Source: EURLEX
Language: en
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# 52012SC0323

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and convergence programme for POLAND Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Poland’s 2012 national reform programme and delivering a Council Opinion on Poland’s updated convergence programme for 2012-2015 /\* SWD/2012/0323 final \*/**

  

CONTENTS

Executive summary.. 3

1. Introduction.. 4

1. Introduction.. 4

2. Economic developments and challenges. 5

2.1. Recent economic developments and outlook. 5

2.2. Challenges. 6

3. Assessment of the policy agenda.. 7

3.1 Fiscal policy and taxation. 7

3.2. Financial sector 13

3.3. Labour market, education and social policy. 14

3.4. Structural measures promoting growth and
competitiveness. 17

3.5. Modernisation of public administration. 20

4. Overview table. 22

Annex.. 26

Executive summary In 2012, Poland's economic activity is expected to slow down as compared to 2011. Nevertheless, GDP growth is still projected to increase by 2.7%. Unemployment is foreseen to slightly rise to 9.8%. Poland's public finances are improving. Helped by solid economic growth in 2011, Poland has reduced its budget deficit in line with the Commission's recommendations. The parliament adopted a major reform of the country's pension system, which would gradually rise the statutory retirement age to 67. In other areas however, reform efforts have been limited, particularly as regards the labour market, education, energy, transport and regulation. In the medium to long term, Poland is faced with a number of challenges. The budget deficit has to be further reduced to reach the medium-term objective. Financial markets require continued attention. A very low labour force participation rate, in particular women, and the quality of vocational training and education are major concerns given an ageing population. There are also signs of labour market segmentation affecting the youth. The low level of public and private R&D spending, weak links between science and industry and the poor innovation performance call for improvements. Poland's infrastructure, particularly its railway and energy system, remains underdeveloped. The efficiency of public administration, tax collection and law-making needs to be significantly improved. Unjustified restrictions in the field of professional services impede economic growth. .

 
1. Introduction

In May 2011 the
Commission proposed 7 country specific recommendations (CSRs) for economic and
structural reform policies for Poland.  In July 2011 the Council adopted these
recommendations which concerned public finances, the pension system, education
and training, the labour market, energy, transport and deregulation.

In November
2011, the Commission published its Annual Growth Survey for 2012 (AGS 2012) in
which set out proposals for building the necessary common understanding about
priorities for action at national and EU level in 2012. It focused on five
priorities — growth-friendly fiscal consolidation, restoring normal lending to
the economy, promoting growth and competitiveness, tackling unemployment and
the social consequences of the crisis, and modernising public administration.
It encouraged Member States to implement them in the 2012 European Semester.

Against this background,
in April 2012 Poland presented updates of its national reform programme and
convergence programme detailing progress made since July 2011 and plans going
forward.

This Staff
Working Document assesses the state of implementation of the 2011 CSRs, as well
as the AGS 2012 in Poland. It identifies current policy challenges and, in this
light, examines the country’s latest policy plans.

Overall, Poland implemented the Council Recommendations only partially. On the positive side,
economic growth was robust in 2011, and the country managed to reduce its
fiscal deficit as required under the Excessive Deficit Procedure (and repeated
in the CSRs). Notwithstanding these important achievements, reform efforts were
limited, particularly as regards the labour market, education, energy,
transport and regulation. Therefore, in these areas, the challenges identified
in July 2011 and reiterated in the AGS 2012 remain valid. As regards the
pension system, Poland has unveiled a major reform proposal that aims to raise
the statutory retirement age to 67, by 2020 for men and by 2040 for women.

Poland’s most pressing challenges are in public finances, the labour
market, infrastructure development, and the business and innovation
environment. The budget deficit has to be further reduced to reach the
medium-term objective and maintain the confidence of financial markets. A very
low labour force participation rate is another major concern in the medium to
long term, given an ageing population. Originating in the poor labour market
performance, poverty and social exclusion is another challenge. Youth
unemployment has increased and there are signs of labour market segmentation
affecting the youth. Moreover, the efficiency of public administration needs to
be significantly improved. Notwithstanding sizeable investments in the road
network, the country’s infrastructure, particularly its railway system, remains
underdeveloped and is thus a factor that severely hinders growth. The low level
of R&D spending and poor performance regarding innovation is another
important policy issue. Finally, in the light of persistent uncertainties in
international financial markets, Poland should continue to pursue prudent and
pre-emptive policies in financial regulation and supervision.

The policy plans submitted by Poland are relevant. They focus on the fiscal consolidation, increasing the employment rate
and improving business environment. However, in some areas, in particular as
regards further reforms of the pension system, they lack the ambition to
address the challenges in a comprehensive way.

2. Economic developments and challenges
2.1. Recent
economic developments and outlook

On the back of
a solid export performance, economic activity expanded strongly in Poland before the financial crisis. Continuous improvements in price- and non-price
competitiveness helped exporters to gain market share and attracted
considerable foreign direct investment in productive sectors. Thanks to
resilient domestic demand and improved absorption of EU funds, the country was
able to weather the financial crisis and its aftermath, with real GDP
increasing by 1.7 % in 2009, and a robust 3.9 % in 2010.

In 2011, the
Polish economy picked up strongly. GDP is estimated to have grown by 4.3 %.
In the first half of the year, strong external demand fuelled manufacturing and
private investments. In addition, EU co-financed
infrastructure projects gave investment a further push. Private consumption picked up on the back of a strong labour
market. However, with growing tensions in global financial markets in the
second half of the year, consumer confidence deteriorated and private
consumption lost steam. A sharp fiscal consolidation, resulting in weak public
consumption, added to negative pressure on domestic demand. Thus, despite
continued strong external trade, helped by currency depreciation, the labour
market outlook also started to weaken.

Following a
drop in 2010, inflation picked up again in 2011. Surging commodity prices and a
depreciating currency pushed up consumer price inflation from 2.7 % in
2010 to 3.9 % in 2011. Despite sustained rises in employment, the
unemployment rate stabilised at around 9.6 % in 2010-2011, keeping nominal
wage growth in check. As a result, real wages remained broadly stable over the
past two years.

Looking
forward, the ongoing recession in the euro area is likely to slow down economic
activity in Poland significantly. Real GDP is projected to increase by 2.7 %
in 2012 and 2.6 % in 2013. In 2012, still favourable, albeit somewhat
weakened, labour market conditions, the continued inflow of EU funds,
increasing investments from the corporate sector and a still depreciated
currency will be the main factors supporting growth. In 2013, private
consumption is expected to inch up again as the global environment starts to
improve. Lower domestic demand and further external trade gains are set to
improve the current account position somewhat. The rate of inflation is
forecast to decrease gradually in 2012-2013, as food and fuel prices stabilise
and the negative effect of currency depreciation peters out.

In the absence
of adverse financial and external developments, GDP growth could average 3½% in
2014-2015. This should bring down the unemployment rate to around 8¼% by
end-2015. Given unfavourable demographic developments, a broad range of
structural reforms will have to be undertaken to keep growth at this level in
the medium term and to deal with underlying imbalances, particularly to reduce
the relatively high current account deficit.

The national
reform programme and the convergence programme were adopted by the Council of
Ministers on 25 April 2012. The convergence programme outlines in an
integrated manner the fiscal consolidation efforts, the key structural reforms
and the reforms that underpin macroeconomic stabilisation. The national reform
programme evaluates progress towards meeting national Europe 2020
targets for employment, R&D, education, energy and climate change and
poverty reduction. These targets set out the longer-term development trajectory
to modernise the Polish economy and put imminent reform priorities in a broader
context. The national reform programme also describes the measures Poland plans to take to fulfil its obligations under the Euro Plus Pact.

Both documents
share the same economic outlook. For 2012, the outlook is broadly in line with
the most recent Commission forecast. However, for 2013, the Polish authorities
are more optimistic and forecast real GDP growth of 2.9 %.

