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# 52013SC0371

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for POLAND Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Poland’s 2013 national reform programme and delivering a Council Opinion on Poland’s 2013 convergence programme for 2012-2016 /\* SWD/2013/0371 final \*/**

  

Table of Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments
and challenges. 6

2.1........ Recent economic
developments and outlook. 6

2.2........ Challenges. 7

3........... Assessment of policy
agenda. 9

3.1........ Fiscal policy and
taxation. 9

3.2........ Financial sector 14

3.3........ Labour market, education
and social policies. 15

3.4........ Structural measures
promoting growth and competitiveness. 19

3.5........ Modernisation of public
administration. 23

4........... Overview table. 24

5........... Annex. 28

Executive
summary

Economic
outlook

According to
the Commission's spring 2013 forecast, Poland’s economic activity is expected
to slow down, after an already sluggish 2012, to 1.1% in 2013 on the back of
falling domestic demand and a difficult global environment, the weakest outcome
in two decades. Growth is expected to pick up again
to 2.2% in 2014. The unemployment rate is forecast to rise from 10.1% in 2012
to 10.9% in 2013 and again to 11.4% in 2014. The current-account deficit is set
to improve from 3.5% of GDP in 2012 to 2.4% of GDP in 2014. Inflation is
projected to decrease strongly to 1.4% in 2013 (from 3.7% in 2012), in line
with weak domestic demand, and to pick up to 2% in 2014 as domestic demand
recovers.

In 2012, the headline
government deficit amounted to 3.9% of GDP, which means Poland did not comply with the deadline of 2012 for the correcting the excessive deficit. Poland intends to correct the deficit by 2014, though according to
Commission forecasts it will stick at 3.9% in 2013 and rise to 4.1% in 2014.
The structural deficit (minus one-off and temporary measures) was 3.8% in 2012
and is estimated to fall to 3.3% in 2013 and 2.9% in 2014. Poland's medium-term objective is for a structural budget deficit of 1% of GDP by 2016,
though there is considerable uncertainty over this target. General government
debt is projected to remain below 60%, though it will rise from 55.6% of GDP in
2012 to 58.9% of GDP in 2014.

Key issues

Poland is the only economy in the EU that has posted positive growth
throughout the crisis, though recent economic developments are less
encouraging. Poland’s good
economic performance throughout the crisis was based on well suited
macroeconomic policies, a strong manufacturing base and a price-competitive
labour force.

Poland has undertaken reforms to tackle some of the challenges identified in
the 2012 CSRs. The general government deficit has
been reduced, but at 3.9% of GDP in 2012 (Poland's deadline for correction) it
remains above the EU's 3% of GDP limit. The government has reformed the pension
system, implemented vocational training reform and proposed further changes to
the education system, which should help to address high unemployment. In
addition, plans to liberalise professional services and improve research
funding have continued.

However, Poland faces many other challenges, which require more ambitious and sustained efforts to sustain growth and create jobs. Challenges
are concentrated in four areas: public finances, labour market participation,
infrastructure and the business and innovation environment.

·
Public finances: It
is necessary to specify additional measures to correct the excessive deficit by
2014, particularly in the light of lower than expected growth, in order to maintain
the confidence of financial markets. Improving the efficiency of healthcare is
crucial to ensure the long-term sustainability of public finances. And there is
significant room for improvement on tax compliance, in particular by reducing
the administrative burden on taxpayers and improving the efficiency of tax
administration. Finally, reforms to improve budgetary coordination between the
different layers of government are necessary.

·
Labour market, education and social policy: Despite recent increases in the overall employment rate (to 64.7% in
2012), older workers, especially women, are not benefitting, owing partly to a
lack of affordable childcare and care for dependent adults. Youth unemployment
is growing (rising to 26.5% in 2012 from 17.2% in 2008), mainly due to
insufficient match between education and the labour market needs. The labour
market is divided into those that work under permanent contracts with a higher
level of protection and those that are working under temporary employment
contracts with limited possibilities to transit into permanent work. Fixed-term
employment is particularly widespread among the young and often results in
lower pay and limited access to vocational training. The share of population
living at risk of poverty and social exclusion is high, notably among children
and working poor (27.2% of the population in 2011). A special pension scheme
for miners and an overly-generous social security system for farmers hold back
productivity growth and prevent workers moving between regions and sectors.

