Sunday, 6 October 2013

Falling Public Investment Depresses Growth

We can all now breathe a sigh of relief. Donald Tusk has declared that the crisis in Europe is over, with Poland managing to survive this period of economic turbulence relatively unscathed. 

It is easy to dismiss such proclamations as wishful thinking. After all, the Eurozone economy  only left its longest ever recession in the second quarter of this year by growing at a meager 0.3%. Unemployment in the Eurozone stands at a record position of over 12% and youth unemployment has reached almost unsustainable levels in countries such as Spain where over a half of all young people are without a job. The austerity programmes imposed by the troika in countries such as Greece continue to drive down living standards and destroy public services. 

In Poland, the slowdown in economic growth was halted in the second quarter of this year, but its rise of 0.8% is still significantly below the level necessary to improve living standards and create jobs. Unemployment remains above 13%, real wages are depressed and huge sections of the workforce are employed on insecure, temporary contracts. Throw in the worsening state of many public services and things do not look quite as positive as the government may have us believe. 

Yet some of the declarations of the government have merit. It is indeed noteworthy that the Polish economy grew on average by 3.5% between 2008 and 2012, without which the living standards of the population would be significantly worse. The question is what caused this growth, why has it slowed down and how is it possible to increase economic growth and improve living standards?  

Poland enjoyed a unique combination of factors that helped it to avoid an economic crisis similar to that suffered in many other European countries. Relatively well-regulated banks, low personnel debt and non-membership of the Eurozone all helped the Polish economy. However, the primary factor that drove economic growth was the increase in government spending, particularly a rise in public investment. 

Whilst a range governments were introducing austerity programmes in Europe, government expenditures in Poland rose from €15.1billion at the beginning of 2008 to €16.5billion in the first quarter of 2012. The most important part of this was a significant growth in public investment, that increased from 4.2% of GDP in 2007 to 5.7% in 2012, leaving Poland with the highest level of public investment, as a share of GDP, in the whole of the EU. 

This surge in public investment was made possible by the €67bn in EU cohesion and structural funds made available to Poland from the 2007-13 EU budget, that were added to by significant government money. The impetus for investment came through preparing for Euro2012, with a  total of 26bn dollars spent on infrastructural projects such as stadiums and roads, which was more than the total spent by the British government on the London Olympics. 

Just as the major factor behind Poland’s economic growth was an increase in public investment, so the slowdown has been due to its subsequent fall. Between 2011 and 2012 public investment shrank from 5.7% to 4.6% of GDP. This decline looks set to continue, with investments in roads set to reach around 15bn złoty in 2013, down from 18bn in 2012 and 23.6bn zloty in 2011. Financial pressures are leading to local governments  reducing their investments to 36bn złoty in 2013, down from 40bn 2012 and 41.2bn in 2011. 

This decline in public investment has primarily been caused by the ending of  funds coming into Poland through the EU’s present budget and the tightening of government spending as public debt edges towards its self-imposed limit of 55% of GDP. This fall in public investment has not been made up for by a rise in private investment, as the profit levels of private companies were over 13% lower in the first quarter of 2013 compared to a year earlier. The government has failed to make up for this shortfall despite its announcement a year ago that it would be creating a new investment fund (Inwestycje Polskie) that was supposed to have instigated a new series of infrastructural investments.  So far its seems to have done little more than create a logo and a Facebook page that has 32 ‘likes’.

Nevertheless, there is some light at the end of the tunnel. Firstly, although for the first time in its history the next EU budget (2014-21) will be reduced in size, Poland will actually receive more money from this budget than from the previous one. Overall, it will have access to around €500bn from the next EU budget, which will equal around €1,890 per head, €82 more than that received out of the 2007-13 budget. Secondly, the recent decision of the Polish government to at least partially abolish the compulsory private pension fund (OFE), will lead to a reduction in public debt by around 8% of GDP. This will provide increased fiscal room for the Polish government to increase its rate of investment. 

The hope of Citizens' Platform is undoubtedly that it can use these opportunities to improve the Polish economy before the next election and return to power for a third time. It would be foolish to rule out this scenario, however a number of factors stand in the way of this strategy being successful. The EU funds will only start to flow into Poland from 2015 and if the government is unable to start its own investment projects earlier then economic growth will remain depressed for at least the next year.  Also, although the reform of OFE will reduce budgetary pressures, the Polish government is still committed to bringing down its budget deficit. Fiscal discipline has been asserted most strongly upon local governments, many of which are suffering large deficits partly due to unwise investments made in recent years (not least on unsustainable stadiums). Finally, the priorities for investments funded by money from the EU’s next budget have altered. The structural and cohesion funds from the 2007-13 budget were focused upon infrastructural projects. However, the forthcoming budget is prioritising raising innovation in order to support private business. It remains to be seen whether funds from this budget will have the same effect of increasing the rate of investment that is needed to boost economic growth.

The left does not need to repeat the fallacies of the ‘Green Island’ made by Tusk and Rostowski in order to welcome the fact that Poland has not entered a recession throughout the economic crisis. Rather the left should be repeating the message that increased government spending and public investment during this time of economic crisis is necessary and effective. However, the priorities of the government investing in such things as stadiums, roads and (increasingly) the military are not ones that the left should support. Despite the growth of the past few years large sections of society have seen their living standards deteriorate. A new wave of public investment is needed but one that includes sustainable economic, social and green investments primarily designed to create jobs and develop essential public services such as health, education and transport.

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