Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Poland and delivering a Council opinion on the 2016 convergence programme of Poland
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Poland, VAT, budget deficit, economic policy, economic reform, investment, labour market, pension scheme, stability programme, tax collection

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 341 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Poland  and delivering a Council opinion on the 2016 convergence programme of Poland  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Poland 

and delivering a Council opinion on the 2016 convergence programme of Poland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it 
did  not  identify  Poland  as  one  of  the  Member  States  for  which  an  in-depth  review 
would be carried out.  
The 2016 country report for Poland6 was published on 26 February 2016. It assessed 
Poland’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 14 July 2015 and Poland's progress towards its national Europe 2020 
targets. 

OJ L 209, 2.8.1997, p. 1. 
COM(2016) 341 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
SWD(2016) 89 final. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  28  April  2016,  Poland  submitted  its  2016  national  reform  programme  and  its 
2016  convergence  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance.7 

in 

Poland  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2016  convergence  programme,  the  government  plans  for  the  headline  balance  to 
increase  from  2.6%  of  GDP  in  2015  to  2.9%  of  GDP  in  2017  before  declining  to 
1.3% of GDP in 2019. The medium-term budgetary objective — a deficit of 1 % of 
GDP  in  structural  terms  —  is  not  expected  to  be  achieved  by  2019,  the  period 
covered  by  the  programme.  According  to  the  convergence  programme,  the 
government debt-to-GDP ratio is expected to increase from 51.3% of GDP in 2015 to 
52.5%  of  GDP  in  2017  before  declining  to  50.4%  of  GDP  in  2019.  The 
macroeconomic  scenario  underpinning  these  budgetary  projections  is  plausible  in 
2016 and favourable thereafter. Based on the Commission 2016 spring forecast, there 
is  a  risk  of  a  significant  deviation  from  the  recommended  adjustment  both  in  2016 
and, under unchanged policies, in 2017. Based on its assessment of the convergence 
programme  and  taking  into  account  the  Commission  2016  spring  forecast,  the 
Council  is  of  the  opinion  that  there  is  a  risk  that  Poland  will  not  comply  with  the 
provisions  of  the  Stability  and  Growth  Pact.  Therefore  further  measures  will  be 
needed to ensure compliance in 2016 and 2017.  

Poland is the only Member State without a fully-fledged independent fiscal council 
and no known plans to create one. In addition to the debt brake built into the Polish 
constitution,  Poland  introduced  an  expenditure  stabilising  rule  in  2013,  which  was 
fully applied for the first time in the 2015 budget. The rule was, however, amended 
in  December  2015  to  allow  for  higher  expenditure.  There  are  significant  fiscal 
sustainability  risks  in  the  longer  term  due  to  an  unfavourable  initial  budgetary 
position  and  the  projected  increase  in  the  costs  of  population  ageing,  mainly  in 
relation to healthcare spending. From a debt sustainability perspective, the medium-
term fiscal risk is high, owing to the projected increase in the stock of debt. 

VAT revenues for 2015 are projected to have remained low as a proportion of GDP, 
despite the measures introduced so far, which include the reverse charge mechanism 
and  the  joint  liability  of  firms  in  sensitive  sectors.  Increasing  VAT  collection  and 
fighting VAT fraud are priorities for the Polish government and a strategy is being 
prepared in this respect. It is expected to include measures such as new IT tools for 
detecting and combating VAT fraud and a reform of the tax administration. A lower 
limit  for  cash  payments  between  companies  will  be  introduced  in  January  2017. 
Poland  still  faces  the  long-standing  challenge  of  inefficient  tax  administration.  The 

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(8) 

(9) 

cost-of-collection ratio, i.e. administrative costs per net tax revenue collected, is the 
highest in the EU. 

Poland  continues  to  apply  reduced  VAT  rates  to  a  large  number  of  goods  and 
services.  This  contributes  to  lost  revenues  and  reduces  the  efficiency  of  the  VAT 
system. Evidence suggests that reduced VAT rates are not an effective social policy 
instrument,  particularly  as 
they  are  not  specifically  targeted  to  vulnerable 
households. They tend to translate into significant subsidies to rich taxpayers. Social 
benefits and income tax are considered to be better targeted and thus more suitable 
for  achieving  redistributive  goals.  The  potential  lost  revenue  due  to  reduced  VAT 
rates and optional exemptions is among the highest in the EU. 

Despite  recent  improvements,  the  Polish  labour  market  faces  significant  challenges 
—  an  ageing  labour  force,  low  productivity  and  high  segmentation  of  the  labour 
market. These are coupled with shortcomings in the education system. Although the 
education  system  has  improved  significantly  in  recent  years,  it  still  fails  to  equip 
pupils sufficiently with the transversal skills needed for the rapidly changing labour 
market  and  innovation.  The  relatively  low  average  standing  of  Polish  higher 
education and science has a negative effect on the quality of provision.  The degree 
of internationalisation of Polish higher education is very limited, both in terms of the 
number of foreign students and participation in international scientific collaboration. 
The financing model of higher education does not promote quality sufficiently, as it 
largely uses past university standings and quantity variables, such as the number of 
students  and  academic  staff.  According  to  employers,  graduates  lack  transversal 
skills  such  as  problem  solving,  critical  thinking,  or  teamwork.  Participation  in 
lifelong learning is low, and vocational education and training do not correspond to 
market needs.  