·
Infrastructure: Despite
sizeable investments in the road network, the country’s infrastructure,
particularly its railway system as well as the energy networks and generating
capacity, remains underdeveloped, which hinders growth. Poland still lags considerably behind other Member States when it comes to information and
communication technology, and fixed broadband coverage is among the lowest in
the EU.

·
Business environment and innovation: Public and private research spending was 0.77% of GDP in 2011,
compared to an EU average of around 2%, and further efforts are needed if
Poland is to reach the national R&D target of 1.7% by 2020. Measures taken
so far have not led to a visible improvement in innovation capacities of Polish
companies which continue to underinvest in research and innovation. In
particular, public instruments to support innovation are not well targeted;
grant financing is predominant and more efficient instruments such as tax
incentives or credits are hardly used.  Poland performs worse than the EU
average in terms of the efficiency of its public administration; reforms needs
are most pressing in the judicial system and the tax administration.

1.
Introduction

In May
2012, the Commission proposed a set of country-specific recommendations (CSRs)
for economic and structural reform policies for Poland. On the basis of these
recommendations, the Council of the European Union adopted six CSRs in the form
of a Council Recommendation in July 2012. These CSRs concerned public finances,
the pension system, education and training, the labour market, the business
environment, energy, transport and deregulation. This Staff Working Document
(SWD) assesses the state of implementation of these recommendations in Poland.

The SWD
assesses policy measures in light of the findings of the Commission’s Annual
Growth Survey (AGS)[1] and the Alert Mechanism Report (AMR),[2] which were published in November 2012. The AGS sets out the
Commission’s proposals for building the necessary common understanding about
priorities for action at national and EU level in 2013. It identifies five
priorities to guide Member States to renewed growth: pursuing differentiated,
growth-friendly fiscal consolidation; restoring normal lending to the economy;
promoting growth and competitiveness for today and tomorrow; tackling
unemployment and the social consequences of the crisis; and modernising public
administration. The AMR serves as an initial screening device to determine
whether macroeconomic imbalances exist or risk emerging in Member States. The
AMR found positive signs that macroeconomic imbalances in Europe are being
corrected. To ensure that a complete and sustained rebalancing is achieved, 14
Member States were selected for a review of developments in the accumulation
and unwinding of imbalances.[3]

Against
the background of the 2012 Council Recommendation, the AGS and the AMR, Poland presented updates of its national reform programme (NRP) and of its convergence
programme on 30 April 2013. These programmes provide detailed information on
progress made since July 2012 and on the government’s plans. The information in
these programmes provides the basis for the assessment made in this Staff
Working Document.

The national
reform programme went through a limited consultation process involving different
stakeholders including, inter alia, representatives of local and
regional authorities, trade unions and employers' organisations. No
consultation process took place for the convergence programme.

Overall
assessment

The analysis
in this SWD leads to the conclusion that Poland has made limited progress on
measures taken to address the CSRs of the Council Recommendation. On the
positive side, the country managed to reduce further its fiscal deficit. It implemented
the reform of the pension system, made progress on its vocational training
reform and proposed further changes to the education system. Notwithstanding
these important achievements, reform efforts were limited, particularly as
regards the fiscal framework, childcare facilities, labour market, an innovation-friendly
business environment, energy, transport and deregulation. Therefore, in these
areas, the challenges identified in July 2012 and reiterated in the AGS remain
valid.

Poland’s most pressing challenges are in public
finances, labour market participation, infrastructure development, and the
business and innovation environment. The budget deficit has to be further
reduced to correct the excessive deficit, to subsequently make progress towards
the medium-term objective (MTO) and to maintain the confidence of financial
markets. There is significant room for improvement on tax compliance.