2.2. Challenges

Despite
remarkable growth performance during and after the financial crisis, Poland could speed up its reform agenda to maintain or improve its growth potential. The
main policy challenges for the country have remained broadly unchanged, though
the progress the government has made with its reform agenda requires some
adjustments.

In particular,
continued fiscal consolidation is required to reach the medium-term objective
(MTO) for the deficit and to maintain the confidence of financial markets.
Increasing the still low share of growth-enhancing expenditure remains a
prerequisite for sustaining good macroeconomic performance. Moreover, the
structural weaknesses of the fiscal framework, identified in the 2011
Commission Staff Working Document, are still present: poor monitoring of budget
implementation, discrepancies between the public accounting and reporting
system and the European System of National and Regional Accounts (ESA95), and
problems with coordination between various tiers of the general government in
the annual and multi-annual budgetary planning.

Regarding
labour supply, Poland still has the second
lowest employment rate among older workers in Europe, particularly of older
women, and one of the lowest average exit ages from the labour market. This is
of particular concern in the medium to long term, given an ageing population
and growing life expectancy. The old age dependency ratio (population aged 65
and over as a percentage of the population aged 15-64) in Poland will double in the next 30 years, from about 20 % to 40 %. Women’s participation in
the labour market is very low, owing partly to the lack of affordable
childcare. Thus, the main challenge is to prolong
working life by raising the statutory and effective retirement age in line with
longer life expectancy and to improve availability of childcare for infants and
young children. A subsidised social security system for farmers keeps an
unnecessarily large part of the labour force in agriculture, and thus holds
back productivity growth and keeps regional labour mobility at a low level.

A key challenge
for Poland is to maintain its economic growth through raising and increasing
effectiveness of growth-friendly expenditure, notably in education, research
and innovation investment. Current growth is to some extent based on the inflow
of structural funds, a price-competitive labour force and growing integration
of Polish subcontractors and manufacturing centres into the global value chain.
. In a medium-term perspective, however, a shift toward an innovation-driven
economy is necessary. Measures adopted so far have not led to visible
improvement in the innovativeness of Polish companies. Low public R&D
spending, weak linkages between science and industry, and severe
underinvestment in research and innovation in the private sector need to give
way to a new approach with well-designed incentives and effective support
through public funding, including more public-private cooperation.

Poland also needs to promote growth and competitiveness by improving
business conditions, modernising public administration and raising the quality
of vocational training and education. Limited competition among incumbent
electricity suppliers, insufficient interconnections with other Member States and ageing energy generation capacity keep energy prices high. Moreover, Poland’s underdeveloped and neglected transport infrastructure, in particular in the rail
sector, continues to be a major growth bottleneck.

Businesses
would greatly benefit from improvements in tax administration, streamlining of
procedures for starting up and closing down businesses, as well as from better
contract enforcement and property registration. In the long run, an overhaul of
the entire law-making system, including effective impact assessment,
stakeholder consultation and monitoring would be required.

Since 2011, challenges
arise in the financial sector. Poland has built up a financial system that
functions well and implemented a prudent and pre-emptive regulatory policy.
This has helped the country to withstand the financial crisis and attracted
foreign investments. This success, however, has also created a new risk.
Continued inflows of foreign capital into sovereign debt markets and the
financial system have increased the country’s dependency on external financing.
While in a normal environment, the level of capital inflows Poland registered in the past few years would not be perceived as harmful, in the current context of
high economic uncertainty and volatile capital markets, it requires special
attention. A sudden stop or reversal of these capital inflows would lead to a
serious limitation in credit supply and increases in financing costs for the
government, as it did in many other EU countries during the current crisis. To
mitigate such potential negative consequences, vigilant financial supervision
as well as strengthened prudential regulation are appropriate tools.

Another important challenge, also highlighted in the Annual Growth
Survey 2012, is the fight against youth unemployment. Despite continued growth,
the youth unemployment rate rose to 25.8 % in 2011. Young
people often lack the necessary skills to find a job, which points to the need
to improve the education system. In addition, there are signs of labour market
segmentation, since the transition rate from temporary to permanent contracts
is low, particularly for the young. The partial abuse of self-employment and
civil law contracts which are not governed by the Labour Law appear to be the
main cause for the low transition rate. The in-work poverty rate for temporary
workers is twice as high as for workers on permanent contracts owing to the
wage penalty associated with temporary contracts, one of the highest in the EU.[1] Moreover, and
contrary to its commitment in the Euro Plus Pact, Poland decided to increase non-wage labour costs by raising the disability pension contribution paid
by employers from 4.5 % to 6.5 %. This measure helped fiscal
consolidation, but it is likely to hinder job creation and the government’s
efforts to reduce the high share of the shadow economy, with a particularly
strong negative impact on young and low-skilled workers.

3. Assessment of the policy agenda
3.1 Fiscal policy and taxation

Budgetary developments

In its 2012
convergence programme, the Polish government confirmed its objective to correct
the excessive general government deficit in 2012 and to continue fiscal
consolidation thereafter in order to reach the medium-term objective
(hereinafter ‘MTO’), i.e. a structural deficit of 1 % of GDP, in 2015. The
programme is precise on how to achieve the 2012 deficit target and specifies an
MTO deadline for the first time. However, it lacks sufficient information on
fiscal measures and reforms needed to ensure progress towards the MTO.

Public finances
have improved significantly since the 2011 European Semester. An ambitious
consolidation programme and robust economic growth of 4.3 % in 2011
allowed the Polish government to decrease its general government deficit by
almost 3 pp from 7.9 % in 2010 to 5.1 % of GDP in 2011. Despite an
unexpected fall in revenues, mainly from social contributions and financial
transfers, the deficit turned out 0.5 % lower than planned, thanks to a
considerably lower expenditure, mainly on public investment, social transfers,
and government consumption.

In 2012 a
further reduction of the deficit is expected. The Commission services’ 2012
spring forecast expects the deficit to marginally exceed 3 % of GDP, while
the national authorities project it to reach 2.9 % of GDP. The gap between
the two forecasts is mainly due to different assumptions on public investment
and corresponding inflows of EU funds. Whereas the Polish authorities expect
public investment to drop significantly following a sharp slowdown in EU
financing after a peak in 2011, the Commission projects a smoother decline. For
the same reason the composition of the consolidation process differs between
the two projections. Both revenue-to-GDP and expenditure-to-GDP are somewhat
higher in the Commission forecast. Compared to the previous programme, the 2012
one projects both revenue and expenditure lower by 1.1 pp of GDP, with lower
tax revenues and public investment as the main drivers.

In 2013, the
2012 spring forecast envisages a further reduction in the headline deficit to
2.5% of GDP, while the Polish government expects 2.2 % of GDP. The
difference is due to a base effect (as the starting point for 2013 is slightly
different) and assumptions on financial transfers and corresponding public
co-financing of investment projects.

The deficit
targets of the 2012 convergence programme differ from those presented in the
previous update. The planned consolidation path is more ambitious, despite a
considerably less optimistic macroeconomic scenario.[2] As the revised macroeconomic
scenario will result in lower tax revenues, the 2012 convergence programme
assumes that consolidation for 2013 onwards is driven by significant cuts in
expenditure, almost exclusively on public investment.

In 2012, the
adjustment effort is concentrated on the revenue side, although total
expenditure is expected to decline based on measures introduced in previous
years (see table below for main measures in 2011 and 2012). The 2012 Budget
also envisages revenues from dividends of state-owned enterprises, classified
as a one-off measure.

From 2013
onwards, adjustment shifts exclusively to the expenditure side. Over the period
2013-2015, both expenditure-to-GDP ratio and revenue-to-GDP ratio are planned
to fall gradually in every year. In case of revenues, the authorities are
planning a sharp decline from 42.6 % in 2012 to 38.6 % in 2015. In
the absence of significant new measures,[3]
the fall in revenues will result from the expiry or gradual reversal of some
consolidation measures implemented in 2011 (see Box 1 below for details).

