COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for POLAND Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Poland’s 2014 national reform programme and delivering a Council opinion on Poland’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Poland, budget deficit, economic convergence, economic growth, economic recovery, economic reform, economic stabilisation, financial control, job creation, stability programme, structural adjustment













EUR-Lex - 52014SC0422 - EN











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52014SC0422

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for POLAND Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Poland’s 2014 national reform programme and delivering a Council opinion on Poland’s 2014 convergence programme /* SWD/2014/0422 final */









Contents
Executive summary. 3
1............ Introduction. 5
2............ Economic situation and outlook. 5
3............ Challenges and assessment of policy
agenda. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 16
3.3......... Labour market, education and social
policies. 16
3.4......... Structural measures promoting sustainable
growth and competitiveness. 20
3.5......... Modernisation of public administration. 27
4............ Conclusions. 28
Overview table. 30
Annex... 36

Executive summary

In 2014, the
Polish economy is expected to pick up noticeably after a slowdown over the past
two years.
Domestic demand is expected to become the main engine of economic growth,
gradually replacing net exports. Public investment is expected to remain
sluggish, while private investment will recover as prospects for private
domestic demand improve and capacity utilisation rises. Inflation will remain
subdued, and the rate of unemployment will go on falling. As a result,
confidence is set to strengthen, improving the environment for further
expansion of economic activity.
Overall, Poland
has made some progress in addressing the 2013 country-specific recommendations. Progress
in ensuring the timely correction of the excessive deficit was limited until
autumn 2013. Since then, and following a new Council recommendation under the Excessive
Deficit Procedure, the situation of public finances has improved on the back of
both better than expected economic growth and some additional measures.
Substantial progress has been made towards strengthening the fiscal framework,
notably by enacting a permanent expenditure rule and improving the coordination
among different levels of government. The government has started reforms to
increase the efficiency of the tax administration and the tax compliance.
Efforts to tackle youth unemployment and increase the labour market
participation of women as well as employability of older workers go in the
right direction: A lifelong learning strategy is now in place and access to
childcare facilities has been improved. However, no progress has been made in fighting
labour market segmentation and no steps have been taken to reform the special
schemes for farmers and miners. Poland has presented promising strategic
programmes aiming at improving its innovation support framework for private companies
but implementation remains limited. Progress on improving energy generation
capacity, energy efficiency and developing railway infrastructure has also been
limited and broadband coverage remains low. There has been substantial progress
in implementing an ambitious reform facilitating access to regulated
professions and some progress was made to improve the business environment.
As a result,
Poland continues to face challenges requiring ambitious efforts
to sustain growth and create jobs. The policy plans submitted by Poland
address most of these challenges. The national reform programme confirms
Poland’s commitment to address shortcomings in the areas of employment,
innovation-friendly business environment as well as energy-related issues,
while the convergence programme reiterates Poland’s commitment to continue
fiscal consolidation. Overall, challenges that Poland faces are concentrated in
four areas: public finances, labour market participation, infrastructure, and
the business and innovation environment.
·        
Public
finances:
 Further fiscal consolidation is required to correct the excessive deficit in a
timely and sustainable manner and subsequent progress towards the medium-term objective.
In this regard, cuts in growth‑enhancing expenditure (education, research and
innovation) should be avoided. There is a scope for improving the efficiency of
social and healthcare spending. Low
tax compliance remains an issue, in particular in terms of efficiency of tax
administration and in the level of administrative burden on taxpayers. The
extensive and incoherent use of reduced rates in VAT leads to losses of
budgetary revenue and high tax compliance costs for businesses, while it is a
distortive and imperfect instrument to achieve redistribution aims. The Polish
fiscal framework lacks a fully-fledged independent
fiscal council.
·        
Labour
market, education and social policy: Employment rose
consistently between 2004 and 2013. However, the lagged effects of the economic
slowdown are still noticeable and the employment rate remains low, especially
for women and older workers. Unemployment among young people remains at very
high levels. The widespread use of fixed-term employment contracts, including
civil law contracts that are not covered by the Labour Code, often means that
those in such jobs earn lower pay and have limited access to training. A
special pension scheme for miners and an overly generous social security system
and a preferential tax system for farmers hamper labour mobility between
regions and sectors and the effective use of resources. There is a persistent
mismatch between the skills in demand and those available. There is still
insufficient access to good quality apprenticeships and work-based learning.
The proportion of the population living at risk of poverty and social exclusion
is high compared to other EU countries, even for those
in employment.
·        
Infrastructure:
In
spite of sizeable investment in the road network, the country’s infrastructure,
particularly its railway system and energy network, remain underdeveloped,
creating bottlenecks for growth. Limited competition among incumbent
electricity suppliers, a lack of interconnections with other Member States and
ageing energy generation capacity keep energy prices high. The energy intensity
of the economy is high and potential gains from improving energy efficiency are
significant. Poland still lags behind other Member States in the use of
information and communication technologies. Fixed broadband coverage is among
the lowest in the EU. There are still environmental challenges in air quality
and waste management. 
·        
R&D,
innovation and business environment: Poland’s export
capacities are concentrated at the lower end of the value chain, while the
innovation and R&D support framework is fragmented and requires substantial
further investment. Poland’s good economic performance throughout the crisis
was based on a strong manufacturing base and competitive labour costs. Though measures
to create an innovation-friendly business environment have been adopted, these
have yet to yield a tangible improvement in the innovative capacity of Polish
companies. A burdensome business environment and an inefficient public
administration weigh on growth and competitiveness. An on-going reform aimed at
lifting restrictions in the field of professional services will reduce the costs
of doing business and boost productivity in the economy.

1.        
Introduction  

In May 2013, the Commission proposed a
set of country-specific recommendations for economic and structural reform
policies for Poland. On the basis of these recommendations, the Council of the
European Union adopted seven country-specific recommendations in the form of a
Council Recommendation in July 2013. These recommendations concerned fiscal
consolidation, the domestic fiscal framework, unemployment among young, women
and the elderly, the capacity of companies to innovate, public infrastructure,
and the business environment. This staff working document assesses the extent
to which these have been implemented in Poland.
This staff
working document assesses policy measures in light of the findings of the
Commission’s Annual Growth Survey 2014[1] and
the third annual Alert Mechanism Report,[2]
which were published in November 2013. The Annual Growth Survey sets out the
Commission’s proposals for building the necessary common understanding about
the priorities for policy action at national and EU level in 2014. It
identifies five priorities to guide Member States to renewed growth: pursuing
differentiated, growth friendly fiscal consolidation; restoring normal lending
to the economy; promoting growth and competitiveness for today and tomorrow;
tackling unemployment and the social consequences of the crisis; and
modernising public administration. The Alert Mechanism Report serves as an
initial screening device to determine whether macroeconomic imbalances exist or
risk emerging in Member States. The Report found positive signs that
macroeconomic imbalances in Europe are being corrected. To ensure that a
complete and durable rebalancing is achieved, 16 Member States
were selected for a review of developments in the accumulation and unwinding of
imbalances. These in‑depth reviews were published on 5 March 2014 along with a
Commission Communication.[3]
Against the
background of the 2013 recommendations, the Annual Growth Survey, and the Alert
Mechanism Report, Poland presented updates of its national reform programme and
its convergence programme on 24 April 2014. These programmes provide detailed
information on progress made since July 2013 and on the plans of the
government. The information contained in these programmes provides the basis
for the assessment made in this staff working document. The national
reform programme went through a wide consultation process involving different
stakeholders including, inter alia, representatives of local and regional
authorities, trade unions and employers' organisations. Limited consultation
process involving experts took place for the convergence programme.

2.        
Economic situation
and outlook

Economic situation
Economic
activity rebounded in late 2013, supported by a general recovery of global
activity.
After a feeble first half, the second half of 2013 saw an upturn in economic
activity resulting in real GDP growing by 1.6 % over the year. This was
better than the 1.1 % projected in the previous staff working document and
significantly stronger than the EU average (+0.1 %) and Poland’s closest
peers, such as the Czech Republic, Hungary and Slovakia. 
The recovery was
initially export-led on the back of sustained gains in price
and non-price competitiveness, while domestic demand lagged behind. Growth in private
consumption remained subdued in the first half of 2013, as labour market
prospects worsened and consumer sentiment deteriorated. Against this backdrop,
investment growth was fragile at the beginning of 2013, due in part to a marked
slowdown in public investment. The economic situation started to improve in the
third quarter of 2013, with private consumption and private investment picking up
on the back of a rise in external orders and an improvement in business
confidence.
Consumer price
inflation was contained at 0.8 % in 2013 due to low
commodity prices, lower increases in administered prices and weak domestic
demand. The rate of unemployment rose from 10.1 % in 2012 to 10.3 %
in 2013, reflecting the usual lag between economic growth and labour market
performance. The current account deficit improved significantly from 3.4 %
in 2012 to 1.6 %, due to a strong recovery in the trade balance.
Poland’s financial
sector has been profitable and has increased its capital buffers. The
capital adequacy ratio (Tier 1) for the banking sector as a whole increased
from 13.1 % in 2012 to 14.2 % in 2013, well above the level required
under the Basel III agreement (8.5 % including the conservation buffer). Weak
economic activity affected the profitability of the banking sector, which,
measured by return on assets, decreased to 1.1 %, from 1.4 % in 2012.
Subdued real GDP growth and a fragile labour market situation did not, however,
affect asset quality: the proportion of non-performing loans (NPLs) decreased
from 8.8 % in 2012 to 8.5 % in 2013 and is bound to decrease further
throughout 2014. Lending to the non-financial sector grew by 3.5 % year‑on-year
to December 2013, up from 1.2 % in 2012, driven by growth in mortgage
loans (4.5 %) and a rise in lending to large corporates (6.1 %).
Figure 1: Main
macroeconomic indicators
Economic outlook
The outlook is improving
for Poland’s main trading partners, and this is expected to support growth in
2014. Real
GDP is forecast to grow by 3.2% in 2014, up from 1.6 % in 2013, as the global
economic outlook improves. This is likely to rub off on the tradable goods
sector and, ultimately, should support domestic demand. Public investment is
expected to pick up only moderately, due to fiscal consolidation requirements
under the Excessive Deficit Procedure. By contrast, private investment is
expected to recover on the back of a rise in private domestic demand and higher
capacity utilisation. Private consumption is likely to benefit from moderate
improvements in the labour market and contained inflation.
Domestic demand
is forecast to accelerate further in 2015, when the euro area recovery is
expected to gather steam. Private consumption is set to strengthen
on the back of further improvements in the external environment and better labour
market conditions. Against this backdrop, private investment is also expected
to rise, financed by a rise in credit supply and accumulated profits. Imports
are set to grow in parallel, due to stronger domestic demand, leading to a
slight rise in the current account deficit to 2.3% of GDP in 2015, up from 1.6 %
of GDP in 2013. Overall, real GDP growth is expected to reach 3.4% in 2015,
significantly stronger than the EU average 2% and for the closest peers.
Inflation is set to remain contained at 1.1% in 2014, thanks to moderate wage rises
and in line with weak external inflationary pressures. It is set to pick up to 1.9%
in 2015 on the back of accelerating domestic demand. The rate of unemployment
is set to fall gradually from 10.3 % in 2013 to 9.5% in 2015.
Poland’s short-term
growth prospects are highly dependent on the economic environment in
neighbouring countries. The deterioration of the situation in Ukraine
might have a negative impact on the Polish economy. First, Polish exports could
fall significantly, especially food, chemicals and machinery. Secondly,
disruptions in imports of oil and gas might have a severe impact on Polish
industry. Thirdly, lower confidence among businesses and consumers might have a
direct impact on domestic demand, while foreign investors might be deterred, leading
to more volatility in capital flows.
The national
reform programme and convergence programme share the same macroeconomic
outlook.
For 2014, the authorities project real GDP growth of 3.3 % with
contribution of domestic demand to growth (+2.8 pp) which is in line with the
Commission forecast. For 2015, the Polish authorities forecast real GDP growth
of 3.8 %, higher than the Commission 2014 spring forecast (+3.4 %).
The macroeconomic scenario does not include an estimate of the impact of
structural reforms on macroeconomic variables.

