Structural reforms and accelerating the digital and green transition would help to further raise living standards in Poland, says the OECD.
Poland’s economy recovered quickly and strongly from the Covid-19 pandemic, but in the wake of Russia’s war of aggression against Ukraine growth is stalling, with inflation at its highest level in two decades.
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In this challenging environment, macroeconomic policy needs to strike a fine balance between supporting the economy while reducing inflation. Structural reforms aimed at paving the way for a successful green transition, reaping the benefits of digitalisation and strengthening public finances, will help Poland to continue lifting living standards, according to a new report from the Organisation for Economic Co-operation and Development (OECD), a club of mostly rich countries.
The latest OECD Economic Survey of Poland says monetary and fiscal policy should be carefully balanced to support growth while avoiding high inflation expectations becoming entrenched.
For the longer term, population ageing makes it important to lift workforce participation and productivity. Broadening the tax revenue base, extending working lives and improving spending efficiency in areas such as health and infrastructure can help boost productivity while easing long-term fiscal pressures.
“Poland’s success in raising living standards has been very impressive and despite the impact of today’s global uncertainties and the war, the fundamentals of the Polish economy remain strong,” says OECD Secretary-General Mathias Cormann.
“To lay the groundwork for future growth, Poland needs to accelerate the development of renewable energies, promote a wider development of digital and managerial skills and ensure it is on a sustainable fiscal trajectory for the future.”
Rising living standards
Prior to Covid-19 and the war in Ukraine, Poland was one of Europe’s fastest-growing economies. Growth averaged 3.7 per cent a year over the decade to 2020, lifting living standards to around 80 per cent of the OECD average.
Gains in labour productivity and sound macroeconomic policies were the main drivers of those achievements. The economy has also benefited from high levels of inward investment, its strong participation in global value chains and its shift towards higher-value activities.
Since Russia’s invasion of Ukraine just over a year ago, Poland has displayed extraordinary generosity in welcoming and integrating over a million refugees from Ukraine, providing public services, school places and employment.
Economic activity recovered to its pre-pandemic level in early 2021 with unemployment falling to its lowest level since Poland’s transition to a market economy. High energy prices, weak domestic demand and global uncertainty mean GDP growth is expected to remain weak through the first half of 2023. However, the survey projects growth to recover to 2.4 per cent in 2024, while inflation is projected to peak in early 2023 before falling to 3.5 per cent by the end of 2024.
For the immediate future, the survey suggests that it is important to ensure that energy-related support to households and firms remains temporary and does not add to inflationary pressure.
Over the longer term, while Poland’s debt is relatively low at 50 per cent of GDP, its public finances face mounting pressures from population ageing and higher health and defence spending. The survey recommends carrying out a comprehensive spending review, improving spending efficiency and broadening the tax revenue base by eliminating some value-added tax exemptions and increasing taxes on real estate.
Extending working lives, including through gradually aligning male and female retirement ages, and increasing that age with healthy life expectancy gains, is also key.
Digital economy lags
Poland has made significant progress in digitalising its economy but still lags other EU countries in terms of digital skills and firms’ adoption of digital technologies.
Doing more to help small and medium-sized enterprises to implement new technologies and promoting flexible lifelong adult skills training would help to accelerate the digital transition and improve productivity growth.
Poland can also build on the strong progress in educational attainment that has lifted it to within the top 10 countries in the Programme for International Student Assessment (PISA) to provide more digital skills training and equipment in schools.
Finally, given Poland’s continued reliance on coal and changes in energy supply, the survey recommends the government follow through on a planned revision of its strategy on how to achieve the transition to climate neutrality through changes in energy supply.
To ensure a just transition to net zero, a social agreement to close coal mines should be extended to lignite coal and complementary policies introduced to the whole coal value chain.
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