A decrease in
expenditure as a share of GDP (from 39.6 % in 2012 to 37.6 % in 2015)
will more than offset the fall in the revenues. The envisaged consolidation is
expected to be driven by a sharp decline in public gross fixed capital
formation and a further decline in the pension expenditure due to the
abolishment of the early pension system in 2009. Moreover, Poland’s temporary expenditure rule will limit increases in existing discretionary and new
expenditures. It is also expected that the wage fund for public sector
employees (with some specific exceptions) remains frozen, but as long as the
measure is not legally enacted, its budgetary effects cannot be guaranteed.

Overall, the
steps discussed above have put Poland on track to fulfil the Council
recommendations on fiscal consolidation. The headline
deficit is forecast to marginally exceed 3.0% of GDP in 2012, but since Poland’s debt-to-GDP ratio is consistently below the 60 %
of GDP reference value, Council Regulation (EU) No 1177/2011 allows to
take into account the cost of a systemic pension reform for assessing whether
effective action has been taken. This cost is estimated at around 0.6 % of
GDP in 2012, which is higher than the gap between the expected deficit and the
reference value.

Poland’s average annual fiscal effort is expected to meet the Council’s
recommendation thanks to the consolidation package implemented in 2011 and
2012. According to the 2012 spring forecast, the structural balance is forecast
to decline significantly, reaching 5.0% of GDP in 2011 and 2.8% of GDP in 2012,
0.3 pp higher than the (recalculated) structural balance[4] forecast by the Polish
authorities. The average annual fiscal effort over the reference period amounts
therefore to 1.5% of GDP, above the recommended 1¼%.

|| Box 1. Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2011 ||

|| Amendment of the pension reform (0.6 % of GDP) Increase in VAT rates by 1 pp (0.4 % of GDP) Nominal freeze of PIT thresholds (0.1 % of GDP) Abolition of VAT reimbursement for company cars and fuel (0.1 % of GDP) Changes in excise duty regulations (0.1 % of GDP) || Expenditure rule (including nominal freeze in wage fund, except for teachers) (0.5 % of GDP) Replacement of early retirement by ‘bridge’ pensions (0.3 % of GDP) Cuts in spending on active labour market policies (0.3 % of GDP) ||

|| 2012 ||

|| Amendment of the pension reform (0.5 % of GDP) Changes in excise duty regulations (0.2 % of GDP) Increase in disability contribution (0.4 % of GDP) Tax on copper and silver extraction (0.1 % of GDP) Increase in dividends from state-owned companies due to exceptionally high profits (0.1 % of GDP) || Expenditure rule (including nominal freeze in wage fund) (0.1 % of GDP) Replacement of early retirement by ‘bridge’ pensions (0.3 % of GDP) Decrease in complementary payments to farmers (0.1 % of GDP) ||

|| 2013 ||

|| Amendment of the pension reform (-0.1 % of GDP) Abolition of specific VAT exemptions (-0.1 % of GDP) Reversal of revenues from dividends to the long-term trend (-0.1 % of GDP) || Reversal of the freeze in the wage fund (-0.1 %) ||

|| 2014 ||

|| Amendment of the pension reform (-0.1 % of GDP) End of temporary increase VAT rates by 1 pp. (-0.4 % of GDP) || ||

Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign means that revenue/expenditure increases/decreases as a consequence of the measure. The degree of detail reflects the type of information made available in the stability or convergence programme and, where available, in a multiannual budget.

The Council
also recommended that Poland should make adequate progress towards the MTO,
i.e. a structural general government deficit of 1 % of GDP. The Polish government is committed to reach the MTO in
2015, targeting a (recalculated) structural deficit of 0.7 % of GDP for
that year. Thus, a further annual structural improvement of 0.6 % of GDP
is planned after the expected correction of the excessive deficit in 2012. This
is more than the benchmark rate of 0.5 % of GDP both on average and in
every year of the reference period.

The analysis of
the expenditure benchmark provides slightly different conclusions. According to
the information provided in the programme, the growth rate of government
expenditure, net of discretionary revenue measures, over 2013 (1.19 %)
will not exceed a rate which is lower than the reference medium-term rate of
potential GDP growth (2.58%) and which ensures an annual structural adjustment
towards the MTO by 0.5 % of GDP. However, according to the Commission
services’ forecast, the benchmark will be exceeded with the growth rate of
expenditure amounting to 2.81% in 2013. According to the programme, expenditure
growth is expected to remain in line with the benchmark later too, in 2014 and
2015.

Based on the
information contained in the programme on enacted structural measures, timely
progress towards the MTO may require additional efforts for several reasons.

First, no
additional consolidation measures for the years 2013-2015 have been enacted so
far. Thus, the reduction towards the MTO largely relies on a sizeable cut in
public investment expenditure (from 5.8 % of GDP in 2011 to 2.8 % of
GDP in 2015). However, given the continued inflow of committed EU structural
funds going forward and the government’s obligation to co-fund them, it seems
unlikely that such a decrease can be achieved. On the other hand, a sharp drop
in public investment is likely to have an adverse impact on Poland’s growth potential and as such is in conflict with the recommendation
to ‘minimise cuts in
growth-enhancing expenditure in the future’ (see first priority of AGS 2012 and
2011 recommendation on fiscal policy).

Second, the
structural measures adopted or announced so far, in particular the reforms
aiming at improving the long-term sustainability of and unifying the pension
system, while relevant and corresponding to the specific recommendations in the
AGS 2012 are not likely to bring budgetary sizeable effects in the
short-to-medium term.

Third, the
projected consolidation path is subject to a number of risks. Poland’s growth prospects, and thus its tax revenues, may be negatively affected by the deteriorating global outlook. In
addition, volatile financial markets and depreciation of the zloty may result
in a rise in the government’s interest costs. On the upside, the rate of GDP growth
may be higher than assumed, leading to a more rapid increase in revenues.

After a rise
from 45.0 % of GDP in 2007 to 56.4 % of GDP in 2011, general
government debt is projected to remain below 60 % of GDP in Poland and to keep
falling over the programme period, both according to the 2012 convergence
programme and the Commission 2012 spring forecast. However, the speed of
reduction differs between the Commission's and the national authorities’
projections. While the programme projects the debt to decline from 56.4 %
of GDP in 2011 to 53.7 % in 2012 and 52.5 % in 2013, the Commission
forecasts a slower reduction to 55.0% in 2012 and to 53.7% in 2013. The
difference in 2012 is due to different assumptions on stock-flow adjustments,
mainly exchange rate movements, while in 2013 a somewhat lower budget deficit
projected by the national authorities is important. Since the debt-to-GDP ratio
is below the reference rate, the debt reduction benchmark is not applicable.

Analysis of the
ownership structure of Poland’s public debt reveals a potential risk factor. At
the start of 2012, about 30 % of domestic debt (issued in PLN) was owned
by foreign investors. In addition, foreign investors held a large majority
(around 95 %) of internationally issued sovereign debt. Poland’s total dependence on foreign investors was thus as high as 50 %. A smooth roll-over of
maturing debt therefore requires continued willingness of foreign investors to
keep the share of Polish assets in their portfolios constant. Moreover, the
accomplishment of projected reduction of debt partially relies on the
completion of privatisation operations. However, their success depends
crucially on future prospects of the Polish economy.

Long term sustainability

Poland’s long-term change in age-related expenditure is below the EU
average. The initial budgetary position compounds the long-term costs. Assuming
no policy change, debt would fall to 50 % of GDP by 2020. The full
implementation of the programme would put debt on an even steeper downward path
by 2020.

Fiscal
framework

The Polish
fiscal framework is composed of three main elements: (i) fiscal rules, applicable to general and local levels of government
separately, (ii) medium-term programming (based on the Multiannual Financial Plan of the State and Multiannual
Financial Projections for local governments), and (iii)
performance budget system (still in the implementation phase). At the level of general government, a debt rule, set out in the
Constitution and the Public Finance Law, puts a limit on the general government
debt-to-GDP ratio, while a temporary expenditure rule limits the annual nominal
growth of all newly-enacted expenditure items and existing discretionary items
to the inflation rate (CPI) plus 1 %.[5]
At the local level, a complex set of deficit, expenditure and debt rules are
not compatible with the rules applying to central government.