3.        
Challenges and assessment of policy agenda
3.1.                
Fiscal policy and taxation

Budgetary
developments and debt dynamics
In
the 2014 convergence programme, Poland plans to improve its fiscal position in
order to correct the excessive deficit by the 2015 deadline and meet the
medium-term budgetary objective by 2018. It aims at improving the general
government balance from a deficit of 4.3% of GDP in 2013 to 2.5% of GDP in
2015, thus bringing it below the 3% of GDP reference value by the deadline set
by the Council under the Excessive Deficit Procedure (see Box 2). The programme
confirms the previous medium-term budgetary objective of -1% of GDP and aims to
reach it by 2018, two years later than planned in last year's programme update.
The medium-term budgetary objective is more stringent than what the Pact
requires (-2% of GDP).
In
2013, the general government deficit amounted to 4.3% of GDP, well above the
reference value of the Treaty and the 3.5% of GDP projected in
the previous year’s programme, although real GDP growth in 2013 turned out
slightly better than projected).  This was due to both higher total expenditure
(by 0.6% of GDP) and lower total revenues (by 0.3% of GDP). On the expenditure
side, the slippage compared to the 2013 programme was driven by higher social
transfers and intermediate consumption, while on the revenue side taxes on production
and imports turned out lower than planned.
The
profile of the general government headline balance in 2014-2015 is strongly
affected by the systemic pension reform reversal enacted in December 2013, in
particular the transfers of assets from the second to the first pension pillar:
a one-off asset transfer worth around 9% of GDP in 2014, as well as annual
transfers of assets of people retiring within 10 years. Under the current
accounting rules of European System of Accounts (ESA95), such transfers are
treated as general government revenue. Under the new rules (ESA2010), which
will come into force this autumn, such transfers will not count as revenue
anymore. Accordingly, the programme foresees a general government surplus of
5.8% of GDP in 2014 and a deficit of -2.5% of GDP in 2015 under ESA95.
Excluding these asset transfers, the headline balance foreseen in the programme
would amount to -3.5% in 2014 and -2.7% in 2015. In structural terms, the
programme foresees an improvement in (recalculated) structural balance of 1.2%
of GDP in 2014 and 0.6% of GDP in 2015. 
The
budgetary adjustment envisaged by the Polish authorities is equally distributed
across 2014 and 2015, with an improvement in the headline
deficit by 0.8% in each year (excluding the asset transfers from private
pension funds). It is focused on the expenditure side, with the
expenditure-to-GDP ratio falling by 1.5 pp in 2013–2015 and a simultaneous
increase in revenue-to-GDP ratio by 0.4 pp (0.2 pp excluding the pension funds
asset transfers). The budgetary targets are subject to implementation risks in
the view of slippages in the past and of upcoming elections. On the other hand,
the fiscal balance might turn out better than planned in case more people do
not decide to remain the second pillar of the pension system (the programme
assumes that 50% of people would remain, which is a conservative assumption
taking into account that the default option in case of lack of explicit
declaration is to shift a person entirely to the first pillar and that private
pension funds are prohibited to advertise), thereby increasing the amount of
social contributions retained in the first pillar.
The
consolidation path outlined by the Polish authorities is faster than the one
projected in the Commission 2014 spring forecast. In 2014, the
Commission projects a general government  balance of +5.7% of GDP (-3.6% of GDP
excluding the transfers of pension funds' assets), similar to the Polish
authorities'. However, in 2015, the Commission projects a deficit of 2.9% of
GDP (3.1% of GDP excluding the assets transfers), which is 0.4% of GDP higher
than the one projected by the Polish authorities. The difference is mostly due
to the fact that, based on common practice, the Commission's projection does
not yet include the future impact of the 2015 budget which will only be
available by mid-October. This is for instance evidenced by a higher projection
of current expenditure, in particular intermediate consumption. The Commission
foresees that intermediate consumption will follow nominal GDP growth (as in
past years), while the Polish authorities assume it will fall as a share of
GDP. The more cautious Commission forecast of the headline figures is also
reflected in its estimates of the cyclically adjusted budget balance net of
one-offs and other temporary measures. The structural budget is projected to
improve by 1% in 2014 and 0.4% in 2015. 
Poland is
currently subject to the corrective arm of the Pact (see Box 2).
The EDP recommendation requires Poland to reach a headline
deficit target of 4.8 % of GDP in 2013, of 3.9 % of GDP in 2014 and
of 2.8 % of GDP in 2015 (excluding the impact of asset transfers from
private pension funds due to the December 2013 reversal of the past pension
reform). This is consistent with the structural balance improving by 1 %
of GDP in 2014 and 1.2 % of GDP for 2015, based on the Commission’s 2013
autumn forecast.
Poland has met
the headline target in 2013 and is expected to meet it in 2014 as well. The
headline deficit, which amounted to 4.3% of GDP in 2013, was lower than the
recommended level of 4.8% of GDP. For 2014, the 3.5% of GDP deficit (excluding
the asset transfers related to the pension reform) target in the Convergence
programme is also below the recommended level. In the Commission 2014 spring
forecast, the 2014 headline deficit is projected at 3.6% of GDP (excluding the pension
assets transfers), broadly in line with the programme target and thus also below
the headline target set in the recommendation. For 2015, the programme deficit
target of 2.7% of GDP (excluding the pension assets transfers) is slightly
better than the recommended level. The Commission 2014 spring forecast, based
on the no-policy-change assumption, projects the 2015 deficit (excluding the
impact of the asset transfer) at 3.1% of GDP, thus above the recommended level.
The change in
the structural balance in 2014 is in line with the recommendation. The
planned change amounts to 1.2% of GDP according to the programme, above the 1% required
by the Council. The Commission 2014 spring forecast projects a slightly smaller
adjustment of 1% of GDP, which is still in line with the requirement, albeit
narrowly. For 2015, the programme targets a change in the structural balance of
0.6% of GDP, i.e. below the recommended level. The Commission forecast, on a
no-policy-change assumption, projects an even lower adjustment of 0.4% of GDP,
well below the recommended adjustment of 1.2% of GDP.
The
budgetary adjustment envisaged in the programme and in the effective action
report is underpinned by a set of measures, the overall
impact of which, according to the Polish authorities, is 1.05% of GDP in 2014
and 1.1% of GDP in 2015. For the summary of the main reported measures, see Box
1 below. However, most of these measures had already been taken before the
Council adopted the new recommendation under the EDP on 10 December 2013 and
were already included in the Commission services’ 2013 autumn forecast. According
to the Commission's assessment, the additional measures taken since then have a
marginal impact in 2014, while they are expected to reduce the deficit by app. 0.1%
of GDP in 2015. 
The
fiscal effort based on the corrected change in the structural balance and the
bottom-up assessment falls well short of the requirement set by the Council. When
corrected for the downward revision in potential growth since the time of the
Council Decision as well as for revenue developments compared to the forecast
underlying the Council Decision, the adjusted structural improvement is
estimated at 0.6% of GDP in 2014, below the effort required by the Council.
This shortfall is confirmed by a bottom-up assessment which estimates the size
of the additional fiscal effort in 2014 on the basis of the discretionary
revenue measures and the expenditure developments between the baseline scenario
underpinning the Council Decision and the Commission spring forecast: it shows
an effort of -0.1% of GDP, compared to the required 0.4% of GDP. For 2015, on
the basis of the usual no-policy-change assumption, the adjusted change in the
structural balance is projected at 0.1% of GDP, well below the 1.2% of GDP required
by the revised EDP recommendation. This shortfall is confirmed in the bottom-up
assessment which projects an effort of -0.8% of GDP in 2015, well below the effort
estimated as needed at the time of the recommendation.
Therefore,
in conclusion, according to the Commission's projection, the headline balance
and the structural improvement in 2014 are set to be in line with the new
Council recommendation under the Excessive Deficit Procedure,
albeit the latter only narrowly. In 2015, however, and prior to the
presentation of the 2015 budget, the Commission services expect the headline
balance and the structural improvement to be below the targets recommended by the
Council. There are risks to the correction as the fiscal effort measured by both
the corrected change in the structural balance and the bottom-up assessment is
well below the recommended level. 
 Box 1. Main budgetary measures ||   
 Revenue || Expenditure ||   
 2014 ||   
 ·      Reversal of the systemic pension reform: transfer of assets from private pension funds (+9%) (one-off)* ·      Reversal of the systemic pension reform: "suwak" (+0.3%)* ·      Reversal of the systemic pension reform: higher social contributions (+0.2%) ·      Measures to improve tax compliance and the efficiency of tax administration (0.1%) || ·      Limitation of the possibility of early retirement (-0.2%) ·      Gradual increase of the retirement age (-0.1%) ·      Reversal of the systemic pension reform: lower debt-financing costs due to the pension assets transfer (-0.4%) ·      Partial freeze of public wages (-0.1%) ||   
 2015 ||   
 ·      Reversal of the systemic pension reform: "suwak" (+0.2%)* ·      Reversal of the systemic pension reform: higher social contributions (+0.5%) ·      Measures to improve tax compliance and the efficiency of tax administration (0.1%) || ·      Limitation of the possibility of early retirement (-0.2%) ·      Gradual increase of the retirement age (-0.2%) ·      Partial freeze of public wages (-0.1%) ||   
 Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. The table contains the measures with an impact of at least 0.1% of GDP.  * These measures have an impact on revenues under ESA95 but will not be treated as such under ESA2010. ||   
General
government debt is projected to remain below 60% of GDP in Poland over the
programme period. The national authorities project it to
fall sharply from 57.1% of GDP in 2013 to 49.5% in 2014, mainly thanks to the
large, one-off transfer of pension fund assets, and remain at this level in
2015. The Commission projects a similar pattern, with a slightly higher
debt-to-GDP ratio of 49.9% in 2015 due to more cautious general government
balance forecast. Since the debt-to-GDP ratio is below the reference rate over
the programme period, the debt reduction benchmark is not applicable.
Box 2. Excessive deficit procedure for
Poland
Poland
is currently subject to the corrective arm of the Stability and Growth Pact.
The Council opened the Excessive Deficit Procedure on 13 May 2009 and
recommended that Poland corrects its excessive deficit by 2014 at the latest.
On 10 December 2013, the Council decided, on the basis of Article 126.8 of the
Treaty, that Poland had not taken effective action in response to the Council’s
recommendation and issued a new recommendation under Article 126 (7) of the
Treaty. 
Poland
was given a deadline of 15 April 2014 to take effective action to ensure a
sustainable correction of the excessive deficit by 2015 and to report in detail
on the consolidation strategy to achieve the targets. According to the Council
recommendation, Poland should reach a headline deficit target of 4.8 % of
GDP in 2013, of 3.9 % of GDP in 2014 and of 2.8 % of GDP in 2015
(excluding the impact of asset transfers from private pension funds due to the
December 2013 reversal of the past pension reform). This is consistent with the
structural balance improving by 1 % of GDP in 2014 and 1.2 % of GDP
for 2015, based on the Commission’s 2013 autumn forecast.