Despite
recent progress, the labour force participation rate, which is still low, is
another major concern in the medium to long term, given an ageing population. Only
64.7% of the population between the ages of 20 and 64 is active on the labour
market, and the rates are even lower for youth and elderly people (notably
women). Youth unemployment has continued to rise and there are signs of labour
market segmentation affecting young people. The efficiency of public
administration needs to be significantly improved. Despite sizeable investments
in the road network, the country’s infrastructure, particularly its railway
system, remains underdeveloped and is thus a factor that severely hinders labour
mobility, foreign investment and growth. The low level of R&D spending and
poor innovation performance is another important policy issue. Finally, in the light
of persistent uncertainties in international financial markets, continued
prudent and pre-emptive policies in financial regulation and supervision remain
important.

The
policy plans submitted by Poland address most of the challenges identified in
last year’s Staff Working Paper, and broad coherence between the two documents
has been ensured. The national reform programme confirms Poland’s commitment to address shortcomings in the areas of low employment, youth
unemployment, the education system and unjustified restrictions on professional
services. The convergence programme reiterates Poland’s commitment to continue
fiscal consolidation, improve the budgetary position towards the medium-term
objective and to ensure the long-term sustainability of public finances in line
with the Stability and Growth Pact. However, in some areas, in particular
innovation-friendly business environment and the quality of fiscal
consolidation, the programmes lack the ambition to address the challenges in a
comprehensive way.

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

Recent economic
developments

In
2012 and early 2013, growth and employment in Poland were strongly affected by
the general weakening of global activity and on-going fiscal consolidation. The year 2012 saw a steady decline in economic performance and a
growth rate of only 1.9%. While exports, driven by sustained price- and
non-price competitiveness gains, supported the economy, domestic demand was
sluggish. In particular, private consumption growth was disappointing as labour
market prospects worsened, real wages declined and consumer sentiment
deteriorated.

Against
this backdrop, investment growth was negative and further hampered by worsening
financing conditions and a slowdown in public investment. Consumer price inflation
remained high at 3.7% in 2012 as a result of currency depreciation, high
commodity prices and a rise in administered prices. Faltering economic growth limited
labour demand and the unemployment rate rose from 9.7% in 2011 to 10.1% in
2012. The current account deficit improved from 4.9% in 2011 to 3.5% to 2012,
mainly on account of cyclical factors.

Economic outlook

According
to the Commission 2013 spring forecast, a weak economic outlook for Poland’s main trading partners is expected to hamper domestic confidence, worsen the
situation of exporters and ultimately constrain the growth of domestic demand
in 2013. Real GDP is forecast to rise by 1.1% in
2013. Economic activity is set to get no support from sluggish public
investment, due to fiscal consolidation needs and completion of EU co-financed
projects in previous years. Uncertain demand prospects and weak global
sentiment are expected to impede private investment. Moreover, private
consumption is likely to suffer from weak growth in disposable income and a
rise in household savings.

Domestic
demand is likely to pick up only in 2014, when the euro area is expected to
recover. Prospects for better growth in the global
economy are set to positively impact prospects for Polish exporters, overall
confidence and ultimately labour market conditions and consumer sentiment
fuelling growth in private consumption. Against this backdrop and supported by
accelerating credit supply, private investment is also expected to rise.
Imports are expected to grow in parallel, due to accelerating domestic demand. The
current account deficit is set to improve from 3.5% of GDP in 2012 to 2.4% of
GDP in 2014. Inflation is projected to decrease strongly to 1.4% in 2013, in
line with weak domestic demand, and to pick up to 2% in 2014 as domestic demand
recovers.

