Thursday, 13 September 2012

Escaping the 60% Trap

Within two years public debt would cross the safety limit of 55% of GDP and in 2015 the constitutional limit of 60%.

This was the response of Finance Minister Jacek Rostowski to the recent presentation of the Law and Justice Party’s economic programme. We should get used to such statements,  as Rostowski has already declared that he will calculate the cost of the economic programmes of all the opposition parties in such a way. And we can be certain that once he has done his math all of them will exceed these magic numbers.

According to Poland’s financial law, if public debt crosses 55% of GDP then the next government’s budget will have to be balanced. This is upheld by the clause in the constitution, which states that public debt cannot cross 60% of GDP.  Public debt is already edging towards the 55% mark, economic growth is slowing down and unemployment rising. Combined this means that any future government will have virtually no room for economic manoeuvre and will be constrained in a straightjacket of spending cuts. And as the experiences of countries such as Greece, Spain and the UK show austerity equals more economic slowdown, further rising unemployment and thus more debt.

Unless the matter of the 60% constitutional public debt limit is tackled, all the declarations, programmes and good intentions of the opposition parties are just pure posturing. By placing such strict restrictions on its public finances, Poland is effectively ruling out a pro-growth strategy.

But what about the markets? The invisible hand, that in recent years has become such a sensitive soul, will be outraged and desert Poland. Well first of all let’s get Poland’s debt into some sort of perspective. The average level of public debt in the EU is 82.4% of GDP. In a number of countries it nears or exceeds 100% of GDP, and in the EU’s leading economy Germany, public debt is over 81% of GDP.

Nevertheless, the disciples respond, the constitutional limit on public debt provides a guarantee to the markets that Poland will not be reckless in its spending and keep its financial house in order. Without this guarantee, our bonds will be sold and the cost of borrowing rise, leading to economic calamity. Our economic success and international good-standing are due to our relatively low levels of public debt. 

There is certainly an element of truth in such thinking. Despite the pretence of neutrality the international markets are being led by a clear political project that is becoming increasingly ideological. Any move to change the limits on public debt in Poland will undoubtedly lead to it being punished on the international bond markets. As an economy standing on Europe’s periphery, it is more difficult for it to service high-levels of debt than it is in some of the leading economies in the West.

Once again, however, some perspective is needed. The bond markets have fallen sharpest in those countries in Europe (particularly in Southern Europe) that have introduced the largest spending cuts.  Despite the pressure on governments to introduce strict fiscal discipline, what the markets desire more than anything else is stability and growth. Whilst removing the 60% constitutional limit would ruffle the feathers of the bond markets, these would soon be soothed if the Polish economy were to continue to grow.

We have to ask ourselves what the alternative is. Economic growth declined from 3.5% in the first quarter of 2012 to 2.4% in the second quarter (a period in which Euro2012 was being held). All the major economic indicators are now turning downwards, most importantly the rate of investment (that had been driven by government led investment) declining from 9.7% in the fourth quarter of 2011 to just 1.9% in the second quarter of 2012. With the government seeking a policy of rapid deficit reduction and holding down its public debt, then it is introducing economic policies that are damaging the economy.

Poland has retained its stability and rising international reputation in recent years, not because of its strict fiscal policies, but because of its relatively sound economic performance throughout the economic crisis. If Poland were to undergo a serious economic downturn or recession then all of this would quickly dissipate. 

It is for these reasons that the left should now consider placing the issue of the constitutional limit on public debt at the centre of its economic programme. Poland needs a programme of economic and social investment in order to ensure the long term development of the country. This includes continuing and improving the infrastructural investment started through utilising EU funds. Significant investment in education and health is required, which would bring huge long-term social and economic gains. Primarily a programme of job creation must be instigated (the SLD’s recent support for a public works programme is a welcome step towards this aim), as the deactivation of labour has the greatest negative impact on the country’s economy, social harmony and public finances.

However, in order to embark on such a programme then there needs to be an initial outlay of money. Over the next few years Poland should be able to rely on a continual (although reduced) inflow of EU money that can be used to partly fund some of this investment. However, these funds are insufficient on their own, are limited to certain areas of the economy and need the joint investments of the national and local governments.

As well as looking at reforming the taxation system, to make it more progressive and fair, there needs to be a consideration of what funds the state can provide to instigate an investment programme. Poland was relatively fortunate to have avoided a full-scale banking crisis and therefore the state was not required to use vast funds to bailout this sector. However, as the Amber Gold scandal and threat of bankruptcies in the construction industry show, all is not potentially secure in the country’s financial sector. Therefore a future left government would also have to consider how it could help to recapitalise the banks and build its own capital base that would be the basis for a major programme of economic and social investment. 

This cannot be done without at least some initial rise in public debt and deficits. This does not mean that the left wants there to be a continuous rise in public debt. There is no desire to see public money wasted or spent on soaking up the misery caused by the increasing number of people pushed out of the labour market. On the contrary, it is only through a pro-growth/employment strategy that public finances in Poland can be secured in the long-term. It is up to the left to show that any short-term rise in public debt is occurring with the long term interests of the country and its population in mind and at how this investment will bring future returns.

Abolishing the limits on public debt entails reforming the country’s constitution, which is a major political act, requiring a two-thirds majority in parliament. However, the Polish constitution has already become a document of fiction, that is at best ignored and at worst abused. The act of reforming the public debt clause should be addressed as part of a programme to realise the social guarantees that are already written in the constitution. These include that health care should be provided by public funds to all citizens regardless of their material situation; that free state education should be guaranteed to all up to 18 years of age and that public authorities must introduce policies that guarantee the housing needs of citizens.

Despite the proclamations of PiS and its conservative allies that it wishes to create a new republic and cleanse the state, it has never once tackled the fundamental problem at the heart of the Polish constitution. For whilst clauses of fiscal discipline and religious attachment are complied with and referred to, its social declarations are routinely ignored. The opportunity exists for the left to take up this challenge and to show how austerity and cuts can be countered with a programme of investment and growth. 

No comments:

Post a Comment

Go for it - but if its abusive then it gets blocked