Poland
was recommended to implement rigorously measures it had already announced and
adopted, while complementing them with additional measures to achieve a
sustainable correction of the excessive deficit by 2015. Poland is also
expected to use all windfall gains for deficit reduction. 
The
Polish authorities were also asked to: 
(i)
improve the quality of public finances, in particular by minimising cuts in
growth-enhancing infrastructure investments and carefully reviewing social
expenditures and their efficiency; 
(ii)
improve tax compliance and increase the efficiency of tax administration; and 
(iii)
make the institutional framework of public finances more binding and transparent,
adjusting definitions used in national accounting to ESA standards, and
ensuring sufficiently broad coverage, improving intra-annual monitoring of
budget execution and ensuring effective and timely monitoring of compliance
with the permanent expenditure rule, based on reliable and independent analysis
carried out by independent bodies or bodies endowed with functional autonomy
vis-à-vis the fiscal authorities.
Finally,
to ensure the success of the fiscal consolidation strategy, the Council
stressed that it would be important for Poland to back fiscal consolidation
with comprehensive structural reforms, in line with Council recommendations in
the European Semester.
At
the established deadline, and pursuant to the latest Council recommendation
under Art. 126(7) of the Treaty, the Polish authorities submitted a report to
the Commission outlining the consolidation strategy aimed at bringing an end to
the situation of an excessive government deficit.
Fiscal framework
Poland
has introduced a new permanent expenditure rule, following the
Council’s 2013 recommendation to enact such a rule, consistent with the ESA95.
The rule limits expenditure growth to an eight-year average real GDP growth
rate multiplied by forecasted inflation. The level of expenditure is reduced by
a correction mechanism if the public debt / general government deficit are
above certain thresholds or if there are accumulated deviations from the
mid-term objective in the general government balance. The new rule has the
potential to improve the Polish fiscal framework. It is close to ESA95, as it
sets the expenditure level for almost the entire general government sector[4] and
the correction mechanism for the new rule is based on the result for the
general government sector. Apart from its main features, the effectiveness of
the new rule will depend on how it is actually implemented, in particular in
view of frequent changes to the fiscal framework introduced in the past.
Overall (and subject to the preceding qualification), the 2013 country-specific
recommendations to introduce a new permanent expenditure rule has been fully
addressed.
Poland
strengthened the annual and medium-term budgetary coordination mechanisms
across different levels of government as recommended by the Council. First,
according to the new permanent expenditure rule, if local government
expenditure is forecast to rise faster than the dynamics implied by the rule,
then the rest of the general government sector would have to compensate for
this by adjusting its planned spending level accordingly. Furthermore, if the
general government deficit turns out to be excessively high due to the local
government sub-sector, deviations from the mid-term objective are accumulated,
and when the sum exceeds a certain threshold, the correction component is added
to the formula of the rule. Secondly, from 2014, existing uniform limits on the
level of debt and the level of debt servicing costs of local governments have
been replaced by individual debt constraints, reflecting the economic capacity
of individual units to pay off liabilities. Thirdly, the
regional financial chambers acquired the power to require from a local
government to draw up a remedial programme, in cases where such government is
at risk of not being able to perform its public duties and breaching its
individual debt constraint. Fourthly, the central government introduced a
uniform type of long-term financial forecast for the local governments. In sum,
there has been substantial progress in this field.
Poland
made some other changes to the fiscal framework, weakening its stringency.
First, the specific correction mechanism for breaching the 50 %
debt-to-GDP threshold (according to which the ratio of deficit to revenues in a
given year cannot be higher than in the previous year) was suspended by the
2013 budget amendment and then removed altogether by the law introducing the
permanent expenditure rule. Secondly, the same law removed the provision which
prohibited adopting certain acts while Poland is subject to an excessive
deficit procedure: containing exemptions, reliefs and deductions whose
financial outcome may be a reduction in government revenues; and causing an
increase in state budget expenditure which was not covered by the previous
expenditure rule (in force until 2014). Lastly, the same law withdrew the
provision according to which the draft budget for a given year cannot include a
deficit higher than the deficit set for that year in the Multi-Annual State
Financial Plan.
The
Polish fiscal framework lacks a fully-fledged independent fiscal council, an
institutional feature already established or currently being introduced by
almost all EU Member States. The current framework contains some positive
elements regarding the ex-ante assessment of the government’s macroeconomic
forecast and the ex-post control of its fiscal policy. At the preparatory
stage, the Monetary Policy Council of the National Bank provides an opinion on
the macroeconomic assumptions underlying the state budget, and the social
partners are consulted. Ex post, the Supreme Audit Office presents annual
reports on the execution of the budget act and its compliance with the rules
governing the budgetary process to the Parliament. However, the remit of an
independent fiscal council would be broader. It would typically cover: (1)
ex-ante checks of compliance with fiscal rules, an assessment of macroeconomic
and budgetary forecasts and an analysis of the long‑term sustainability of
public finances; and (2) an ex-post assessment of compliance with fiscal rules.
By issuing regular recommendations on fiscal policy to the government, such a
body could contribute significantly to improving the quality of public debate
on public finances. As mentioned above, the fiscal framework in Poland has been
frequently modified in the recent past, and some of these modifications went
largely unnoticed. A fiscal council could play an essential role in raising
public awareness of such issues.
Long-term sustainability
Poland appears
to face medium fiscal sustainability risks in the medium-term. The medium-term
sustainability gap[5],
showing the adjustment effort up to 2020 required to bring debt ratios to 60 %
of GDP in 2030, is at 0.2 % of GDP. It is primarily related to the
structural primary balance in 2015 (-0.2 % of GDP in 2015). In the long-term,
Poland appears to face medium fiscal sustainability risks. They are primarily
related to the structural primary balance in 2015 and the projected ageing
costs (contributing with 1.4 and 1.1 pp. of GDP respectively over the very long
run), in particular in the field of health care. The long-term sustainability
gap[6]
shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not
on an ever-increasing path amounts to 2.5 % of GDP. Risks
would be higher in the event of the structural primary balance reverting to
lower values observed in the past, such as the average for the period
2004-2013. It is therefore appropriate for Poland to maintain sufficient
primary surpluses and to further contain age-related expenditure growth to
contribute to the sustainability of public finances in the long term. 
Growing
healthcare needs related to ageing population could create fiscal challenges in
the future. Already, due to existing inefficiencies, Poland
faces difficulties in delivering adequate healthcare and long-term care
services. The extent to which waiting times in Poland restrict access to
medical care is the highest in the EU. As a result, the proportion of unmet
needs for medical care has risen significantly in recent years. Patients are
often forced to opt for private medical services, and usually have to pay for
them in full. The indebted hospital sector has a relatively high number of
acute beds. This number has been steadily decreasing, but not getting closer to
the EU average. There is a lack of transparency in the contracting of services
in hospital and specialist medical care. Poland has relatively few general
practitioners, so the role of these as care coordinators is relatively weak.
The Polish authorities have implemented only limited measures regarding the
assessment of patient eligibility to join medicines management programmes to
improve the cost effectiveness and efficiency of the healthcare system. Based
on the information available, it is not possible to judge if these measures will
improve the effectiveness and efficiency of healthcare expenditure. Overall,
Poland has made limited progress in improving the cost effectiveness and
efficiency of spending in the healthcare sector.
Tax system
Tax
compliance remains a challenge, in particular due to inefficiencies in tax
administration. The average cost incurred by the tax administration
to achieve a given amount of tax revenue is well above the EU average. The tax
administration appears to be highly fragmented. There are more than 400 tax
offices with separate management, human resources and accounting functions as
well as IT systems and databases, which may contribute to high overhead costs.
Poland also makes only limited use of multilateral controls in the field of
VAT, a useful tool to tackle cross-border VAT fraud in cooperation with
neighbouring countries. Poland has made some steps aimed at improving the
situation. A single database of tax identification numbers was introduced to
replace the fragmented local databases managed by the tax offices. In April,
the government presented a package of planned further reforms aimed at
increasing tax compliance and the efficiency of tax and customs administration.
A consolidation of the overhead functions of tax administration has been
announced. To sum up, some progress has been achieved.
High
tax compliance costs are one of the main problems in the business environment
in Poland. The number of hours per year spent on tax compliance
is very high in Poland,[7] as
is the number of tax payments required over a year from a standardised business[8].
E-filing of tax returns by taxpayers remains low[9]
while prefilling services offered by the tax administration are marginal. To
address the challenge, the government has started working on a comprehensive
reform named "e-tax". It aims at the digitalization of most tax
compliance processes on the side of the tax administration and the introduction
of e-filing at a larger scale. Legislative work to give tax authorities tools
for prefilling of tax returns (such as better access to third party
information) has also started. Overall, only
limited progress has been achieved.
There
is scope to increase VAT efficiency by limiting the use of reduced and zero
rates.
The 23 % standard VAT rate is above the EU average, while two reduced
rates (8 % and 5 %) are applied to broad categories of goods and
services. The resulting system appears complex and inconsistent. The VAT policy
gap in Poland (i.e. loss of potential revenue due to reduced rates and
exemptions) has been the highest in the EU. The extensive use of reduced rates
leads to revenue losses to the state budget (see Box 3 below) and higher tax
compliance costs for businesses, while it is an imperfect instrument to achieve
redistribution aims. Limiting the scope of reduced VAT rates could improve the
efficiency of the system as compared to temporary increases in the standard VAT
rate[10].
Box
3. VAT revenues in Poland in recent years
VAT revenues[11] fell by 5.1 % in 2012 compared to 2011, and staged a
moderate recovery of 0.4 % in 2013[12]. This pattern was largely unexpected, since household consumption
(the tax base of VAT) grew by 5 % in 2012 and by 1.6 % in 2013. The
left chart below compares actual VAT collections in 2012-13  with the level of
VAT implied by observed household consumption growth and the standard tax
elasticity. The ‘VAT gap’, defined as the difference between the two, amounted
to 0.8 % of GDP in 2012 and 0.9 % of GDP in 2013.[13]
 