National
reform programme and convergence programme share the same macroeconomic
outlook. For 2013, the authorities project real GDP
growth of 1.5% and a stronger increase in private consumption and private
investment compared to the Commission 2013 spring forecast. The contribution of
domestic demand to growth (+0.8 pp) is therefore over optimistic. Moreover, for
2014, the Polish authorities forecast real GDP growth of 2.5%, higher than the
Commission 2013 spring forecast (+2.2%). The macroeconomic scenario does not
include an estimate of the impact of structural reforms on macroeconomic
variables.

2.2.
Challenges

Poland
faces significant challenges as regards public finances, labour market
participation, youth unemployment, education, efficiency of healthcare, business
environment, and efficiency of public administration and innovativeness of the
economy. These challenges were identified in the
2012 SWD and reflected in the Council Recommendations issued for Poland. As suggested by the AGS and the AMR, these challenges remain fully or partly
relevant. In addition, new challenges have appeared in the light of recent
economic developments.

One
major challenge relates to public finances. Continued
fiscal consolidation is required to correct the excessive deficit and
subsequently make progress towards the medium-term objective and to maintain
the confidence of financial markets. A higher share of growth-enhancing
expenditure (education, research and innovation) remains a prerequisite for
sustaining good macroeconomic performance. Improving the efficiency of
healthcare is crucial in view of the long-term sustainability of public
finances. Moreover, structural weaknesses in the fiscal framework are a challenge:
poor monitoring of budget implementation, discrepancies between the public
accounting and reporting system and the European System of National and
Regional Accounts (ESA95), as well as problems with coordination between
various tiers of the general government in the annual and multi-annual
budgetary planning all need attention. Tax compliance remains a focal point in
terms of combating the shadow economy. Reducing the administrative burden on
taxpayers and improving the efficiency of tax administration also need
attention.

In
the labour market, low employment rates of older workers, women in particular, linked to a relatively low effective retirement age and sector-specific
pension systems pose a challenge. Despite the progress observed since 2005,
employment rate of people aged 55-64 is the fifth lowest in the EU, and the
average exit age from the labour market is still very low. A very marked gap
with the EU average is observed in relation to older women out of whom only
29.2% are employed. Possibilities for early retirement have been significantly
reduced, but there is still a generous special pension scheme for miners.
Women’s participation in the labour market is very low, owing partly to the
lack of affordable childcare, as well as lack of quality care for dependant
adults. While some positive steps have been taken to increase the availability
of childcare facilities, the childcare system still fails to take into account
the geographical distribution of demand and there are still too few places available.
The overly generous social security system for farmers (KRUS) creates
incentives for small-scale farmers to remain in the agricultural sector. This results
in hidden unemployment in rural areas, holding back productivity growth and
keeping regional and sectoral labour mobility at bay.

Subdued
growth puts strains on the employment prospects of the young. Unemployment among young people is growing and the youth employment
rate is below the EU average. In addition, the widespread use of civil law
contracts and fixed-term employment often results in lower pay and limited
access to vocational training; barriers to move to more sustainable forms of
employment should be removed. Public Employment Services focus too narrowly on
administrative tasks, while activation, job search, career guidance and
retraining are still of relatively low quality and do not satisfy employers’
needs. This aggravates the mismatch between the supply of skills and labour
market needs, because of the low quality and relevance of higher education and poor
access to good quality apprenticeships and work-based learning.

Poland lacks an effective social
protection system. It invests a very low share of
its GDP (below 10%) in social protection (excluding pensions), the coverage and
the level of social benefits and housing support are low. The benefits are
poorly targeted with only 7.5% of non age related social protection benefits
means-tested (compared to the EU27 average of 14.7% in 2010) The share of the population
living at risk of poverty and social exclusion is high, notably among children
and the working poor. Having a job is not a sufficient safeguard against
poverty and social exclusion. On the other hand, in-work benefits are limited
and insufficient to prevent slipping into long-term unemployment.