The Polish
government has not yet taken action to implement a permanent expenditure rule
by 2013, as in the recommendation on the fiscal framework. According to the
programme, work on a permanent rule is at an advanced stage, but the final
version has not yet been announced. There has also been no progress on
adjusting the national classification of public accounts to ESA95 standards,
and on improving coordination among different levels of government when it
comes to the budgetary process. A new deficit rule for local governments, which
is expected to enter into force in 2013, is also at the final stage of
preparations. It is also not yet known whether compatibility
between the local and the central expenditure rules and the mechanisms to
implement and monitor the process will be ensured.

Tax system

The tax burden
on labour in Poland is among the lowest in the EU and the implicit tax rate on
labour has been steadily decreasing. The tax burden has decreased with the
introduction of the new personal income tax system in 2009, which removed the
highest income tax rate of 40 %. However, non-wage charges constitute a
substantial part of the cost of labour in Poland, and the disability
contribution rate paid by employers has been increased as of 2012 from 4.5 to
6.5 %, partially reversing earlier reductions.[6]

Tax compliance
appears to show scope for improvement, with the shadow economy estimated as
accounting for as much as 25.0 % of GDP, well above the EU average of 15.2 %.
Moreover, Poland tops the ranks of most burdensome administrations in the EU in
terms of time needed to comply with tax requirements and the high
administrative cost of revenue collection. Progress on this front would enable Poland to comply with the AGS 2012 recommendations, as improved efficiency in tax collection and
lower tax evasion would make Poland’s fiscal consolidation more
growth-friendly.

The VAT revenue
ratio (measuring actual VAT revenues as a percentage of theoretical revenue if
the standard rate were applied to all final consumption) is below the EU
average, at 48.7 %, compared with 54.2 % in the EU in 2010. Poland has potential for increasing VAT efficiency by extending the scope of the standard
rate. The standard rate is 23 %, whereas reduced rates, applied to a
relatively wide range of goods and services, are 5 % and 8 %.

Increased tax
rates on energy products other than renewable energy could be one of many
cost-efficient instruments to facilitate Poland’s transition toward achieving
the Europe 2020 targets for reduction of CO2 emissions and total
energy consumption. Excise duties on energy products other than transport fuels
are among the lowest in the EU, but in line with EU requirements. While Poland obtains a relatively high share of revenues from energy taxation (2.1 % of GDP,
compared with 1.8 % of GDP in the EU), the implicit tax rate on energy
consumption is only around half the EU average, as the energy intensity of
production is very high.

Overall, the
composition of tax revenue is rather favourable, as a high share is raised from
indirect taxes, which are considered less distortionary. Poland has one of the highest levels of revenue from consumption taxes other than VAT, such as
excise duties on alcohol and tobacco, recurrent property taxes or energy taxes.

3.2. Financial sector

Financial sector stability

Financial
institutions in Poland have adopted a rather conservative, domestically
oriented business model, which, in combination with prudent financial
regulation, has allowed the banking sector to weather the financial crisis well
and to benefit from a subsequent rebound. In 2011, total banking profits
reached pre-crisis levels and the quality of the loan portfolio stabilised. The
share of non-performing loans fell to 4.7% in 2011, from 4.9% in 2010 (compared
to the EU average of 7 % in 2010),[7]
mainly as a result of improved profitability in the corporate sector. The
capital adequacy ratio (Tier 1) for the banking sector as a whole decreased
slightly to 11.8 %, but remains well above the level required under the
Basel III agreement. No Polish financial institution was in need of
recapitalisation within the temporary bank recapitalisation exercise launched
by the European Council of October 2011 and coordinated by the European Banking
Authority.

The Polish
government has addressed credit and liquidity risks in the banking sector.
These risks stem from the fact that 36 % of the outstanding loan portfolio
comprises foreign currency loans (mainly housing loans in Swiss francs). The
Polish financial supervisory authority has revised prudential recommendations
to limit the extent to which foreign currency mortgages are used. Moreover, closing down a subsidised housing-loan programme,
‘Family on its own’, may result in falling demand for housing and
mortgage loans. These regulatory and legal changes are relevant and
effective, as banks have limited the supply of foreign currency housing loans
(77 % of all new housing loans in 2011 were granted in the domestic
currency). Overall, these measures have addressed this challenge in an
effective manner.

Despite a
recent increase, the average funding gap (difference between loans granted to
domestic sectors and deposits collected) in the banking sector remains at a
relatively low level (17 %). However, this number conceals significant
differences among Polish banks. In particular, subsidiaries of foreign
financial institutions have a higher funding gap and often depend on the
ability and willingness of their parent entities to continue funding. Recent
changes in the taxation of retail deposits, intended to close a legal loophole
in capital gains tax, might lower the availability of domestic deposits,
ultimately increasing the funding gap. However, the
financial supervisor, in cooperation with the central bank, wants to revive the
market for securitised instruments. Once implemented, this should provide
long-term funding for banks. Moreover, the supervisory authority monitors
liquidity flows in the banking sector on a daily basis and has recommended
retaining 2011 profits, depending on the capital situation of individual banks.
These steps are intended to strengthen the liquidity and capital positions of
banks and to facilitate access to long-term funding. Consequently, Poland is effectively supporting lending activity in line with AGS priorities.

Overall, the country
should continue with its prudent and pre-emptive regulatory policy, though more
ambitious efforts to increase domestic deposits, ultimately
lowering the loan-to-deposit ratio, might be useful. Moreover, the financial
supervisor could identify early warning indicators and immediate measures to
allow a quick reaction in case of intensified capital outflows.

Financing of the real economy

Banks continued to provide lending to the
corporate sector, SMEs in particular, fuelling investment activity and growth.
However, there are still bottlenecks for specific segments of the market,
namely those where innovative SMEs and start-up companies seek financing. In
particular, the venture capital market is still in its infancy and the
availability of risk capital is limited. Moreover, relatively high collateral
requirements limit the scope for SMEs to receive credit. Poland is trying to tackle these issues with the National Capital Fund. Since the fund only became
operational in 2010, it is too early to assess its impact on the development of
start-ups and seed capital funds.

3.3. Labour market, education and social policy

One of the
strengths of the Polish economy is its endowment with labour and the regulatory
set up of the labour market. The labour force is relatively skilled, labour
taxes are comparatively low and labour laws provide for a sufficient degree of
flexibility. However, Poland faces a number of challenges that need to be
addressed properly to allow the country to exploit its untapped growth
potential and to counteract negative demographic developments.

A main concern
is the overall low participation rate. Only 64.8 % of the population between
the ages of 20 and 64 is active on the labour market, and the rates are even
lower for youth, women and elderly people. Youth unemployment is above the EU
average and is mainly the result of skills mismatch and low
access to apprenticeships. Women, particularly those with children, find
it difficult to combine family and job because of the lack of availability of
childcare. Elderly workers exit the labour market early because the current tax
and pension systems provide only limited incentives to stay in the labour
market. Finally, employers are discouraged from employing elderly workers who —
after reaching a certain age — enjoy special protection and cannot be easily
dismissed.

The government
has acknowledged these challenges, which were identified in last year’s
recommendations and were also highlighted in the AGS 2012. The national reform
programme set an ambitious employment target for 2020, at 71 %, and the
main aim of the National Action Plan for Employment 2012-2014[8] is to facilitate access to the
labour market and to ensure a high level of participation, combating poverty
and increasing mobility.