Importantly, in 2012-13, there were no
significant changes to existing VAT regulations that could explain the
shortfall. For the purpose of sound budgetary planning, it is crucial to gain a
better understanding of the reasons underlying recent trends in VAT revenues in
Poland.
The following elements seem to have
contributed to the ‘VAT gap’ in 2012: (i) a significant fall in public
investment. VAT revenues also depend on purchases by the government sector. As
the government cannot deduct VAT incurred on purchases of inputs, this VAT is
part of government expenditure as well as revenues. Estimating 2012 revenues
with a composite tax base consisting of household consumption, public
investment and public intermediate consumption lowers implied VAT revenues and
explains 22 % of the ‘VAT gap’; (ii) increase in VAT arrears[14] as a share of GDP, which seems to explain another 22 % of
the ‘VAT gap’; (iii) Increase in not reporting of VAT due, i.e. situations in
which a seller of goods or services charges his customer the full price
inclusive of VAT without reporting the transaction to the tax authorities. An
increase of this type of fraud would seem to explain around 10 % of the ‘VAT
gap’; (iv) Other factors, for example a shift towards sales subject to lower
VAT rates or increase in other types of tax fraud. 
In 2013, VAT revenues followed the growth
of the composite VAT base without closing the gap that had emerged in 2012.
Hence, the 2013 ‘VAT gap’ shown in the chart above is due to the 2012 level
effect. The VAT shortfall is an issue of concern from a budgetary planning
perspective and, more general for fiscal policy.
Environmental
taxation in Poland is relatively low. Although taxes
on energy yield 2.2 % of GDP (compared with 1.8 % in the EU in 2012),
this is due to the high energy intensity of the economy rather than the
environmental targeting of the tax system. The implicit tax rate on energy is
relatively low[15],
while some energy products are treated preferentially with respect to excise
duties. The rates of excise duties on both un-leaded petrol and diesel,
expressed in fixed amounts per 1 000 litres, have been almost unchanged
since 2007, and are relatively low compared to those in neighbouring countries.
Poland is also one of the few EU countries that has no CO2 component
in car taxation. 

3.2.                
Financial sector

The challenges
to Poland’s financial sector are comparatively limited. They
include a relatively high proportion of non-performing loans, the highest since
the end of 2006 (especially in the corporate sector), a still‑high proportion of
housing loans denominated in Swiss francs (the legacy of the pre-2009 credit
boom), a funding gap in the banking sector (though this is shrinking), limited
availability of credit for small and medium‑sized enterprises (SMEs) and low
capital buffers in the credit unions subsector.
Poland
implemented measures to address credit risks in the banking sector in
line with the recommendations issued by the Polish Financial Supervision
Authority. Housing loans can only by granted in the currency in which the
debtor receives revenues. It limits the length of repayment of mortgage credits
to 35 years and sets the maximum loan‑to‑value ratio for all housing loans at
80 % (to be reached gradually by 2017), while easing some other rules
(e.g. less stringent debt-to-income ratios). Revised rules making it easier to
obtain consumer bank credit with a view to attracting clients currently with unregulated
credit companies entered into force in July 2013.
Poland made
further progress in tackling the funding gap in the banking sector. The
average funding gap (the difference between loans granted to the domestic
non-financial sector and deposits) in the banking sector fell from 15.4 %
in December 2012 to 12.6 % in September 2013, as the gradual deleveraging
of foreign parent banks ultimately led domestic banks to compete for deposits.
To address the remaining dependency on foreign owners and short-term financing,
both the National Bank of Poland and the financial regulator are actively
monitoring the financial situation of banks and have taken steps to revive the
market for long‑term bank securities.
Poland has made
some progress in improving the availability of credit to small and medium‑sized
enterprises. In 2013, Poland introduced a programme of de
minimis guarantees for SMEs for loans on working capital. The scheme was
very well received and in the second half of the year, it was extended to cover
investment capital. In 2013, it provided PLN 7 billion of guarantees
for almost 39 000 SMEs, covering PLN 12 billion of credit. The Polish
Growth Fund of Funds was established by the European Investment Fund and Bank
Gospodarstwa Krajowego to stimulate equity investment in venture capital,
private equity and mezzanine funds. The role of the National Capital Fund (Krajowy
Fundusz Kapitałowy) is being refocused on venture capital funds supporting
the start-up phase of innovative SMEs.
The recent
reform of the Polish pension system will have repercussions on capital markets,
especially on the bond and equity segments. The transfer of
participants (and their contributions) and accumulated assets from defined
contribution Open Pension Funds (Otwarte Fundusze Emerytalne) to notional
defined contribution Social Insurance Institution  (Zaklad Ubezpieczen
Spolecznych) will influence the bond market, as greater dependence on
non-residents might ultimately result in more market volatility and,
potentially, a higher risk premium. The impact on equity markets is likely to
be more stretched over time, but the liquidation of Open Pension Funds is
likely to have an adverse impact on the primary market, since pension funds were
becoming a major investor for Polish equities in recent years.

3.3.                
Labour market[16], education and social policies

Competitive labour costs and the relatively flexible
regulatory set-up of the labour market are among specific features of the Polish
economy. Compared to the EU-28, labour is relatively inexpensive
and productive,[17]
labour taxes are comparatively low[18] and
labour laws provide for a substantial degree of flexibility. Employment rose steadily
between 2004 and 2012. Nevertheless, the lagged effects of the economic
slowdown are still noticeable. As a result, the unemployment rate remains high,
especially among the young. Stagnating real wages, partly driven by the nominal
freeze on public sector employees’ salaries, contribute to an increase in the
poverty rate. Labour market participation in Poland remains low, especially for
women and older workers. Public employment services and active labour market
policies do not address the needs of specific groups of unemployed people,
while labour
market segmentation and skills mismatches
persist.
In the 2013 recommendations,
Poland was encouraged to strengthen efforts to reduce youth unemployment
through the Youth Guarantee (please see Box 4), increase the availability of
apprenticeships and work-based learning, reinforce cooperation between schools
and employers while improving the quality of teaching, to adopt the life-long
learning strategy, combat labour market segmentation and in-work poverty and
reduce the excessive use of civil law contracts in the labour market. Further
recommendations aimed at increasing female labour market participation and the
employability of older workers and phasing out special pensions schemes for
miners and farmers. The analysis in this staff working document leads to the
conclusion that Poland has made some progress on measures taken to address
these recommendations (for the full country-specific recommendations assessment
see the overview table in Section 4).
Labour market policies
Labour market
participation in Poland remains low, especially for women and older workers.
Early retirement schemes have been reduced significantly but more effort is
still needed to improve the employability and labour market participation of
older workers (particularly women) and thus the effective duration of working
life, especially when the statutory retirement age is set to rise gradually to 67
as of 1 January 2013. Disability pensions based on a defined benefit
formula may be another bottleneck in the social insurance scheme.    A proposal
for an extensive active ageing strategy was approved in December 2013 but its
implementation is still pending. The strategy includes actions to raise the
numbers of those aged 50 or more in employment and to promote the development
of their skills and competences. Overall, there has been some progress in
implementing the recommendation on the labour market participation of older
workers.
Female labour
market participation also remains low.[19] There
have been significant efforts to raise the number of children enrolled in
pre-school education and to provide more childcare facilities. Poland plans to
offer every eligible child a place in pre-school education by 2017 and has planned
to boost funding to meet this target. Nevertheless, Poland still ranks bottom in
the EU regarding the availability of early childcare services, most of which are
concentrated in urban areas. There are also disparities in access to pre-school
education facilities between urban and rural areas and the overall participation
rate is lower than the EU average. In parallel, Poland decided to extend
parental leave, effective as of June 2013, and plans to
assess the effects of the reform at the end of 2014. These changes must be seen
in conjunction with the relatively low availability of childcare facilities. Overall,
there has been some progress in addressing the recommendation on female labour
market participation.
Youth
unemployment has been rising steadily over recent years. The
quality of youth employment is a concern, as Poland has the second highest
incidence of temporary contracts among young people in the EU, and the
transition rate from temporary to permanent employment is low. The proportion
of young people who are neither in education, nor in employment or training is
also growing[20]. There
is a lack of access to good quality apprenticeships and work-based learning, even
though Poland started implementing reforms of its vocational education and
training system as from the 2012/13 school year. Overall,
adjustments to facilitate more work-based learning and apprenticeships are going
in the right direction There has therefore been some progress in addressing the
recommendation.
Box 4.
The
delivery of a Youth Guarantee in Poland
After assessing
the Polish Youth Guarantee Implementation Plan, the remaining challenges to
deliver a Youth Guarantee (YG)[21] in
Poland[22] are:
- Ensuring the
quality of offers under a Youth Guarantee in order to support lasting labour
market integration of the young persons, accounting for the urban/rural
differences among young people, who are neither in education, nor in employment
or training;
- Effectively
implementing a pro-active, tailored outreach to the different subgroups of
non-registered young people, who are neither in education, nor in employment or
training;
- Developing
quality partnerships between all relevant stakeholders (in particular
strengthening cooperation between schools and employers) allowing for a strong
and coherent intervention;
- Setting up of
a monitoring system enabling continuous progress evaluation and underpinning
regular policy review.
Labour
market segmentation persists, especially regarding the protracted transition
from fixed-term to permanent employment and the excessive use of so-called
civil-law contracts. Fixed-term contracts are particularly
widespread among the young (aged 15-24)[23] and
the transition rate from temporary to regular employment is very low (19.5 %
in 2011).
Fixed-term
contracts also include civil law contracts, the number of which has increased
significantly throughout the crisis years, amounting to at least 28.5 %
of all temporary employees in 2012. The government recently recognised this and
put the issue on the political agenda. It announced that all types of contracts
would be covered with obligatory social security contributions, with the first
proposal already tabled to cover the contracts of mandate. However, there is
neither an effective control system within the National Labour Inspectorate (Państwowa
Inspekcja Pracy) nor labour law enforcement in terms of shorter and
smoother judicial procedures to reduce the excessive use of civil law
contracts. There has to date been no progress in addressing the recommendation
in this field.
Reforming
the
special pension schemes for miners and farmers remains a challenge. The
farmers’ scheme (Kasa Rolniczego Ubezpieczenia Spolecznego) is still
heavily subsidised,[24] with
very low pension contributions and low benefit levels, while miners continue to
enjoy privileges in terms of pension rights and the minimum work record required.
The
farmers’ scheme and income tax exceptions create incentives for small-scale
farmers to remain in the agricultural sector, which still employed 12.6 %
of the workforce in 2012. This results in hidden unemployment in rural areas on
the one hand and an informal economy on the other, negatively impacting
sectoral and territorial labour mobility and the effective use of resources. Except
for minor improvements, no new credible measures have been introduced nor
announced. Labour market mobility is similarly hampered by the special pension scheme
for miners[25] and
there has been no progress on the draft law limiting the early retirement age
since summer 2013. Overall, there has been no progress in
implementing the recommendation.
Public employment
services and active labour market policies have not yet been adjusted to
address the particular needs of specific groups of unemployed. However,
Polish authorities recognise the importance of modernising public employment services.
In April 2014 an amendment of law on promotion of employment and labour market
institutions was approved, but its implementation is still pending. The law
includes a package of new activation measures and tools supporting the
employment of young and older workers.
Education policies
Education
outcomes have significantly improved. The OECD’s 2012
Programme for International Student Assessment (PISA) shows very good results
in reading, mathematics and science. The OECD Adult Skills Survey
(PIAAC) shows young adults are at the same level as (or above) those in other
OECD countries. However, the results also show an urgent need to improve the
skills of older adults such as numeracy, literacy and ICT skills, as these competencies
are currently significantly lower in this age group and tend to
decrease with age.
Poland
continues to face a mismatch between skills and labour market needs despite
substantial efforts to improve the quality of education and its appropriateness
for the current labour market. There was progress in modernising
core curricula, improving the practical aspect of education and adjusting it to
the needs of employers. The reform of the vocational education system is
currently being implemented. Some amendments planned in the 2011 reform of higher
education, e.g. a national graduates’ tracking system or faster paths for
adults to complete tertiary education, are already envisaged. Poland has a high
tertiary attainment rate[26] but
10.4 % of higher education graduates aged 25‑29 and 22.5 % of
graduates aged 20-24 remain unemployed since employers, apart from professional
competences, look also for interpersonal skills. There are still shortcomings
in the provision and quality of apprenticeships and work-based learning and
these deficiencies contribute to growing unemployment among young people. There
is also considerable scope to increase the involvement of social partners in
improving the labour market relevance of the educational system to co-create
curricula and provide practical training opportunities. Overall,
Poland has made substantial progress in implementing the recommendation on the
quality of teaching. However, making education more relevant to the needs of the
labour market is still a challenge.
Participation in
lifelong learning remains very low, especially among older and low‑skilled workers.
In
September 2013, Poland finally adopted a lifelong learning strategy to address
these challenges but the lack of a framework to complement this (e.g. National
Qualification Framework) puts in question its effective
implementation. Adult participation in lifelong learning is one of
the lowest in the EU, especially for older workers[27]. There
are still significant challenges ahead to tailor the training on offer and the support
available to the needs of different age groups to ensure permeability
among different sectors of education, addressing the results of the
OECD’s Adult Skills Survey. There has been substantial
progress in implementing the recommendation through
the adoption of the strategic framework but it constitutes only a first step to
overcome the challenge.
Social policies
Poland lacks an
effective social protection system with limited overall
impact on poverty reduction. The coverage and adequacy of
unemployment and social assistance benefits is low[28],
while spending on pensions remains high, partly due to the inefficient special
schemes.
The country is among the Member States with the lowest real household income
per capita and it also has one of the lowest statutory minimum wages in the EU.
Access
to work is only part of the answer, as the level of in-work poverty in Poland
is still the fifth highest in the EU. Key factors
behind in-work poverty are mostly linked to household size, labour intensity
and low skills that are connected to low wages. It is also focused in some sectors,
especially agriculture. Temporary and part-time job holders are much more at
risk of poverty than those in permanent jobs. Poland concentrates efforts to
reduce in-work poverty on increasing the statutory minimum wage, while
overlooking poverty drivers linked to sectoral mobility, family support and household
work intensity. Overall, there has been limited progress in addressing the
recommendation on improving the targeting of social policies by the government.