Regarding
the structure of the economy, Poland’s export capacities are concentrated at the
lower end of the value chain, while the innovation and R&D framework is
fragmented and suffers from underinvestment. Poland’s good economic performance throughout the
crisis was based on a strong manufacturing base and a price-competitive
labour force. In a medium-term perspective, however, a shift towards an
innovation-driven economy seems warranted. Measures adopted so far have not led
to a visible improvement in the innovativeness of Polish companies. Low public
R&D spending, weak linkages between science and industry, a low level of
in-house technological innovation, fragmentation of R&I policies and severe
underinvestment in research and innovation in the private sector are key
challenges in this respect.

Low
level of domestic savings hampers the creation of an innovative economy. So far, Poland has relied largely on continued inflows of foreign
capital, while domestic savings were less important. Although capital inflows have
an important role to play in financing investments, dependence on foreign
capital in the current context of heightened financial market volatility points
to the importance of vigilant financial supervision as well as carefully
designed prudential regulation to avoid abrupt capital reversals. Moreover, Poland’s low domestic savings rate poses a challenge, as an increase, for example, through
more widespread use of long-term savings instruments, would support growth
potential of the economy.

Finally,
a burdensome business environment and lengthy as well as complicated
interaction with the public administration impede growth and competitiveness. 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, especially in the rail
sector, continues to be a major growth bottleneck. Businesses would greatly
benefit from improvements in tax administration, further streamlining of
procedures for granting construction permits, starting up and closing down
businesses, faster insolvency proceedings and appeals procedures in the second
and highest instance administrative courts, as well as from better contract
enforcement and property registration. Finally, lifting unjustified
restrictions in the field of professional services would reduce costs of doing
business and boost productivity in the economy.

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

Budgetary
developments and debt dynamics

In
its 2013 convergence programme, Poland confirms its plans to further improve its fiscal position and to progress towards correcting the excessive deficit and meeting the medium-term budgetary objective (MTO). The objective of the budgetary strategy outlined in the programme is to improve
the general government balance to 3.5% in 2013 and 3.3% in 2014. The planned
consolidation path is thus not sufficient to bring the headline deficit below
3% of GDP by the end of 2014. The programme confirms
the previous MTO of -1% of GDP and aims to reach it by 2016
(compared to 2015 in the previous programme). The MTO reflects the objectives of the Stability and Growth Pact.

In
2012, the general government deficit amounted to 3.9% of GDP, well above the
reference value of the Treaty and the 2.9%
projected in the previous year’s programme. This was mainly due to the economic
slowdown in 2012, which had a negative effect on revenues, in particular
indirect and direct tax revenues. With the deficit reaching 3.9% in 2012, Poland did not comply with the deadline of 2012 for the correcting of the excessive
deficit, even after taking into account the direct costs of pension reform.

The general
government deficit projected in the programme is lower than the projected
deficits of 3.9% and 4.1% of GDP in the Commission’s 2013 spring forecast. The difference stems mainly from the Polish authorities’ higher
GDP growth forecast. Moreover, the Commission forecast does not take into
account the decision to keep VAT rates at their current level instead of
lowering them back to their pre-2011 level, as provided for in legislation.
This was announced in the 2013 update of the Polish Convergence Programme. The
(recalculated) structural balance[4]
from the convergence programme improves by 1% in 2013 and 0.5% in 2014. The
difference in the structural balance between the convergence programme and the
Commission 2013 spring forecast is 0.6% in 2013 and 0.7% in 2014.

The
adjustment envisaged by the programme is front loaded, with an improvement in the headline deficit by 0.4% in 2013 and
0.2% in 2014. It is based on the expenditure side, with the expenditure-to-GDP
ratio falling by 1.8 pps in 2012–2014 and a simultaneous fall in revenue-to-GDP
ratio by 1.2 pps. The main downside risk to budgetary targets in 2013 and
beyond is weak budget implementation and strong pro-cyclicality of indirect and
direct tax revenues.

