate organisational unit, its financial condition has a direct impact on the state of the state itself. Therefore, we assess the abolishment of the 30-fold limit, as we have done it many times in the past, definitely negatively. Potential revenues from the abolition of the limit are estimated at approximately PLN 5 billion. It seems that entrepreneurs would gladly accept a correction of the announcement of a budget without a deficit considering the withdrawal from this idea which is clearly harmful to Poland.
The accumulation of social programs also seems to be dangerous. While the 500+ program significantly reduced the problem of extreme poverty among families with children in Poland, at the moment we are dealing with a multitude of different types of benefits, some of which were included in the draft budget (extension of 500+ to every first child, the “Good start” program which is a sort of a package for school children and adolescents, medication program 75+), some were adopted this year (13th retirement), and others have just been announced (13th and 14th retirement as annual benefits for pensioners). In the current, still good economic situation, the successful implementation of these announcements is not endangered. The danger, however, exists that when the national economy stops growing at an expected pace, the state will be willing to reach deeper into the pockets of taxpayers, counting on primarily entrepreneurs and middle class representatives to finance their proposals. One of these manifestations may be the abolition of the 30-fold limit, which had already been discussed, however, in the context of the proposals contained in the Long-Term Financial Plan, it also seems dangerous to extend the obligation to pay social security contributions for other purposes. Such an increase in labour costs, combined with an increasingly intense wage pressure (especially in the context of an abrupt announcement of a minimum wage increase), must translate into an increase in the prices of products and services, and, consequently, lower competitiveness of Polish companies.
It is not at all possible not to notice that the budget includes a significant reduction in the tax wedge consisting of several elements, i.e. exemptions from PIT for employees up to 26 years of age, a reduction in the basic PIT rate to 17%, as well as an increase in tax deductible costs. This is obviously the desired direction. The Union of Entrepreneurs and Employers has consistently supported every initiative aimed at reducing all taxes and levies resulting in a payroll burden.
It is difficult to predict how realistic the macroeconomic assumptions used by project’s authors to develop a budget remain. The almost 10% revenue increase from VAT, stable revenues from income taxes and excise duties – there is no doubt that these issues were estimated assuming that the Polish economy will not be affected by a significant slowdown. It is impossible to say now whether such optimism was justified. One must, however, take into account the fact that so far the deteriorating sentiment in the German economy has not had a greater impact on the dynamics of Polish growth.
There is no doubt that the first balanced budget after 1989 is a very good piece of information. It is difficult to accept this success be depreciated by emphasising e.g. the one-off nature of some of the funds. Of course – some of them, such as the transformation fee from Open Pension Funds or proceeds from the sale of CO2 emission permits do not take place on a regular basis. However, we are dealing with such cases very often, from various titles, and so far this has not resulted in creating a budget in which the sum of expenses would be balanced by the sum of revenues. At the same time, criticism should be taken into account, as it would be reasonable to develop a long-term strategy for balancing state finances, taking into consideration many risks – both of temporary and strategic nature – and finding ways to neutralise them. A budget without a deficit (or with a minimal deficit) should not be an exception in the long, multiannual history of state debt, but should become a new target, a kind of a standard that any government should strive for every year.
Download the position: Position of the Union of Entrepreneurs and Employers on the draft state budget for 2020