3.4.                
Structural measures promoting sustainable growth
and competitiveness

Poland has
steadily improved its external competitiveness, and further improvement is
likely over the near term. The real effective exchange rate, based
on unit labour costs, depreciated by nearly 9 % over the last two years, while
Poland’s world export market share stabilised at 1.1 % (Box 5 describes in
details the performance of Polish exports after 2000). Further advances can be
expected, but at a slower pace, as Poland is already close to its technology
frontier. Although the business environment has slightly improved in recent
years thanks to steps taken to improve the situation in registering property, Poland
still lags behind the rest of the EU.
Box 5.
Performance of Polish exports
Poland’s role as an exporter has been growing
steadily. Aggregate data show that since 2000, in real terms, the value of
goods exported rose by a factor of 2.5, while exports of services almost
doubled. In 2013, Poland accounted for 1.1 % of world exports of goods and
0.87 % of exports of commercial services
The change in the market share for goods between
2000 and 2012 can be broken down into a number of different factors: initial
product specialisation, initial geographical specialisation, market share gains
in geographical destinations and market share gains in product markets.[29] Initial
product specialisation and initial geographical specialisation indicate whether
a country is specialised in sectors with dynamic global demand and whether
destination countries are dynamic markets. The two remaining components measure
the performance within product markets and within geographical markets and are
the outcome of a country’s competitive advantage (reflecting both price and
non-price competitiveness).
The initial product specialisation was not favourable
(Figure 5.1). Poland's export were heavily concentrated in products with low
global import growth (paper, wood, apparel, machinery, electrical equipment and
vehicles), the share of new highly-innovative product markets was low as a
result of low R&D spending, underdeveloped links between research
institutes, academia and firms and few innovation-enhancing instruments. By
contrast, Poland’s initial geographical specialisation was favourable, as it
was well placed to benefit from strong growth in demand for imports from
Russia, Ukraine, the Czech Republic, Lithuania and Slovakia. 
Figure 5.1: Constant market share
decomposition of the difference between growth rate of Polish exports and
global imports in 2000-12
Source:UN
Comtrade
Moreover, Poland benefited from the dynamic effects
of increasing competitiveness. Exports grew much more strongly than global
imports in several product categories (machinery, electronic equipment,
vehicles, plastics and meat), mainly on account of limited growth in labour costs.
The growth of Polish exports to Germany, the United Kingdom, France, Italy, the
Czech Republic and the Netherlands was also much stronger than growth in
imports from those countries. 
Revealed comparative advantage indices (RCA) use the
trade pattern to identify sectors in which an economy has a comparative
advantage, by comparing the trade profile of a country with the world average.
The aggregated RCA index for goods shows that from 2000 to 2012, Poland
sustained its comparative advantage in low and medium-low technology goods. It
also shows that Poland lacked comparative advantage in medium-high and high
technology goods, reflecting low R&D spending in the private sector, heavy reliance
on technology-absorption and low intensity of in-house innovation among
exporters.[30]
Overall, Poland’s strong export growth since 2000
was backed by increased competitiveness and diversification in terms of product
composition and geographical destinations. However, the RCA analysis reveals that
Poland lags behind peers in exports of technologically advanced goods, and the
export structure still mainly reflects relatively contained labour costs. If
Poland is to sustain strong export growth it will have to bring about a
significant change in the export sector towards technologically advanced goods
and services, supported by further reforms of the innovation framework and
business environment. 
In 2013, Poland
received three recommendations concerning structural measures promoting growth
and competitiveness. These refer to creating an innovation‑friendly business
environment and to access to finance for research and innovation activities.
They also cover improving the functioning of several network industries,
including investment in energy generation and efficiency, development of the
electricity grid, cross‑border exchange of energy and competition in the gas
sector, improvement of the railway infrastructure, broadband coverage, and improving
waste and water management. The country‑specific recommendations also covered access
to professional services.
The
analysis in this staff working document leads to the conclusion that Poland has
made limited progress in taking measures to address these recommendations (for
the full country-specific recommendations assessment see the overview table, Section
4).
Transport infrastructure 
Poland’s heavily
underdeveloped and neglected transport infrastructure continues to be a major
bottleneck to growth. The deteriorating railway network
particularly needs significant investment to boost the competitiveness of the
sector and to achieve a better balance between road and rail transport. Only a
third of about 20 000 km of functioning railway lines is in a good condition.
There are persistent problems with the timely implementation of railway projects,
mainly due to administrative and organisational capacity constraints, the
burdensome regulatory environment and prioritisation of other modes of
transport by the authorities. On the positive side, the railway regulator’s
budget was increased significantly and, following a European Court of Justice
ruling, average track access charges were reduced by about 20% as of December
2013.
In spite of this, overall, there was limited progress in 2013 regarding railway.
Other
challenges in transport include a low, although slowly improving, level of road
safety[31]
and a high level of urban congestion. Urban congestion is linked to the overall
unsustainable structure of urban transport and results in
high costs and delays, a rising level of greenhouse gas emissions
and a particularly
high energy intensity of the transport sector. The reasons for
the underperformance of the urban transport system include underinvestment in
public transport, a low number of comprehensive urban transport/mobility plans
and insufficient usage of Intelligent Transport Systems. 
R&D and innovation
Poland still has
one of the lowest levels of R&D expenditure in the EU and is one of the
worst performers in broader innovativeness indicators. R&D
expenditure has grown by 9.7 % on average between 2007 and 2012, reaching
0.9 % of GDP in 2012 but it is still well below its national
target (1,7 %
of
GDP for 2020).
A strong increase in public R&D intensity since 2007 has been a main driver
of overall R&D intensity growth. However, private R&D expenditure is
especially low (0.33 % of GDP), therefore private funds will have to play a
much stronger role if Poland is to reach its 2020 target. A low level of
R&D expenditure, especially in the private sector, coupled with weak
research and innovation activity in companies, a low degree of
commercialisation of research and an insufficiently innovation-friendly
business environment are reflected in Poland’s weak science and innovation
performance.
Traditionally,
the innovation support system in Poland has been risk‑averse, based mostly on
grants, supporting technology absorption and transfer without a large impact on
genuinely new innovation. Box 6 provides a detailed analysis on economic growth
potential hindered by current innovation capacity of the Polish economy.
Box 6. The
innovation gap in the Polish economy
Poland has been
the only EU country that has weathered the past crisis without a contraction in
aggregate economic activity. One of the key challenges going forward is to
manage the transition from a growth model based on favourable cost
competitiveness in low and medium technology sectors to sectors with higher
technological content and value added. 
A very simple
but illustrative way to explore the potential for up-grading the current growth
model is a shift-share analysis. This analysis indicates what Poland’s economic
growth would have been if it had the economic structure, in terms of sectorial
composition of GDP, of another country. We use Germany, Italy and two Central
and Eastern European countries - the Czech Republic and Hungary - as reference[32].