Box 1. Main measures

|| Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2012 ||

· || · Changes in excise duty regulations (+0.1%) · Tax on copper and silver extraction (+0.1%) · Freeze of PIT thresholds (+0.1%) · Increase in dividends from state-owned companies due to exceptionally high profits (+0.1%) (one-off) || · Expenditure rule (including nominal freeze in wage fund) (-0.1%) · Decrease in complementary payments to farmers (-0.1%) ||

|| · 2013 ||

|| · Freeze of PIT thresholds (+0.1%) · Amendment of the pension reform (-0.1 %) · Digital dividend (+0.1%) (one-off) · Increase in dividends from state owned companies (+0.2%) (one-off) || · Expenditure rule (including nominal freeze in wage fund) (-0.1%) · Wage increases for university teachers and soldiers (+0.1%) ||

|| · 2014 ||

|| · Maintaining the VAT rates raised temporarily in 2011 (avoiding -0.4%) · Reinstatement of VAT reimbursement on the purchase of cars and fuel (-0.1%) · Freeze of PIT thresholds (+0.1%) || · Expenditure rule (including nominal freeze in wage fund) (-0.1%) · Extension of maternity leave (+0.2%) · Wage increases for university teachers and soldiers (+0.1%) · Reduction in national direct payments to farmers (-0.1%) ||

|| · 2015 ||

· || · Freeze of PIT thresholds (+0.1%) || · Expenditure rule (including nominal freeze in wage fund) (-0.2%) · Reduction of national direct payments to farmers (-0.2%) · Wage increases for university teachers and soldiers (+0.1%) ||

|| · 2016 ||

|| · Freeze of PIT thresholds (+0.1%) || · Expenditure rule (including nominal freeze in wage fund) (-0.3%) · Reduction in national direct payments to farmers (-0.1%) ||

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

·

After
correcting the excessive deficit by 2014, Poland intends to reach the MTO of
-1% by 2016. However, there is considerable
uncertainty over this target. According to the information provided in the
programme, the (recalculated) structural balance is projected to improve by 0.3
pp in 2015 and 0.7 pp in 2016. At the same time, the growth rate of government
expenditure, net of discretionary revenue measures, over the years 2015–2016 is
expected to be below the reference medium-term rate of potential GDP growth of 2.45%
and to respect the expenditure benchmark. Following an overall assessment of
the budgetary plans, with the structural balance as a reference, including an
analysis of expenditure net of discretionary revenue measures, the minimum
adjustment path towards the MTO in 2015-2016 is respected but does not enable
Poland to reach the MTO by 2016, as the (recalculated) structural balance is
projected to reach -1.2% that year.

General
government debt is projected to remain below 60% of GDP in Poland over the programme period. The national authorities
forecast a slightly increase, from 55.6% of GDP in 2012 to 55.7% of GDP in 2014
(then a decrease to 54.5% by 2016), whereas the Commission, taking account of
possible risks to the consolidation plans and debt decreasing items, expects an
increase to 58.9% of GDP in 2014. Medium-term debt projections (see Graph below
Table V in annex) indicate that full implementation of the programme would put
debt on a downward path by 2020.

Box 2. Excessive deficit procedure for Poland

On
7 July 2009, the Council decided that there was an excessive deficit in Poland. The most recent Council Recommendation under 104 (7) TEC was adopted on the same
date. The Council recommended that the Polish authorities should put an end to
the present excessive deficit situation by 2012. To bring the general government deficit below 3%
of GDP in a credible and sustainable manner, the Council Recommendation called
on the Polish authorities to implement fiscal consolidation measures in 2009 as
planned, to ensure an average annual structural budgetary adjustment of at
least 1¼% percentage points of GDP, starting in 2010, and to spell out detailed
measures needed to bring the deficit below the reference value by 2012. Reforms
to contain primary current expenditure over the following years were also recommended.

An
overview of the current state of excessive deficit procedures, including
additional steps adopted after the finalisation of this Staff Working Document,
is available on: http://ec.europa.eu/economy\_finance/economic\_governance/sgp/deficit/index\_en.htm
(please refer to country sections at the bottom of the page).