An action
cutting across all groups is the implementation of the flexicurity principle.
Its objective is to simultaneously enhance flexibility and security in the
labour market. The basic idea is to combine flexible and reliable contractual
arrangements, comprehensive lifelong learning strategies, and effective active
labour market policies. In this context, the efficiency of Public Employment
Services will be improved. These measures are a step in the right direction,
but their budgetary impact must be carefully assessed. Moreover, they must be
implemented in parallel with an overhaul of the social benefit system that will
ensure the right incentives to stay in employment, while protecting the most
vulnerable and reducing the shadow economy.

A number of
measures are planned to facilitate the entry of young people into the labour
market. The most important are a reform of the benefit system and a reform aimed
at facilitating the access to regulated professions. In addition, improving the
efficiency of the tax system, including incentives to take up legal employment,
will help to combat undeclared work. In the context of promoting lifelong
learning, specific attention will be given to training in the workplace and
strengthening cooperation with employers, e.g. by promoting apprenticeships.
The Ministry of Labour has also designed a new pilot programme, ‘30 minus’,
addressed to those under 30.

Improving the childcare
system is an important tool for raising the participation of women in the
labour market. The number of places in child-care institutions for children up
to the age of three will increase by 4 560 in 2012 compared to 2010, thanks to
the continued implementation of the Toddler Programme, with significant support
from the European Social Fund. However, the number of places could be more
ambitious, given the low starting point. This measure alone is unlikely to lift
the participation rate of women significantly. Poland has the lowest enrolment
rate in pre-school education in Europe (70.9 % in 2009).[9] This is due mainly to the lack
of places, the lack of adequate infrastructure and of qualified staff.
Moreover, the government’s declaration that it would generate additional funds
for creating pre-school institutions (3-5 years of age) is not reflected in the
2012 Budget Law, which decreased funding for education. These inconsistent
measures not only cast doubts on the government’s willingness to create more
places, it also resulted in some municipalities closing down schools and
kindergartens, thus undermining the credibility of the reform.

To address the
low participation of elderly workers in the labour market, Poland has announced a pension reform. The statutory retirement age (currently 65 for men and 60 for
women) will be gradually raised from 2013 onwards, to 67 for men in 2020 and
for women in 2040. Changes in the pension system will be accompanied by reforms
in the health sector to improve the health of the workforce. Moreover, for the
pension reform to be successful, it would have to be underpinned with a major
programme of active ageing measures. For now, an important policy aspect is to
break the entrenched practices of early retirement, in particular the alignment
of special schemes with the general pension scheme.

Poland has also continued its efforts to limit favourable retirement
conditions for uniformed services. A draft law adopted by the government
envisages the possibility of retirement after fulfilling two conditions: 25
years of service and 55 years of age (currently only 15 years of service).
However, the new conditions would apply only to new officers (those currently
employed would be able to join the new system on a voluntary basis) which
significantly limits the impact of the reform on the labour market and the
public finances. Poland also intends to modify a special retirement scheme for
miners. The new scheme would apply only to miners who work underground, thus
restricting the number of beneficiaries.

Poland has one of the highest numbers of farmers in the EU. They form a
very diverse group. Some own very modern farms that produce high-quality
products. However, most produce only for local markets and benefit from special
social and pension systems. These subsidised systems need to be reformed. In
2011, Poland introduced some changes to the farmers’ social security fund
(KRUS). The state will continue to pay health contributions for the smallest
farms (up to 6 ha), whereas owners of larger farms will have to pay for
themselves. However, it is only a temporary solution for 2012 and then may be
extended for 2013. A permanent reform still needs to be designed and
implemented.

At 11.4%
in-work poverty in Poland is fifth highest in the EU and its statutory minimum
wage is among the lowest. Coupled with very low net transfers to low-income
earners and strong eligibility rules, the impact on reducing poverty among the
working population is very limited. Those on temporary contracts or civil law
contracts are particularly exposed, since this group represents as much as
26.8% of total employment and holding a temporary contract involves a wage
penalty of 27.8% relative to permanent contracts. These elements tend to trap
people in poorly paid jobs and hamper upward mobility.

An important
challenge for Poland is pre-school education, a pre-requisite for good
educational attainment and the development of social skills. In particular, it
is a chance for children from disadvantaged backgrounds to catch up with social
and learning skills so that they have an equal start with others at school. Poland needs a substantial increase in the number of pre-school places to cater for this
challenge.

A horizontal
measure in this field is in lifelong learning, in which Poland is well below the EU average, with an adult participation rate of 5.3 % (vs. 9.1 %
for the EU). Access to tailored and individualised support programmes,
including dedicated training and apprenticeship programmes leading to a first
vocational experience, is low. There should be more support for encouraging
apprenticeships (e.g. by reimbursing employers’ training costs) and more
cooperation between vocational schools and employers. The new programme ‘Business
for education’ is a useful tool in this regard. The reform of Vocational
Education and Training (VET), set to be implemented as of 2012/2013, aims to
introduce more cooperation between VET schools and employers and more flexible
learning pathways. Moreover, the reform is intended to increase the number of
apprenticeships and to develop the skills of both the older and the unskilled
workforce, using dedicated vocational training. While these reforms are
relevant and respond to the challenges identified in the country
recommendations, they are not ambitious enough. Allocating more funds to raise
the number of apprenticeships and to encourage employers to accept trainees
could remedy the situation. Further efforts are required to make VET more
attractive, and to reduce the skills mismatch by improving the quality of
teaching.

Poland started implementing an ambitious higher education reform in the
second half of 2011 that aims to strengthen university-business links and to
address the skills and job mismatch. The reform aims to
make courses on offer more flexible, responding better to changing labour
market needs. Academic Enterprise Incubators are a good
example of an initiative that offers students
and graduates a chance to develop entrepreneurial skills on preferential terms.
It also promotes self-employment. Another
instrument in this area is the introduction of a financing mechanism for higher
education institutions based on their qualitative performance. Nevertheless,
there is still a need to strengthen the relevance and quality of teaching provision,
with a particular focus on tertiary private institutions.

Given all
measures taken, in terms of ambition and adequacy, Poland addressed the
country-specific recommendations related to the labour market and education
only partially. In particular, much remains to be done regarding changes to the
farmers’ social security fund. Reforms in higher education and VET are heading
in the right direction, but the quality of tertiary education in Poland still needs to be improved significantly, particularly as regards private higher
education institutions, and there are shortcomings in the provision and quality
of career guidance.

3.4. Structural measures promoting growth
and competitiveness

Poland has been able to secure continued growth even during the financial
crisis and remains a ‘growth engine’ in the European Union. To enhance its
growth potential, it is important that the country continues along this path
and tackles the challenges that were identified in the European Semester 2011
and the AGS 2012. The country has to continue its modernisation, focusing on
improving the business environment and infrastructure, strengthening
innovation, and reducing energy dependency.

Structural funds

Poland is the largest beneficiary of cohesion policy in 2007-2013, with a
total allocation of nearly EUR 68 bn. Financial progress is more than
satisfactory, with nearly 40 % of payments from the Commission made.
Currently Poland is focusing on avoiding backlogs in the final years of the
funding period and spending the remaining 60 % of the allocation on time
to avoid any de-commitments. Overall, progress is good, but some sectors, in
particular information society and broadband and railways,
require further attention.

Transport
and infrastructure

Poland’s underdeveloped transport infrastructure continues to be a major
bottleneck to growth. This particularly applies to rail infrastructure, where
substantial investment in a deteriorating, ageing rail network is a priority.
Out of about 20 000 km of lines operated, only 36 % is in good
technical condition. In November 2011, the government adopted a multiannual
plan for investment in railway infrastructure by 2013 (as required by the
recommendation on infrastructure). This plan, with an overall budget of PLN
20.4 billion (including EU, EIB and national funds), will focus on modernising
the existing railway network and will enable 2 300 km of lines to be
upgraded. However, the plan lacks ambition in terms of scope, is not
sufficiently consistent with other programmes, and its funding may be
problematic.