Between 1995 and
2010, Polish Gross Value Added increased by 80.5 %, more than any of the
five countries mentioned above. At the same time our analysis shows that
Poland’s growth would have been significantly higher not only if one applies
the sectorial composition of Germany but also with the composition of Italy,
Hungary or the Czech Republic (see Figure 6.1). The differences are due to the
different technological content of the different growth models.
Figure 6.1:
Comparison of the actual GVA growth in Poland and implied GVA growth by
structure of a reference country (1995=100)                                                                
Source: Commission services
Relying on a
commonly used OECD classification, individual sectors can be grouped in terms
of their R&D intensities: high technology,
medium-high technology industries, medium-low technology, low‑technology and a
residual category of technologically non-classified industries[33]. Importantly,
sectors with higher technological content tend to growth faster. Figure 6.2
shows trends in the ratio of GVA produced in high technology industries
(combined high and medium-high) to low technology (medium-low and low). While
Poland, the Czech Republic and Hungary started with broadly similar ratios
(around 0.3 - 0.4), Poland made little progress since the mid-1990s, although
it managed to catch up with Italy.
Figure 6.2:
Relation of high/high- medium technology to low/low-  medium  technology in GVA
of manufacturing Poland and reference countries                                                                    
                        

Source: Commission
services
Taken together,
the shift‑share analysis and comparison of the technological content of
production indicate that there is significant scope to catch up in terms of
innovative capacity of the economy. Over the last decade, Poland has managed to
build and safeguard substantial cost competitiveness, which is demonstrated by
the relative fall of unit labour costs. Although it currently gives Poland a
considerable competitive advantage, it cannot be taken for granted going
forward. Moreover, non-price competitiveness (e.g. R&D expenditure, number
of patent applications or a share of highly-innovative products in Polish
exports) is comparatively low.
Raising the
innovation capacity of Polish small and medium enterprises, improving links
between science and industry and developing targeted instruments adapted to the
whole innovation cycle, has been a long-standing challenge for Poland. There
have been various policy responses in recent years. The Enterprise
Development Programme together with the National Strategy for Smart
Specialization was finally adopted by the government on 8 April 2014. The
programme focuses on promoting an innovation‑friendly
business environment and improving the financing of the R&D support
system with better
financial instruments and tax incentives. The EU-funded 2014-20 Smart
Growth Operational Programme focuses primarily on commercialising new
technologies. Recent reforms in the field of science and
higher education have started to
bear fruit, i.e. the applied research agency (Narodowe
Centrum Badan i Rozwoju) proved successful in inducing a growing share of
private investment in R&D projects. Additional
measures to encourage innovation, such as more efficient financing of
scientific activities or relaxing R&D services from binding restrictions
related to public procurement procedures are foreseen. Taken together, the
changes are comprehensive and consistent in their approach. Implementation will
show how effective they are. Unless the Enterprise Development
Programme is implemented effectively, progress in addressing the relevant recommendation
will remain limited.
Existing
tax incentives for R&D are ineffective in promoting internal R&D in the
private sector and are used only by big companies. In 2012, tax
incentives for the purchase of new technologies amounted to almost 0.35 %
of corporate income tax revenues, but only 94 corporate taxpayers actually used
them. At the same time, personal income tax taxpayers hardly used them at all.
A tax incentive addressing internal R&D is available to companies that have
obtained the status of R&D centre. However, take-up has been limited, as
the law requires strict conditions to obtain that status. In 2013, only 29
entities were registered as such centres. Overall, limited progress has been
observed in respect of tax incentives for R&D, since the Enterprise
Development Programme envisages a tax relief for R&D activities, which may
replace the existing relief for the acquisition of new technologies.
Information and communication technologies
Despite recent
efforts, Poland still lags behind considerably when it comes to seizing the
growth potential of information and communication technologies. Fixed
broadband coverage is among the lowest in the EU, both at national level and especially
in rural areas[34],
and the take-up of broadband is the fourth lowest in the EU. Broadband projects
co-financed from EU structural funds continue to face significant implementation
difficulties. The absorption of broadband funds from the Rural Development
Programme has also been very low. Moreover, the assignment of spectrum for
mobile broadband has again been postponed, despite the expiry of the derogation
decision, which aggravates the problem of low fixed broadband coverage,
especially in rural areas. There has therefore been limited progress on this country-specific
recommendation.
Environment and energy
Environmental
challenges identified in the 2013 staff working document remain valid. 75%
of collected municipal waste is landfilled while only 13% is recycled,
resulting in missed business opportunities for Poland[35].
Landfill charges still fail to bring incentives to make recycling and re-use
economically attractive. Further constraints arise due to insufficient separate
collection and inadequate infrastructure for alternative treatment.
Unsatisfactory enforcement of the waste legislation also stands for a major
bottleneck, in particular in case of the Extended Producer Responsibility
schemes, where the scale of abuses undermines viability of the system. Poor
air quality is a significant problem for some urban areas, as the exposure of
the urban population to air pollution by particulate matter is far above the EU‑28
average with the main sources of pollution stemming from transport and
residential heating based on coal. Although urban wastewater collecting systems
and treatments plants require further investments, Poland successfully uses the
EU Funds to build the infrastructure required by the EU environmental
directives.
Difficulties in
delivering on Poland’s commitment to limit the increase of greenhouse gas
emissions in sectors outside the Emission Trading Scheme are expected. The
latest inventory data show that emissions are higher than expected in
Poland’s latest EU projections. The emissions outside the Emission Trading
Scheme increased by 14% between 2005 and 2012 and are already equal to the 2020
target[36].
In particular, transport emissions have grown considerably over the last decade
and are projected to rise yet further by 2020.
As far as energy
efficiency is concerned, there are still very high potential gains in all
sectors of Poland’s economy and achieving them could support economic growth
and play a role in reducing Poland’s energy dependency.
Poland set an indicative national energy efficiency target to stabilise its
primary energy consumption at the level of 96 Mtoe[37] in
2020. However, the energy and carbon intensity of the Polish economy are two
and three times higher, respectively, than the EU average. The energy intensity
of the transport sector is particularly high compared to the EU average and has
been increasing
at
an annual rate of 6 % between 2005 and 2011, mainly due to a surge in
passenger and freight road traffic, relatively low excise duties on motor fuel,
and a vehicle tax system which does not incentivise the use of emission‑efficient
cars. The residential sector accounts for almost a third of total energy
consumption and grew at an average annual rate of 1 % in 2005 - 2011.
There is significant potential for improving the energy efficiency particularly
in housing and in public buildings, but also in district heating systems. The
Polish White Certificate System supports investment in end‑use energy efficiency.
The domestic
energy generation capacity is ageing, the electricity grid is congested, while
coal remains the major source of energy, and the use of renewable energy
sources remains low. Poland has made progress in enabling
reverse flows on gas interconnectors with Germany. The construction of the LNG
terminal in Świnoujście
and
the expansion of three underground gas storage facilities are to be finished by the
end of 2014. Preparatory work on major interconnections between Poland and its
neighbours (the Czech Republic, Slovakia and Lithuania) is well advanced. Regarding
energy generation, the share of renewables in consumption has grown
rapidly (from 7 % in 2005 to 11 % in 2012). However, the current
system to support renewable energy generation based on quotas did not deliver
as expected, though a new draft law has been adopted by the government in April
2014. The price of green certificates that each non-renewable electricity
producer had to purchase to meet quotas was too low and did not compensate
renewable electricity producers sufficiently.
The key problems
in the natural gas market are still a lack of diversification and lack of
competition. Almost 90 % of natural gas imports come from
Russia. Ongoing
investments in infrastructure are likely to improve diversification. To
introduce more competition, the Polish authorities continue to encourage the
exploration of shale gas. However, there has been limited progress in improving
competition in retail energy markets. Price regulation for household customers
continues to prevent competition in the household gas market and regulation is
broadly maintained for most industrial customers. Poland also continues to
regulate retail electricity prices for households but competition in the
industrial consumers’ segment is more vibrant and not restricted by retail
price controls.
Overall, Poland
has made limited progress in addressing the recommendation in the energy
sector.
Professional services and
competition
In the field of
professional services, unjustified restrictions are still hampering
economic activity. Professional services play an important
role in the business service markets that account for 7.8 % of Polish GDP.
This sector is composed mainly of SMEs facing a high regulatory burden, which
affects their growth potential. Although the number of regulated professions is
still among the highest in the EU, the government is committed to a highly
ambitious deregulation reform. Access to 50 professions has been liberalised
in the first tranche of reform in 2013. Deregulation of the second tranche,
covering 91 professions, was adopted by the Polish Parliament on 4 April 2014. The
third tranche, covering 101 further professions has been passed to the
Parliament and is planned for the beginning of 2015. A fourth tranche is also considered,
with 40 possible further professions proposed through an open consultation. Overall,
the current advancement represents a significant improvement in opening access
to professions, and a substantial progress in the respective country-specific
recommendation is observed, although a large part of the reform is still to be
implemented.
Box
7: Potential impact of structural reforms on growth – a benchmarking exercise
Structural reforms are crucial for
boosting growth. It is therefore important to know the potential benefits of
these reforms. Benefits of structural reforms can be assessed with the help of
economic models. The Commission uses its QUEST model to determine how
structural reforms in a given Member State would affect growth if the Member
State narrowed its gap vis-à-vis the average of the three best EU performers on
key indicators such as the degree of competition or labour market
participation. Improvements on these indicators could raise Poland's GDP by
about 9 % in a 10-year period. Some reforms could have an effect even within a
relatively short time horizon. The model simulations corroborate the analysis
of Section 3.3, according to which large gains would likely stem from
increasing participation rates among the elderly. In addition, the simulations
support the priority placed by the authorities on increasing participation
rates among women by investing in childcare. 
Table:
Structural indicators, targets, and potential GDP effects[38]

Source:
Commission services. Note: Simulations
assume that all Member States undertake reforms which close their structural
gaps by half. The table shows the contribution of each reform to total GDP
after five and ten years. If the country is above the benchmark for a given
indicator, we do not simulate the impact of reform measures in that area;
however, the Member State in question can still benefit from measures taken by
other Member States.[39]
*The long-run effect of increasing the share of high-skilled
labour in the population could be 3.0% of GDP and of decreasing the share of
low-skilled labour could be 0.7%. ** EU average is set as the benchmark. 

3.5.                
Modernisation of public administration

The
particular challenges in this field are in contract enforcement, obtaining
construction permits and tax compliance costs for businesses, as reflected in
2013 country-specific recommendations. Moreover, there is scope for improvement
in the use of e‑administration. Poland has made some progress in addressing the
2013 recommendations (for the full country-specific recommendations assessment
see the overview table in Section 4).
Contract
enforcement in Poland continues to be lengthy. Poland scores
55th in the World Bank's global ranking on the overall number of
days needed to enforce a contract.[40] As
to the general performance of the judicial system, Poland performs well as
regards the time needed to resolve litigious civil and commercial cases at
first instance. However, the clearance rate[41] for
such cases is low and it deteriorated between 2010 (95 %) and 2012 (89 %),
creating a considerable backlog. Alternative methods of dispute resolution are
little used. The government amended the civil procedure code to streamline
civil and commercial proceedings, which might speed up the enforcement of
contracts. Overall, some progress has been made.
The
area of construction permits is still a challenge, as the number of required
administrative procedures is high. Poland is ranked 88th
in the World Bank’s global ranking on the ease of dealing with construction
permits.[42]
Moreover, there is a considerable backlog of cases before the administrative
courts, which has a negative impact in case of an appeal against an
administrative decision needed for a construction permit. The government
submitted to the Parliament legal amendments that would simplify the
requirements for certain types of construction permits (mostly residential).
Furthermore, the Codification Committee for the Construction Law is scheduled
to present its findings in late 2014 on a comprehensive reform on planning,
land use and construction. Overall, limited progress has been made.
Overall,
the digitisation of administration and the interoperability of existing IT
systems is low. The government adopted a law on the
standardisation of forms in administrative procedures, intended to raise the
number of forms available for online processing. Poland made some progress in
improving the Point of Single Contact, however, it does not fully comply with
the Services Directive in relation to the possibility of completing procedures
online. The share of e-Procurement in total public procurement is among the
lowest in the EU. 