Long-term
sustainability

Overall,
Poland appears not to face a risk of fiscal stress in the short run. Nonetheless, there are some indications that the macro-financial
and competitiveness side of the economy could pose potential challenges. The
country is at medium sustainability risk in a medium-term and a long-term
perspective, conditional upon full implementation of the planned ambitious
fiscal consolidation and on maintaining the primary balance well beyond 2014 at
the level expected to be reached in that year. Government debt (55.6% of GDP in
2012 and expected to rise to 58.9% in 2014) is below the 60% of GDP Treaty
threshold. Risks would be higher in the event of the structural primary balance
reverting to lower values observed in the past, such as the average for the
period 1998-2012.

Pressing
issues to be addressed in the Polish healthcare
system relate to limitations in access to care and cost inefficiencies.[5] This is of particular importance, as healthcare spending is
expected to grow considerably in the medium to long term, increasing the burden
on public finances. Poland has limitations in access
to care, especially for
specialised treatment. The country has an above EU average number
of acute hospital beds per 1000 inhabitants (4.4 in Poland versus 3.6 in the
EU), but relatively few
general practitioners. This implies cost-saving potential by shifting
relatively costly hospital care towards primary and ambulatory care and strengthening the role of general
practitioners as gate-keepers to further levels of care. In recent years, the
Polish health sector has been undergoing a restructuring, with incentives to
commercialise hospitals, some privatisation of healthcare institutions and recent attempts to improve the
indebtedness of medical entities. However, more efforts are needed to enhance
the efficiency and quality of public spending. In
particular, cost efficiency within hospitals could be improved, for example, by
linking remuneration to performance and improving management skills. Enhanced
computerisation, leading to better information, communication and monitoring
systems could further foster cost efficiency gains in the sector.

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. At the level of general
government, a debt rule, set out in the Constitution and Public Finance Law,
puts a ceiling 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%. At
the local level, there is a complex set of deficit, expenditure and debt rules,
not compatible with the rules applying to central government.

As
of mid-2013, the Polish government has not yet implemented a permanent
expenditure rule consistent with the ESA by 2013, as recommended by the Council
in 2012. The convergence programme provides a broad
outline of the planned expenditure rule without specifying an exact date, but
mentions an obligation to introduce it by 2013. The current outline mentions a nominal
target, instead of a structural one. There is still no draft law, and details
are not known and thus, so progress depends on whether the government will
ultimately deliver. There has also been no progress in medium-term planning and
improving coordination among different levels of government when it comes to
the budgetary process. The government has dropped plans to enact a new deficit
rule for local government, arguing that the current fiscal framework has been
successful in containing the fiscal balance of local government. 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

Overall
composition of tax revenue in Poland compares favourably to the EU average. In 2011 (latest available data), 42.7% of tax revenues came from
growth-friendly taxes (i.e. taxes on consumption and recurrent property, which
are less detrimental to growth), compared to the EU GDP-weighted average of
36.7%. Of that, a significant share is raised from indirect taxes. Poland has
one of the highest levels of revenue from consumption taxes other than value-added
tax (VAT), such as excise duties on alcohol and tobacco (1.95% of GDP compared to
0.9% EU GDP weighted average), recurrent property taxes (1.2% of GDP compared to
1.3% in the EU) or energy taxes (2.2% of GDP, compared to 1.8 % in the
EU). The rise in disability pension contributions (from 4.5% to 6.5%) and the
nominal freeze of tax brackets increased the tax-wedge last year. However,
despite an increase in the implicit tax rate on labour since 2008 by 0.5 pp,
the overall tax burden on labour in Poland Poland is still relatively low
compared to the EU average.

Poland has some potential for improving
VAT efficiency by extending the scope of the standard 23% rate. 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 49.3% — well below the EU average of 54.7% [2011]. The
reduced rates (5% and 8%) apply to a relatively wide range of goods and
services. At the same time, there is scope for broadening the tax base in
direct taxation by cutting tax expenditure.