Despite the
fact that the need for investment in the rail network is huge, Poland is not fully using the Cohesion Fund resources available for this purpose. On the
contrary, in June 2011, it asked the Commission to accept a shift of EUR 1.2 billion
from rail to road projects. This request delayed the implementation of its rail
transport master plan (as required by the recommendation on infrastructure).
Progress with the implementation and use of EU funds available for
modernisation of the existing railway network, in particular TEN-T corridors,
are possible steps for improvements.

Car ownership
and road use are constantly growing, and the motorway and expressway network is
being extensively developed with support from EU funds. There are currently 530
km of motorways and 740 km of expressways under construction. However, over the
2007-2013 funding period, the investment ratio between road and rail is 3:1,
strongly favouring road projects. Therefore, the quick adoption and
implementation of a new integrated transport strategy should provide a better
balance in investment priorities in various transport modes, together with
better prioritisation of specific investments. The country specific
recommendations relating to the transport sector remain partially valid and
should be followed up this year.

As regards
development of the information society, Poland is below the EU average. Take-up of broadband connections by households is slightly slower
than the EU average (58 % vs. 61 %). In particular, there is a lack
of coverage in rural areas. Poland has recently mobilised public funding to
increase its rural broadband coverage. However, more is needed to bring
about widespread connectivity.

R&D
and innovation

Another major
weakness of the Polish economy continues to be a low level of R&D and
innovation investments and a lack of innovativeness in businesses. Despite
recent growth, Poland’s
R&D expenditure remains relatively low (0.74 % of GDP in 2010)
and is among the lowest in the EU. The pervasive underinvestment of the private
sector is particularly worrying. The low levels of investments are also
reflected in a poor scientific and technological performance.[10]

Poland recognises these shortcomings. Recent reforms of the science and
higher education systems initiated a major restructuring and shift towards a
more efficient and competitive system, including support mechanisms to induce
science-industry cooperation. However, there are still structural problems with
the functioning of an innovation-friendly environment, which at present fails
to drive private-public collaboration, and does not stimulate the growth of
innovative companies. So far, structural fund support for R&D and
innovation has been skewed towards absorption of new technologies, and has been
less successful in undertaking indigenous research and innovation projects,
especially at regional level. As a result, ongoing reforms need to be
accompanied by more effective support measures, in particular for innovative
young companies and SMEs.

The National
Research Programme adopted in August 2011 is an important step in tackling the
existing fragmentation of R&D efforts. However, it remains unclear how
priorities are linked and taken forward in innovation, and more broadly, in
industrial policy. Poland needs to ensure better coordination between science
and innovation policy and further concentrate funding on key strategic areas,
including developing private-public partnerships in these areas. Another
critical challenge is not sufficient internationalisation of Polish science.

Environment and energy

As regards the
environment, waste management, water and air pollution are among the main
challenges. Too much municipal waste is still landfilled — 73 %, while the
EU average is below 40 %, and recycling accounts for only 18 %.
Valuable resources in waste are being buried in landfills, with negative
economic and environmental impacts. More could be done to use cohesion funds to
support the development of the infrastructure needed, complemented by a landfill
tax and other economic instruments such as ‘Pay As You Throw’ schemes creating
additional incentives. Moreover, atmospheric emissions levels in Poland are among the highest in the EU, and the urban population’s exposure to particulate
matter and ozone is still above EU targets. Energy production, household
combustion and transport largely account for emissions. Health benefits lost
from not achieving the 2020 targets of the Air Strategy are estimated at
between EUR 6 bn and EUR19 bn.

With respect to
energy, coal remains the dominant fuel source for power
generation. Poland still has to
make a considerable effort to reach its 15 % Europe 2020 renewables target. Furthermore, congestion on the Polish domestic electricity grid could be reduced
by more capacity to interconnect to neighbouring markets, as these shortcomings
slow down market integration. Regarding natural
gas, the key problem is lack of diversification, with almost 90 % of gas
imported from Russia. However, the situation is improving, thanks to a set of
new investments (co-financed by the EU), such as an LNG import terminal, new
interconnections with the Czech Republic and Germany, and new storage
facilities. Furthermore the creation of a gas trading
platform and phasing out regulated prices would stimulate competition in the
gas sector. Adoption of a national programme of
development of the nuclear power in 2011 was another step towards enhancing
country’s energy security. Implementation of EU energy legislation,
particularly regarding the Second and Third Energy
Package and the EU Renewable Energy Directive, is lagging behind, and a number
of infringement procedures are pending.

Poland is not obliged to reduce greenhouse gas (GHG) emissions and has to
limit the increase in GHG emissions to 14 % (compared to 2005) by 2020 as
part of the energy and climate headline target. As of 2010, emissions had
increased by 12 % (compared to 2005). According to the latest Polish
projections, emissions are expected to decrease by 4.5 % by 2020, leading
to overachievement by 18.5 percentage points.

Compared to the
EU average, Poland has a higher and increasing share of private cars in
passenger transport, and a lower share of railways, buses and trams. This
overall trend is ongoing, and is negative from the point of view of greenhouse
gas and other atmospheric emissions and energy efficiency. There is generally
underinvestment in urban transport, which needs modernisation. The proportion
of road freight has risen in recent years. To reduce energy demand and emissions
levels, intermodal transport should be promoted in Poland. Its share in total
freight is currently under 5 %).

In 2011, Poland adopted the Energy Efficiency Act that introduced a new white certificate scheme
intended to deliver at least half the overall energy savings the Polish
authorities have set as targets. As part of this scheme, energy companies are
obliged to obtain either a set amount of energy savings among end-use consumers
or energy generation (e.g. district heating) or to pay a fee that could be used
by the public administration to support new energy efficiency investments. More than two thirds of energy savings are expected from
investments in the residential sector and through refurbishment of public
buildings.

Professional services

Unjustified
restrictions in the field of professional services hamper economic growth. Poland has notified 368 regulated professions to the Commission (32 % in construction
and industry, 21 % in the transport sector and 20 % in the health
sector). Recently, Poland announced a plan to scale regulation in professional
services down by half, regarding both educational requirements and licensing.
The government launched a public consultation on a first draft law liberalising
access to around 50 professions in March 2012. It intends to adopt subsequent
draft laws covering around 200 professions in total in the second half of 2012.
The government estimates that such deregulation may increase employment in the professions
concerned by 15-20 %. It would result in 50 000 to 100 000 new jobs.
Moreover, the reform will increase competition, cut red tape and reduce prices
of selected services.

Single
market legislation

Although Poland transposed the Services Directive, the effect of the horizontal law on a number of
sectoral acts remains uncertain, especially with respect to the cross–border
provision of services such as education and tourism (e.g. establishment,
registration requirement and obligation to possess a special identity
document). The poor transposition of the single market legislation negatively
affects business environment, in particular for companies from other Member
States.

3.5. Modernisation of public
administration

Improvements in
public administration, policy design and delivery are crucial for a better business
environment and to raise the quality of government and public institutions in Poland. Two major legislative packages were adopted in 2011 in this regard. The revision of
the freedom of entrepreneurship act limited administrative constraints on
business activity. It decreased the burden of controls and allowed electronic
registration of economic activity by creating the Central Electronic Register
and Information on Economic Activity. This should bring a one-stop shop closer,
and reduce the time needed to start a business. The second legislative package,
consisting of two deregulation acts, aimed to reduce information obligations
and administrative procedures for citizens and businesses. The new provisions
replaced administrative certificates with self-declarations in many areas.

Despite recent
efforts, the administrative burden on business remains high and public
administration continues to lack efficiency. The main areas of concern include
high administrative compliance costs, unstable tax legislation, weak
enforcement of contracts, lengthy and burdensome licensing and permit
procedures, property registration and zoning legislation.