4.                      
Conclusions

Although Poland has
weathered the post-2007 global economic and financial crisis relatively well, it
faces significant economic policy challenges: further fiscal
consolidation, low labour market participation, high youth unemployment,
relatively low levels of education, weaknesses in public healthcare and
business environment as well as a lack of innovative capacity. There are also deficiencies
in public administration and waste management. These challenges were already identified
in the 2013 Staff Working Document. In July 2013, relevant policy responses
were recommended in the country-specific recommendations issued for Poland. As
suggested by the 2014 Annual Growth Survey and the 2013 Alert Mechanism Report,
these challenges remain fully or partly relevant.
The analysis in
this staff working document concludes that Poland has made some progress in
addressing the 2013 country-specific recommendations. Progress
in ensuring the timely correction of the fiscal deficit was limited until
autumn 2013. Since then, and following a new Council recommendation under the Excessive
Deficit Procedure, the situation of public finances has improved on the back of
both better than expected economic growth and some additional policy measures. Substantial
progress has been made towards strengthening the fiscal framework, notably by
enacting a permanent expenditure rule and improving the coordination among
different levels of government. The government has started reforms to increase
the efficiency of the tax administration and increasing the tax compliance.
Efforts to tackle youth unemployment and increase the labour market
participation of women and older people go in the right direction: A lifelong
learning strategy is now in place and access to childcare facilities has been
improved. However, no progress has been made in fighting labour market
segmentation and no steps have been taken to reform the special schemes for
farmers and miners. Poland has presented promising strategic programmes aim at
improving its innovation support framework for private companies but
implementation remains limited. Progress on improving energy generation
capacity and energy efficiency and developing railway infrastructure has been
also limited and broadband coverage remains low. There has been substantial
progress in implementing an ambitious reform facilitating access to regulated
professions and some progress was made to improve the business environment.
The policy plans
submitted by Poland address most of the challenges identified in last year’s Staff
Working Document and broad coherence between the two documents has been ensured. The
national reform programme confirms Poland’s commitment to address shortcomings
in the areas of low employment, youth unemployment, innovation-friendly
business environment as well as energy generation and efficiency. The
convergence programme reiterates Poland’s commitment to continue fiscal
consolidation, improve the budgetary position towards the medium-term objective
and to ensure the long-term sustainability of public finances in line with the
Stability and Growth Pact.  However, in some areas, in particular in phasing
out special pension schemes to enhance labour mobility, the programmes lack the
ambition to address the challenges in a comprehensive way.

Overview table[43]
 
 2013 commitments || Summary assessment 
 Country-specific recommendations (CSRs) 
 CSR 1: Reinforce and implement the budgetary strategy for the year 2013 and beyond, supported by sufficiently specified measures for both 2013 and 2014, to ensure a timely correction of the excessive deficit by 2014 in a sustainable manner and the achievement of the fiscal effort specified in the Council recommendations under the EDP. A durable correction of the fiscal imbalances requires credible implementation of ambitious structural reforms, which would increase the adjustment capacity and boost potential growth and employment. After the correction of the excessive deficit, pursue the structural adjustment effort that will enable Poland reaching the medium‑term objective by 2016. With a view to improving the quality of public finances minimise cuts in growth-enhancing investment, reassess expenditure policies improving the targeting of social policies and increasing the cost effectiveness and efficiency of spending in the healthcare sector. Improve tax compliance, in particular by increasing the efficiency of the tax administration. || Poland has made some progress in addressing CSR 1: ·         Progress in ensuring the timely correction of the excessive deficit was limited until autumn 2013. Since then, and following a new Council recommendation under the EDP, the situation of public finances has improved on the back of both better than expected economic growth and some additional policy measures. According to the Commission's 2014 spring forecast, the headline balance and the structural improvement in 2014 are set to be in line with the new EDP Council recommendation. Further consolidation measures are needed to ensure sustainable correction of the excessive deficit in 2015 Limited progress in targeting social policies. Some measures to reform social protection system announced but no further developments observed. Limited progress in increasing the cost effectiveness and efficiency of spending in the healthcare sector. Some measures on patient eligibility assessment to join pharmaceutical programmes were implemented. Some progress in increasing tax compliance and the efficiency of the tax administration. More information has been made accessible to tax authorities in the mortgage register and reverse charge in VAT was introduced for some products. A single database of tax identification numbers was introduced and changes to the structure of the tax administration announced. 
 CSR 2: Ensure the enactment of a permanent expenditure rule in 2013 consistent with the rules of the European System of Accounts. Take measures to strengthen annual and medium-term budgetary coordination mechanisms among different levels of government. || Poland has made substantial progress in addressing CSR 2: Substantial progress in enactment of permanent expenditure rule. The rule has been adopted. Substantial progress in taking measures to strengthen coordination among different levels of government. The new permanent expenditure rule takes into account the spending of local governments when setting the expenditure level; existing uniform limits on local governments replaced by individual debt constraints; adopted regulations concerning remedial programme for local governments in cases of breaching of individual debt constraints; uniform type of long-term financial forecast for the local governments adopted 
 CSR 3: Strengthen efforts to reduce youth unemployment, for example through a Youth Guarantee, increase the availability of apprenticeships and work-based learning, strengthen cooperation between schools and employers and improve the quality of teaching. Adopt the proposed life-long learning strategy. Combat in-work poverty and labour market segmentation through better transition from fixed-term to permanent employment and by reducing the excessive use of civil law contracts. || Poland has made some progress in addressing CSR 3:  Some progress in efforts to reduce youth unemployment. Youth Guarantee Implementation Plan presented in December 2013 and an updated version in April 2014 Some progress in increasing the availability of apprenticeships and work-based learning. The reform of the vocational education system is on-going. Some progress in strengthening cooperation between schools and employers. Modernisation of core curricula aimed at adjusting tem to the needs of employers is on-going. Substantial progress in improving the quality of teaching. National graduates’ tracking system is planned and faster paths for adults to complete tertiary education are envisaged. Substantial progress on the life-long learning strategy. In September 2013, the lifelong learning strategy was adopted but its implementation is still pending. Limited progress in combating in-work poverty. Increase in the statutory minimum wage was undertaken. No progress in combating labour market segmentation. 
 CSR 4: Continue efforts to increase female labour market participation, in particular by investing in affordable quality childcare and pre-school education, by ensuring stable funding and qualified staff. With a view to improving sectoral labour mobility, take permanent steps to reform the farmers’ social security scheme KRUS. Phase out the special pension system for miners with a view to integrating them into the general scheme. Underpin the general pension reform with measures promoting the employability of older workers to raise exit ages from the labour market. || Poland has made some progress in addressing CSR 4:  Some progress in increasing female labour market participation. Poland plans to offer every eligible child a place in pre-school education by 2017 and has planned to boost funding. The number of places in early childcare still far too low to satisfy needs. No progress in phasing out special pension scheme for farmers and miners. Some progress in promoting employability of older workers. The lifelong learning strategy has been adopted and some measures have been announced in the draft programme: Solidarity across Generations 50+. 
 CSR 5: Take additional measures to ensure an innovation-friendly business environment by strengthening the links between research, innovation and industrial policy, by further developing revolving instruments and tax incentives, and by better targeting existing instruments to the different stages of the innovation cycle. || Poland has made limited progress in addressing CSR 5:   Some progress in strengthening links between research, innovation and industrial policy. The Enterprise Development Programme, the Smart Growth Operational Programme 2014-20 and the Smart Specialisation Strategy were adopted. Numerous co-operative projects and funding instruments involving academia and business are being introduced and coordinated by the applied research agency (NCBiR). Limited progress in further developing revolving instruments. The Enterprise Development Programme proposes new support system of financial instruments for R&D. Limited progress with reforming tax incentives for R&D. The Enterprise Development Programme announces the introduction of tax reliefs for innovative projects. Limited progress in better targeting existing instruments. New support instruments have been introduced to fill in the identified gaps such as the support to innovative capital (NCBiR and National Capital Fund). The Enterprise Development Programme and the programmes of the new financial perspective 2014-2020 include several measures streamlining the support for the entire innovation cycle. 
 CSR 6: Renew and extend energy generation capacity and improve efficiency in the whole energy chain; speed up and extend the development of the electricity grid, including cross-border interconnections, and eliminate obstacles in electricity cross border exchange; reinforce competition in the gas sector by phasing out regulated prices; strengthen the role and resources of the railway market regulator and ensure effective implementation of railway investment projects without further delay; accelerate efforts to increase broadband coverage. improve waste and water management. || Poland has made limited progress in addressing CSR 6:  Limited progress in energy generation and efficiency. The White Certificate System has been started but overall energy efficiency remains poor. Some progress in developing the electricity grid. Progress in enabling reverse flows was achieved. Short‑term solutions for unscheduled loop flows going through its electricity grid were adopted and cross-border electricity interconnections are under development. Limited progress on phasing out regulated prices. Price regulation continues at the retail gas markets and it is maintained for most industrial customers. Limited progress in railway investment and infrastructure. Progress on many projects is still slow and poorly planned. However, the railway regulator’s budget was increased in 2013 and some legal changes were introduced. Limited progress in broadband coverage. Absorption of funds from Rural Development Programme remains low and the assignment of spectrum for mobile systems is postponed. Some progress in improving waste and water management. Law on waste management has been implemented but further constraints arise due to insufficient separate collection and inadequate infrastructure for alternative treatment. 
 CSR 7: Take further steps to improve the business environment by simplifying contract enforcement and requirements for construction permits and by reducing tax compliance costs. Adopt and implement the planned liberalisation of access to professional services. || Poland has made some progress in addressing CSR 7: Some progress in the simplification of contract enforcement. Some electronic procedures were introduced, complaints procedure speeded up and there is more use of the mediation procedure. Clearance rate of enforcement cases rose to 99 %. ·         Limited progress in simplification of requirements for construction permits. Amendments to the construction law have been proposed covering mostly residential permits. Codification committee expected to present proposal for a comprehensive reform in late 2014, Limited progress on reducing tax compliance costs.  Changes to the structure of the tax administration have been introduced as a prelude to an e-tax reform and the legal framework to set up a tax portal was announced. Substantial progress in facilitating access to regulated professions. First of the three planned tranches of reform fully implemented and further tranches are to follow in 2014. 
   Europe 2020 (national targets and progress)   
 Policy field target ||  Progress achieved 
 Employment rate target: 71 % || Employment rate (20-64 age group) has been rising slightly (0.4 pp in comparison to 2010, 0.2 pp to 2011 and 0.2 pp to 2012), reaching 64.9% in 2013. Nevertheless, more efforts are needed to meet 2020 target. 
 R&D target: 1.7 % of GDP || Polish R&D intensity reached 0.9 % of GDP in 2012. Although Polish R&D intensity over 2007-12 rose at an impressive average growth rate of 9.7 %, slightly higher than 8.3 % average annual growth required to reach the ambitious Polish target of 1.7 % by 2020, reaching the target will not be possible without a significantly bigger role for the business sector in the R&D system. Business R&D intensity is now at 0.33 %, well below EU average (23rd place in the EU). 
 Greenhouse gas (GHG) emissions target: 14 % (compared to 2005 emissions; ETS emissions not covered by this national target) || Change in non-ETS greenhouse gas emissions between 2005 and 2012: + 14 %.   According to the latest national projections submitted in 2014 to the relevant United Nation body (UNFCCC), the target is expected to be reached by a singlificantly narrover margin than according to the lastest EU projections. 
 2020 Renewable energy target: 15 % Share of renewable energy in all modes of transport: 10 % || Share of total renewable energy in gross final energy consumption was 11 % in 2012 and 6.1 % in the transport sector.   Limited progress has been made on transposition of the Renewable Energy Directive and on development of a stable, efficient, reliable legal and regulatory framework for the support for renewable energy sources. 
 Energy efficiency target: 13.6 Mtoe (reduction of energy consumption)   By 2020: not exceeding the level of 96.4 Mtoe primary consumption and 70.4 Mtoe final energy consumption || In 2011, primary energy consumption reached 97.38 Mtoe. Keeping it below 96.4 Mtoe until 2020 despite expected economic growth is now a growing challenge requiring increasing the level of ambition of the current energy efficiency policies in all sectors (end-use consumption, transmission/generation, energy generation).  Some policy efforts have recently been taken in particular as regards supporting final energy savings among end-use consumers (e.g. initiation of the White Certificate System in 2013). However, compliance with the new EU energy efficiency legislation requires further strengthening of the support for energy saving in Poland. 
 Early school leaving target: 4.5 % || The early school leaving rate was 5.6 % in 2011, 5.7 % in 2012 and 5.6 % in 2013. The EU target has already been achieved. Poland is already well below the target set for 2020 for the EU average (10 %). The national target is very ambitious, and progress towards reaching it has been reversed over last two years. 
 Tertiary education target: 45 % || The tertiary educational attainment rate was 36.5 % in 2011, 39.1 % in 2012 and 40.5 % in 2013. Substantial progress has been achieved towards meeting the target. The 2020 target has almost been achieved. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: 1 500 000 || The number of people at risk of poverty and social exclusion has been reduced by 281 000 since 2010 (by 68 000 in 2012 and 213 000 in 2011). Poland has made some progress. More coordinated efforts are needed to reach the 2020 target. 