(10)  While the availability and take-up of pre-school education has increased significantly 
in recent years, the availability of early childcare services remains among the lowest 
in the EU. Raising the obligatory school starting age to the age of seven years, and 
removing  the  obligation  for  five  year  olds  to  attend  the  pre-school,  combined  with 
the  new  child  benefit,  may  have  further  negative  effects  on  labour  market 
participation, especially of women. 

(11) 

Despite a strong rise in permanent employment contracts in 2015, the proportion of 
fixed-term  employment  in  Poland  is  among  the  highest  in  the  EU.  Poland  has 
recently  taken  a  number  of  measures  to  tackle  labour  market  segmentation.  An 
amendment to the Labour Code has been introduced, the social security contributions 
connected  to  some  civil  law  contracts  have  been  increased  and  a  minimum  hourly 
remuneration for those working on civil law contracts is expected to be introduced in 
January 2017.However, certain features of the Labour Code create disincentives for 
employers  to  hire  people  on  open-ended  contracts  and  the  use  of  these  contracts 
remains  limited.  This  is  predominantly  due  to  the  complexity  of  labour  regulation 
and  the  high  implicit  costs  of  dismissals  under  such  contracts.  These  include  high 
procedural  costs,  costs  associated  with  lengthy  and  uncertain  dispute  resolution 
mechanisms  and  provisions  such  as  the  special  protection  of  older  workers  from 
layoffs. 

(12) 

Preferential  sector-specific  social  security  arrangements,  in  particular  the  highly 
subsidised  pension  systems  for  farmers  and  miners,  have  high  budgetary  costs  and 
may  contribute  to  reducing  labour  mobility.  The  number  of  insured  under  special 
security  system  for  farmers  has  been  slowly  decreasing  since  2007,  and  the 

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government  expects  that  in  2019  it  will  amount  to  1.18  million  people,  while  the 
number of retirement benefits of 1.229 million will probably grow until 2018. Since 
2011, the share of state budget expenditure for KRUS in GDP has been constant at 
1%. There is no general tax requirement for the farmers or an obligation to have an 
accounting system, and the self financing of KRUS is low. There were 1.382 million 
farms in Poland in 2014 of which 52% under 5 ha (GUS). Miners are exempt from 
the  general  defined-contribution  public  pension  system  with  special  preferential 
pension  multiplier  coefficients,  which  is  a  significant  yearly  cost  to  the  public 
finances of over 0.5 % of GDP. The unfavourable demographic outlook has already 
translated  into  a  declining  working  age  population.  Preserving  the  positive  trend  in 
employment, especially of older workers, is therefore essential, also with a view to 
preserving public pension system adequacy and sustainability. Although the average 
effective retirement age increased in recent years, it remains significantly below the 
statutory  retirement  age.  Therefore,  an  increase  in  the  effective  retirement  age  is 
crucial  for  the  longer-term  social  adequacy  of  future  pensions  and  the  stability  of 
public finances, as well as to increase labour market participation.  

Despite sizeable investment in recent years, bottlenecks and deficiencies in transport, 
energy  and  communication  networks  persist.  Investment  activity  is  hampered  by 
barriers  in  relation  to  the  functioning  of  the  public  administration,  taxation,  the 
environment  for  research,  development  and  innovation  activities,  and  lengthy 
contract enforcement. Weaknesses in managerial and administrative capacity have a 
negative  effect  on  the  timely  implementation  of  investment  projects  in  the  railway 
sector and other transport, energy and telecommunication infrastructure projects. The 
Polish  economy  is  still  energy-  and  carbon-intensive  and  the  potential  gains  from 
improving  energy  efficiency  are  significant.  Electricity  generation  facilities  are 
ageing  and  remain  heavily  dependent  on  coal.  The  power  network  is  insufficiently 
connected to neighbouring countries. The renewable energy support scheme,  which 
was meant to take effect on 1 January 2016, has been delayed, creating investment 
uncertainty.  Key  factors  hampering  investments,  in  particular  in  construction,  are 
very low coverage of and instability in spatial planning, especially at the local level, 
as  well  as  over-regulation  and  regulatory  and  administrative  inconsistencies  that 
impede the issuing of construction permits.  

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Poland’s  economic  policy  and  published  it  in  the  2016 
country  report.  It  has  also  assessed  the  convergence  programme  and  the  national 
reform programme and the follow-up to the recommendations addressed to Poland in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in  Poland  but  also their  compliance  with  EU rules 
and guidance, given the need to strengthen the EU's overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 3 below. 

(13) 

(14) 

(15) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  convergence 
programme, and its opinion8 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Poland take action in 2016 and 2017 to: 

1. 

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Achieve  an  annual  fiscal  adjustment  of  0.5%  of  GDP  towards  the  medium-term 
budgetary objective in 2016 and in 2017. Strengthen the fiscal framework, including 

Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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by  establishing  an  independent  fiscal  council.  Improve  tax  collection  by  ensuring 
better VAT compliance, and limit the extensive use of reduced VAT rates. 

Ensure  the  sustainability  and  adequacy  of  the  pension  system  and  increase 
participation  in  the  labour  market,  by  starting  to  reform  the  preferential  pension 
arrangements,  removing  obstacles  to  more  permanent  types  of  employment  and 
improving the labour market-relevance of education and training.  

Take  measures  to  remove  obstacles  to  investment  in  transport,  construction  and 
energy infrastructure, and increase the coverage of spatial planning at local level. 

2. 

3. 

Done at Brussels, 

For the Council 
The President 

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