Judicial
proceedings and other legal actions are relatively high in number and long in
duration. The introduction in 2010 of simplified electronic procedures
targeting mainly small and mass claims, run successfully by an e-court in
Lublin (responsible for the entire country), slightly reduced the backlog of
pending court cases. In 2011 legislative amendments introducing a general
simplification of judicial proceedings for economic cases were adopted, but
further changes are necessary to improve the situation. Since 2007, the average
time to complete proceedings in civil and commercial matters has continued to
increase. The situation in the courts of Warsaw, where the headquarters of most
major businesses are located, is worse than in any other part of the country.
Insolvency proceedings are longer than the EU average and show very low
recovery rates.[11]
Furthermore, the length of the legal procedures necessary to enforce contracts
in Poland (court proceedings and enforcement of the judgment) gives rise for
concern.

E-government
services for citizens are not very well developed in Poland. The availability
of public services is somewhat below the European average (at 73 %) and
the take-up is low (at 28 %). In addition, efforts to improve the
situation have been lacking efficient coordination and integration into a
well-functioning system. Online service provision for businesses is close to
the EU average (at 88 %) while use by businesses has greatly surpassed the
EU average level (at 89 %).

Efforts to
reduce the administrative burden are ad hoc and lack clear orientation. Impact
assessments and consultations with stakeholders are poorly conducted and have
little impact on the final provisions of legislative acts. Actions are not
coordinated at government level and the implementation of existing guidelines
is not monitored. Without stronger political commitment, it seems unlikely that
the situation will change to any significant extent in the near future. A new
strategy, ‘Efficient State 2011-2020’, due to be adopted soon, should address
these challenges in a systemic way.

Regarding state
aid, sectoral aid spending is much higher than the EU median. Poland also lacks a coordinating body that would be empowered to vet domestic state aid and a
central state aid registry, the existence of which would enable better
monitoring of public expenditure.

4. Overview table

2011 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Implement the measures announced in the draft 2012 Budget Law and take additional measures of a permanent nature if needed to reduce the general government deficit to below 3 % of GDP in 2012, in line with the Council recommendations under the EDP. While ensuring adequate progress towards the medium-term objective, minimise cuts in growth-enhancing expenditure in the future. || Poland has partially implemented the CSR. Based on the Commission 2012 spring forecast, Poland has managed to reduce its general government deficit close to the recommended 3 % threshold in 2012 (taking into account the cost of a systemic pension reform the Council recommendation is considered to be met), while further consolidation effort is required to ensure adequate progress towards the MTO. In this regard, plans provided lack ambition and are not clear enough.

CSR 2: Enact legislation with a view to introducing a permanent expenditure rule by 2013. This rule should be based on sufficiently broad budgetary aggregates and should be consistent with the European system of accounts. Moreover, take measures to strengthen the mechanisms of coordination among the different levels of government in the medium-term and annual budgetary processes. || Poland has not implemented the CSR. All measures covered by this recommendation, the expenditure rule, the consistency with ESA 95 as well as the deficit rule for local governments have not yet advanced beyond the negotiation stage and details are often missing.

CSR 3: Raise as planned the statutory retirement age for uniformed services, continue steps to increase the effective retirement age, such as linking it to life expectancy. Establish a timetable to further improve the rules for farmers’ contributions to the social security fund (KRUS) to better reflect individual incomes. || Poland has partially implemented the CSR. While efforts have been undertaken to limit favourable retirement conditions for uniformed services and an increase in the general retirement age for men and women is planned, these measures should have been more ambitious, as the expected impact, in particular regarding uniformed services, is very modest and will occur only in the long-run. The time span over which the retirement age for women is to be raised is overly long (until 2040).

CSR 4: Implement the proposed lifelong learning strategy, enhance apprenticeships and dedicated vocational training and education programmes for older workers and low-skilled workers. Strengthen links between science and industry by implementing the ‘We build on Knowledge’ programme (‘Budujemy na Wiedzy’). Implement the higher education reform programme ‘Partnership for Knowledge’ (‘Partnerstwo dla Wiedzy’) so as to better align educational provision with labour market needs. || Poland has partially implemented the CSR. Poland has introduced several reforms in the areas of education, training and lifelong learning, which are all relevant to tackle the challenges identified in the CSR. There needs to be more effort to reduce the skills mismatch, and more cooperation between companies and higher education institutions. Support mechanisms have been launched to induce science-industry cooperation. However, they need to be scaled up, and more widespread efforts are needed to address persistent structural problems with functioning of the innovation-friendly environment which at present fails to drive private-public collaboration and lacks incentives for companies to innovate.

CSR 5: Increase female labour market participation by taking measures to ensure stable funding for pre-school child-care arrangements, to increase enrolment rates of children under three years. || Poland has partially implemented the CSR. Raising the number of places in child care institutions by 4 500 seems insufficient to increase the female labour participation rate significantly. Moreover, funds for pre-school child-care institutions are reduced in the 2012 budget.

CSR 6: Take measures to improve incentives for investment in energy generation capacity with a view to encouraging low-carbon emitting technologies, and to further develop cross-border electricity grid interconnections; develop a multiannual plan for investment in railway infrastructure and implement the rail transport master plan. || Poland has partially implemented the CSR. Some progress has been made in relation to the diversification of energy supply, but progress is limited in transportation, i.e. rail and implementation of the transport master plan.

CSR 7: Take steps to simplify legal procedures involved in enforcing contracts; revise construction and zoning legislation, with a view to streamlining appeal procedures and speeding up administrative procedures. || Poland has partially implemented the CSR. Despite recent efforts, the administrative burden remains high and administrative efficiency could be improved. Only minor reforms have been introduced, which are not expected to have an impact sufficient to address the challenges.

Euro Plus Pact (national commitments and progress)

Commitments to further improve public finance sustainability include enforcement of the existing debt rule, temporary expenditure rule (CPI + 1 %), introduction of new regulations limiting deficit ratios of local governments and introduction of a permanent expenditure rule. || The public finance commitments have been only partially implemented: The existing debt rule is fully operational and enforceable, although based on national classification of national accounts, different from internationally comparable ESA95. The temporary expenditure rule has been included in the 2011 budget and is to remain in force in 2012. The new deficit rule for local governments has not been implemented as the Ministry of Finance and the local government entities could not agree on its final shape. The permanent expenditure rule is still under preparation.

Commitments to foster employment focus on labour market participation (provision of better care facilities for children under three, preservation of lower disability pension contributions) and education (getting business involved in education). || Labour market commitments have been only partially implemented: Non-wage labour costs were increased by raising the disability pension contribution paid by employers from 4.5 % to 6.5 %, contrary to one of the commitments. The number of places in child-care institutions for children up to the age of three will increase by 4 500 in 2012 compared to 2010, but the government’s declaration to generate additional funds for creating pre-school child-care institutions (3-5 years of age) is not reflected in the 2012 Budget Law, which decreased education subsidies. This reduction not only casts doubts on the government’s willingness to create more places, it also resulted in closing down schools and kindergartens by some municipalities, undermining credibility of the reform. Progress in involvement of business in education process is even more limited.

Commitments to foster competitiveness presented by the government focus on education and the science sector (i.e. implementation of the reform of the science system; support to young scientists; transfer of knowledge into the economy and implementation of the reform of the higher education system), infrastructure development (i.e. creation of modern road, rail, energy and digital networks) and the business environment (i.e. reductions in red tape, easier access to bank loans, a pay freeze in the public sector). || The competitiveness commitments have only been partially implemented: Two new bills on education and science have been enacted and are being implemented. Infrastructure is being upgraded, but progress in the field of business environment is very slow.

Measures to reinforce financial stability aim for more efficient regulation and supervision of the banking sector (i.e. new regulations for bank resolution funds and support for the activities of the ESRB) || The commitments have been partially implemented: A new banking resolution scheme is still being prepared. Poland is actively involved in the works of the ESRB

Europe 2020 (national targets and progress)

Employment rate target (in %): 71 % || Employment rate reached 64.9 % in 2009 and 64.6 % in 2010. Despite recent reforms of early retirement regimes, no progress has been made towards achievement of the target.