Annex 

Standard Tables
Table I. Macro-economic indicators                                                                        
Table II. Comparison of
macroeconomic developments and forecasts    
Table III. Composition of the
budgetary adjustment
Table IV. Debt dynamics                                                                              
Table V. Sustainability indicators                                                                
Table VI. Taxation indicators                                                                      
Table VII. Financial market
indicators                                                       
Table VIII. Labour market and
social indicators                                                              
Table IX. Product market
performance and policy indicators                                         
Table X. Green Growth                                                                                
List of indicators used in Box 7 on the
potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[44]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org. 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation rates:
Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate:  Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Aside from the 16 Member States identified in the Alert Mechanism
Report, Ireland was also covered by an in-depth review, following the
conclusion by the Council that it should be fully integrated into the normal
surveillance framework after the successful completion of its financial
assistance programme.
[4] In particular, it covers the government funds managed by the Bank
Gospodarstwa Krajowego (a state-owned bank) — including the National Road Fund.
[5] See Table V. The medium-term sustainability gap (S1) indicator
shows the upfront adjustment effort required, in terms of a steady improvement
in the structural primary balance to be introduced until 2020, and then
sustained for a decade, to bring debt ratios back to 60% of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population. The following thresholds were used to assess
the scale of the sustainability challenge: (i) if the S1 value is less than
zero, the country is assigned low risk; (ii) if a structural adjustment in the
primary balance of up to 0.5 p.p. of GDP per year until 2020 after the last
year covered by the autumn 2013 forecast (year 2015) is required(indicating an
cumulated adjustment of 2.5 pp.), it is assigned medium risk; and, (iii) if it is greater than 2.5 (meaning
a structural adjustment of more than 0.5 p.p. of GDP per year is necessary), it
is assigned high risk.
[6] See Table V. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: i) the initial budgetary position (IBP) which gives the gap to the
debt stabilising primary balance; and ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest
and the real growth rates); thereby not necessarily implying that the debt
ratio will fall below the EU Treaty 60% debt threshold. The following thresholds for the S2 indicator were used: (i) if the
value of S2 is lower than 2, the country is assigned low risk; (ii) if it is
between 2 and 6, it is assigned medium risk; and, (iii) if it is greater than
6, it is assigned high risk.
[7] 286 hours per year in Poland, compared to 178 hours per year in the
EU (2012).
[8] 18 payments in Poland compared to an average of 11 in the EU. In
particular, Poland requires 12 separate VAT payments a year. In vast majority
of EU countries VAT is either paid once a year or filed electronically (World
Bank, Doing Business 2014).
[9] According to the national data, the number of all tax declarations
filed electronically has risen from 10% in 2011 to 27% in 2013 but still
remains below the EU average of 60%. See: Ministry of Finance website
www.epodatki.mf.gov.pl
[10] In 2014, Poland prolonged the 2011 temporary increase in VAT rates
by one percentage point until 2017.
[11] In ESA-95 terms. According to the national statistics, VAT revenues
fell by 0.7 % in 2012 and by 5.3 % in 2013. This is PLN 12 billion
(0.7 % of GDP) lower than planned in the 2012 budget law and PLN 18.6 billion
(1.1 % of GDP) lower than provided for in the original 2013 budget law.
The main difference between the national and the ESA statistics is that the
former are cash‑based, while the latter are accrual‑based.
[12] Commission services projection.
[13] The hypothetical VAT revenues in 2013 are calculated using the
hypothetical 2012 VAT revenues (and not the factual 2012 VAT revenues).
[14] Arrears data published by Polish Ministry of Finance: http://www.finanse.mf.gov.pl/budzet-panstwa/zaleglosci-budzetowe.
[15] Implicit tax rate on energy is energy tax revenues in relation to
final energy consumption (Euro per ton oil equivalent, deflated with the final
demand deflator). It amounted to 122.5 in Poland compared to the EU weighted
average of 214.8 in 2011.
[16] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[17] Real unit labour costs declined by 4 % in Poland between 2005
and 2012 while remaining broadly unchanged in the EU.
[18] The tax wedge on labour (amounting to 35.5 % for a single
individual in 2012) is slightly below the OECD average, slightly above the EU‑27
average (34.1 %) and far below the average for those EU Member States
which are also members of the OECD (41.8 %). However, the tax wedge in
2012 increased by 1.1 pp compared to 2011.
[19] Women’s employment rate remains particularly low in Poland at 57.5 %
(EU average: 62.3 %), with an important gender employment gap (men’s
employment rate: 72 %), which indicates a significant growth potential on
the supply side.
[20] From 9.0 % in 2008 to 12.2 % in 2013.
[21] Pursuant to the Council Recommendation of
22 April 2013 on establishing a Youth Guarantee (2013/C 120/01): "ensure
that all young people under the age of 25 years receive a good-quality offer of
employment, continued education, an apprenticeship or a traineeship within a
period of four months of becoming unemployed or leaving formal education".
[22] Poland presented a Youth Guarantee Implementation Plan in December
2013. It was assessed by the Commission's services and feedback was provided to
the Polish authorities in a meeting on 11 February 2014 and during a
fact-finding mission to Poland on 14 March 2014. Poland sent an updated version
of a Youth Guarantee Implementation Plan in April 2014, which was taken into
account in a Commission's services revised assessment.
[23] The proportion of temporarily employed 15-24 year-olds amounted to
68.6 % in 2013
[24] The supplementary budgetary payments to the farmers’ scheme reached
PLN 15.2 billion (EUR 3.8 billion); meanwhile farmers
contributions amounted only to PLN 1.5 billion (EUR 0.37 billion).
[25] Although the number of active miners is decreasing (there are
around 107 thousand miners), according to the data of the Ministry of Labour,
the supplementary payment from the State budget to the miners' pension scheme
amounted to 6.5 billion PLN (1.65 billion EUR) in 2012.
[26] 40 %
in 2013 vs. 36.6 % EU average and a national target of 45 % for 2020.
[27] Adult participation in life-long learning was 4,3 % vs. 10.4% in EU
28 in 2013; 0.8% in 2012 vs. 5.7% in EU28 for the age group 55-64 in 2013
[28] Coverage of unemployment benefits 10.3% vs 30% EU28 (LFS, 2012);
non-coverage rate of jobless poor 39.3%, 5th highest in EU (EU-SILC,
2012)
[29] See Section 3.2 of the Quarterly Report of the Euro Area, Vol. 11,
No 2, 2012 for the methodology of shift-share decomposition.
[30] We refer here to the OECD’s classification of manufacturing
industries based on R&D intensities as proposed by T. Hatzichronoglou in Revision
of the high-technology sector and production classification, OECD Science,
Technology and Industry Working Papers, No 2, 1997.
[31] Poland had the second worst road deaths record in the EU in 2013
with 87 fatalities per million inhabitants.
[32] In our analysis we have used the NACE (revision 2) statistical
classification of economic activities, which was broken down to 38 branches of
the economy. The analysis covers the period of 1995–2011, being restricted by
data availability.  We have also referred to the OECD’s classification of
manufacturing industries based on R&D intensities as proposed by T.
Hatzichronoglou that is compatible with the NACE.
[33] High technology industries include aircraft and space craft manufacturing
and pharmaceuticals; medium-high technology industries include electrical
machinery and motor vehicles manufacturing, machinery and equipment; medium-low
technology industries include building and repairing ships, rubber and plastic
products; low technology industries embrace wood and paper products, food and
beverages.
[34] In 2013 71% at national level compared to EU average of 96% and 38%
at rural level compared to EU average of 86%.
[35] Full implementation of the existing waste legislation could create
more than 37,000 jobs in Poland and increase the annual turnover of the waste
sector by over € 4 bn. Moving towards “0” landfilling could take this to over
44,000 additional jobs and increase the annual turnover by over €4,6 bn.
Source: Commission study "Implementing EU legislation for Green Growth",
2011, http://ec.europa.eu/environment/waste/studies/pdf/study%2012%20FINAL%20REPORT.pdf
[36] 204 MT CO2 eq. in 2012 against a 2020 target of 204,6 MT
CO2 eq. 
[37] Million tonnes of oil equivalent.
[38] Final goods sector
mark-ups is the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators
see Annex.
[39] For a detailed explanation
of the transmission mechanisms of the reform scenarios see: European Commission
(2013), "The growth impact of structural reforms", Chapter 2 in QREA
No. 4. December 2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[40] 685 days in Poland compared the OECD average of 529 days.
[41] Clearance rate is the number of resolved cases over the number of
incoming cases.
[42] Source: World Bank, Doing Business database: http://www.doingbusiness.org/Rankings.
[43] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations:  No progress:
The Member State has neither announced nor adopted any measures to address the country-specific
recommendations. This category also applies if a Member State has commissioned
a study group to evaluate possible measures.  Limited progress: The
Member State has announced some measures to address the country-specific
recommendation, but these measures appear insufficient and/or their
adoption/implementation is at risk.  Some progress: The Member State has
announced or adopted measures to address the country-specific recommendation.
These measures are promising, but not all of them have been implemented yet and
implementation is not certain in all cases.  Substantial progress: The
Member State has adopted measures, most of which have been implemented. These
measures go a long way in addressing the country-specific recommendation. Fully
addressed: The Member State has adopted and implemented measures that
address the country-specific recommendation appropriately.
[44] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.