Monday, 24 January 2011

Miller - 'Cut Business Taxes First'

Leszek Miller, the former Prime Minister and leader of the Democratic Left Alliance (SLD), commenting on the present government's public finance and tax policies, has argued that taxes should 'firstly and perhaps only be cut for businesses'. The context of his comments was the experience of his term in office as PM between 2001 and 2004.

The SLD returned to power in 2001 on the back of a disastrous right-wing coalition government (AWS-UW) that saw economic growth fall from nearly 6% to 1% and unemployment rise from 10.3% to 18% . As a result the SLD won over 40% of the vote in the 2001 elections and was able to form a coalition government with the Peasants' Party (PSL).

The SLD was governing during a period of intense economic difficulty. Economic growth was stagnant, exports falling and unemployment exceeded 20%. The government was in continuous conflict with the National Bank of Poland and Monetary Policy Council - which maintained the highest real interest rates in Europe and an overvalued currency. Miller was also in disagreement with his former ally, President Aleksander Kwaśniewski. Simultaneously the government was finalising the EU accession negotiations, which exerted a huge external pressure upon it to reduce government spending and - in the words of its own manifesto - to 'finish the process of ownership transformation in the Polish economy'. Combined with a series of corruption scandals and the decision by Miller to support George Bush's adventures in the Middle East, the SLD faced a turbulent time in power from which it is yet to recover.

One of the first victims of the government was the Finance Minister Marek Belka. Belka - who is the current head of the National Bank of Poland - had been widely blamed for costing the SLD an overall majority when he announced shortly before the election that he would push through austerity measures to rebalance the budget. The resignation of Belka was as much a result of the conflict between Miller and Kwaśniewski (of whom Belka was an ally) than to do with concrete economic policy. However, it did open the way for the return of Grzegorz Kołodko - who had been the relatively successful Finance Minister during the term of the first SLD-led government in the 1990s.

Kołlodko offered a break from the more liberal policies of Belka and proposed a programme aimed at reigniting economic growth and reducing unemployment through the government taking a more interventionist role by supporting industries threatened with collapse; actively reducing inequalities; increasing education spending; devaluing the currency to boost exports and increasing taxes for the highest earners. Whatever the merits of such a programme, it did not comply with the wishes of those controlling the financial levers in Poland or Europe. After a period of political struggle Kołodko was replaced by Jerzy Hausner as Finance Minister.

It is Hausner who Miller praises in his recent interview, claiming that the 'Hausner Plan' was the last attempt to seriously reform Poland's public finances. He states that this was necessary due to the fact that the budget deficit had reached 11% of GDP. Unfortunately, Miller's memory seems to be playing tricks with him as the budget deficit in Poland, throughout the SLD's term in office, hovered at around 5-6%. Miller is in fact probably referring to the infamous prediction made by the Finance Minister from the AWS-UW government, Jarosław Bauc, who predicted that the budget deficit might exceed 11% of GDP - a statement that triggered that government's collapse. Also, although Hausner did propose a number of reforms to public finances, he was opposed to Kołodko's policy of rapidly entering the eurozone and was therefore not so concerned about quickly bringing down the budget deficit. Therefore a major component of his programme was to cut the country's corporation tax from 27% to 19% (Kolodko had proposed reducing it to 24%.) This action led to Poland having one of the lowest corporation tax rates in the whole of Europe, thus starving the budget of essential funds and further placing the burden of public finance onto employees. Simultaneously the government proposed decreasing subsidies for mines and railways, reducing sickness allowances, cutting help for companies employing disabled workers, increasing the retirement age for women, limiting public sector pay and reforming the labour code.

Miller had traditionally been seen to be a 'hardliner' in the party and had not gained the trust of the liberals as Kwaśniewski had done. He therefore attempted to curry favour with the establishment through adopting an economic stance (which he still maintains) that was even more liberal than his rival in the President's palace. This culminated in his announcement, the day after the EU referendum, that he would be prepared to consider the implementation of a flat-income tax rate in Poland. This is probably the first time in history that a leader of a social democratic government has made such a proposal. Expressing this newly found liberal faith he stated:
'Generating national wealth and its redistribution are to a large extent separate spheres. The first is decided by the hard and objective laws of economics and the market and the second by social justice. Policies must have a liberal character because the market can only fulfill its potential in conditions of a free economy. The problems of society must not be placed on the market nor should ideology be an impediment for the free market. Economic growth will be quicker through low taxes, a low budget deficit and better management of budget resources.' (Trybuna, 09.10.2003)

In his latest interview Leszek Miller quotes a colleague who told him that the Hausner Plan would be 'very good for Poland but fatal for the SLD'. Well at least he was right in one respect. Miller managed to cling onto power until the day after Poland joined the EU, after which he was replaced as PM by Marek Belka (returning from his post as financial advisor in Iraq) to form a 'government of experts'. The SLD's support had fallen into single figures, the party split and around a third of its membership left. The SLD has not even managed to win a half of the vote it gained in 2001 in any election since.

However, Miller claims that it was these policies that allowed the Polish economy to grow again and for unemployment to fall. This analysis completely ignores the impact of Poland entering the EU, which led to an increase in foreign investment, an inflow of European funds, alongside the emigration of around 1.5m people. In fact, the cutting of business taxes did not even lead to any real increase in private investment. The recent growth within the Polish economy has had more to do with public investment than a stagnant private investment rate, despite the fact that private businesses have enjoyed a huge tax break for the best part of a decade.

There are many lessons for the left from the experience of its last term in office. Unfortunately it seems that Leszek Miller has not learnt them.

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