R&D target (in %): 1.7 % || Gross domestic expenditure on R&D (in % of GDP) reached 0.68 % in 2009 and 0.74 % in 2010. Marginal progress has been made towards achievement of the target.

Greenhouse gas (GHG) emissions target: + 14 % (compared to 2005; ETS emissions are not covered by this national target) || Change in non-ETS GHG emissions between 2005 and 2010: +12 % (this data corresponds to the current ETS scope)

Renewable energy target: 15.48 % target for renewable energy sources in overall final energy consumption; 10 % — share of renewable energy in the transport sector by 2020 || The share of renewable energy in gross final energy consumption (in %) reached 8.9 % in 2009. The share of renewable energy in the transport sector reached 3.6 % in 2009. Limited progress has been made towards the achievement of the target. On 22 December 2011, the Ministry of Economy presented a draft Renewable Energy Sources Law.

Energy efficiency– reduction in primary of energy consumption by 2020 in Mtoe: 13.60 Mtoe || The NRP re-confirms the Polish national energy efficiency target for 2020 to stabilise primary energy consumption at the level of 96 Mtoe despite projected economic growth during that period. The NRP estimates that achieving this target will mean primary energy savings of 13.6 % in 2020 as compared to a business-as-usual scenario. Energy efficiency objectives are set according to national circumstances and national formulations. As the methodology to express the 2020 energy consumption impact of these objectives in the same format was agreed only recently, the Commission is not yet able to present this overview.

Early school leaving target (in %): 4.5 % || The share of early leavers from education and training (Percentage of the population aged 18-24 with at most lower secondary education and not in further education or training) reached 5.3 % in 2009 and 5.4 % in 2010. No progress has been made towards achievement of the national target, which is well below the Europe 2020 headline target.

Tertiary education target (in %): 45 % || Tertiary educational attainment reached 35.3 % in 2010. There has been some progress towards achievement of the national target, which is above the Europe 2020 headline target.

Target on the reduction of population at risk of poverty or social exclusion in number of persons: 1 500 000 || People at-risk-of-poverty or social exclusion in 1 000 persons attainment reached 10 454 in 2009 and 10 409 in 2010. No progress has been made towards achievement of the target.

Annex

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. Long-term sustainability indicators

Figure. Medium-term debt projection

Table VI. Taxation

|| 2001 || 2005 || 2007 || 2008 || 2009 || 2010

Total tax revenues (incl. actual compulsory social contributions, % of GDP) || 32.2 || 32.8 || 34.8 || 34.3 || 31.8 || 31.8

Decomposition by economic function (% of GDP)1 || || || || || ||

     Consumption || 11.1 || 12.3 || 12.9 || 12.9 || 11.5 || 12.3

              of which: || || || || || ||

              — VAT || 6.8 || 7.7 || 8.3 || 8.0 || 7.4 || 7.8

             — excise duties on tobacco and alcohol || 1.9 || 2.0 || 1.8 || 2.2 || 1.6 || 2.0

             — energy || 1.8 || 2.3 || 2.3 || 2.2 || 2.1 || 2.1

             — other (residual) || 0.7 || 0.3 || 0.4 || 0.5 || 0.4 || 0.3

     Labour employed || 13.6 || 12.1 || 12.2 || 12.2 || 11.5 || 11.3

     Labour non-employed || 0.8 || 0.7 || 0.8 || 0.8 || 0.8 || 0.3

     Capital and business income || 5.3 || 6.2 || 7.2 || 6.6 || 6.3 || 6.3

     Stocks of capital/wealth || 1.7 || 1.8 || 1.9 || 1.9 || 1.8 || 1.8

     p.m. Environmental taxes2 || 2.1 || 2.7 || 2.7 || 2.6 || 2.6 || 2.6

VAT efficiency3 || || || || || ||

     Actual VAT revenues as % of theoretical revenues at standard rate || 40.5 || 47.5 || 54.1 || 50.6 || 46.8 || 48.7

Note:

1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2012), Taxation trends in the European Union, for a more detailed explanation.

2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). See European Commission (2011), Tax reforms in EU Member States, European Economy 5/2011, for a more detailed explanation.

Source: Commission

Table VII. Financial market indicators

                                                                                                                   2007      2008      2009       2010      2011 Total assets of the banking sector (% of GDP)                                   75.2         72.3         88.3         87.9         83.9 Share of assets of the five largest banks (% of total assets)            46.6         44.2         43.9         43.4         … Foreign ownership of banking system (% of total assets)                67.6         84.9         64.1         …            … Financial soundness indicators:               — non-performing loans (% of total loans) 1)                        5.2           4.5           8.0           4.9           4.9               — capital adequacy ratio (%) 1)                                                12.0         11.2         13.3         13.9         13.2               — return on equity (%) 1) , 2)                                                     24.9         20.4         10.6         13.2         16.0 Bank loans to the private sector (y-o-y % change)                            40.6         19.0         8.5           11.9         1.2 Lending for house purchase (y-o-y % change)                                  59.5         42.2         12.7         28.6         6.5 Loan to deposit ratio                                                                               93.7         108.4       105.2       104.2       105.4 CB liquidity as % of liabilities                                                                0.5           2.0           1.6           0.1           0.0 Banks’ exposure to countries beneficiary of official financial assistance (% of GDP) …            …            …      …                                                                                                                    … Private debt (% of GDP)                                                                          43.5         43.6         54.8         54.6         … Gross external debt (% of GDP) 3)             — Public                                                                                        17.4         14.1         18.9         22.8         22.3             — Private                                                                                       23.9         24.4         27.9         27.0         25.1 Long term interest rates spread versus Bund (basis points)\*          126.8       208.8       289.8       303.8       334.8 Credit default swap spreads for sovereign securities (5-year)\*       …            226.0       190.8       129.6       171.6 Notes:                                                                                                                                                                           1) Latest September 2011. 2) Net income to equity ratio. After extraordinary items and taxes. Accumulated income of the last 12 months. Tier 1 capital. Branches of foreign banks are excluded. 3) Latest data 2011Q3. \* Measured in basis points.                                                                                                                                          Source: Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), Commission (long-term interest rates), World Bank (gross external debt), ECB (all other indicators).

Table VIII. Labour market and social indicators

Table IX. Product market performance and policy indicators

Table
X. Green growth performance

[1] •    In Poland temporary workers represent 27 % of total
employment (against EU average of 14 %). Temporary workers are on average
paid 28 % less than other workers with similar qualifications and
experience, and they face twice as high a risk of poverty compared to workers
on permanent contracts (12 % against 6 %).

[2] In particular, in 2012 an unchanged target of 2.9 % of GDP is
foreseen with 1.5 pps. lower growth (2.5 % against 4.0 %). In 2013, a
0.3 pp lower deficit shall be reached despite 0.8 pp slower growth (2.9 %
versus 3.7 %). Finally, in 2014 a 0.1 p. faster reduction in the deficit
(to 2.0 % of GDP) will be accompanied by 0.7 pp slower growth.

[3] Some reforms with a positive, though minor, budgetary effect are
planned but not enacted yet. They include an increase in PIT revenues on the
author’s rights revenues, abolishment of PIT exemptions on internet use and
multiple children upbringing, as well as the introduction of CO2 emission payments
and the sale of rights to use additional radio frequencies.

[4] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission on the basis of the information provided in the
programme, using the commonly agreed methodology.

[5] This rule is expected to be replaced by a permanent expenditure
rule for the central government once the Council adopts a decision abrogating
the EDP for Poland.

[6] The disability contribution is one of four components of Poland’s social security fund, which together finance a broad range of social security
benefits.

[7] IMF Financial Soundness Indicators at: http://fsi.imf.org/.

[8] An
operational document to the National Reform Programme, draft of 4 April 2012.

[9] The EU
average was 92.5 % in 2009.

[10] In the 2011 Innovation Union Scoreboard, the country dropped to rank lowest among moderate innovators
(23rd place).

[11] World
Bank, Doing Business, Economy Profile, Poland, 2012.

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