There
is scope to improve the effectiveness of environmental (‘green’) taxation
through better targeting. For instance, Poland applies an excise duty rate on passenger cars with an engine capacity above 2000 cm3
that is six times higher than on other passenger cars, but is one of the very
few Member States applying vehicle taxes without explicit CO2 or
fuel-efficiency differentiation. Moreover, some excise duty exemptions or lower
rates are applicable to certain users and uses of fossil fuels, driven by
reasons other than environmental considerations.

The
development and implementation of a comprehensive tax compliance strategy
remains a key challenge. At least three elements
are of importance: combating the shadow economy, reducing the administrative
burden on taxpayers and increasing the efficiency of tax administration. A
report published in November 2012 on the transformation of the Polish revenue
administration into an efficient, electronic-oriented service appears to be a
good basis for future action. Moreover, Poland has started work on a general
anti-avoidance rule (GAAR) as well as on the simplification of some procedures.
In 2012, some compliance rules were relaxed and more electronic filing could be
expected in 2013 due to removal of the certified signature condition for VAT
returns. Still, Poland remains one of the most burdensome administrations in
the EU in terms of time needed to comply with tax requirements and the high
administrative cost of revenue collection (1.72% of tax collected in 2009). A
recent Ministry of Finance survey showed that the Polish tax authorities face a
heavy workload on tasks related to debt enforcement and recovery for other
government bodies and communes. It appears that 78% of such tasks are not
tax-related. This could point in the direction of an issue with tax
administration efficiency. The Ministry of Finance plans to address this by
reorganising of the tax administration possibly starting as of 2014. Progress
on a comprehensive tax compliance strategy would enable Poland to comply with the 2012 country specific recommendations, as improved efficiency in
tax collection and lower tax evasion would mean higher revenues, given the
existing tax structure.

3.2.
Financial sector

In
recent years, Poland’s financial sector has been profitable and increased its capital
buffers despite a recent increase in non-performing loans. The capital adequacy ratio (Tier 1) for the banking sector as a
whole increased to 13.1%, well above the level required under the Basel III
agreement. Financial institutions in Poland continued to benefit from
relatively benign macroeconomic conditions and increased their profits by 4% in
2012. However, the loan portfolio quality deteriorated: the proportion of
non-performing loans (domestic definition) increased from 8.2 % in 2011 to
8.8 % in 2012 and is bound to rise throughout 2013. The weakening of the
economy in 2012 negatively affected both loans to the construction sector and
mortgages. Lending to the non-financial sector grew by 1.2% year-on-year to
December 2012, driven mainly by domestic currency lending to corporates, while
lending to households stagnated.

Nevertheless,
Poland implemented measures to address credit risk in the banking sector,
stemming from the fact that 32% of the outstanding loan portfolio comprises
foreign currency loans (mainly housing loans in
Swiss francs). In 2012, the Polish financial supervisor (KNF) introduced a supervisory
resolution increasing the risk weight for foreign currency-denominated loans
from 75% to 100%. Moreover, it plans to revise recommendation S,[6] which should
result in almost full abolishment of these loans in 2013. These regulatory and
legal changes are relevant and effective, as the supply of new foreign currency
housing loans was brought to a standstill in 2012. The stock of outstanding
foreign currency housing credit fell from 24.7% of the outstanding loan
portfolio in 2011 to 22% in 2012. However, these regulatory changes, in
conjunction with recommendation T[7]
tightening the rules for consumption credit resulted in stagnation in the
lending rate to households in 2012. To counterbalance this negative effect for
domestic currency credit to households, the authorities changed recommendation
T, easing the rules for obtaining consumer credit. Moreover, the revised
recommendation S sets the maximum loan-to-value ratio for all housing loans at
80%, while easing some other rules (e.g. less stringent debt-to-income ratios).

Poland made progress in tackling the problem
of the positive funding gap in the banking sector. The
average funding gap (difference between loans granted to domestic non-financial
sectors and deposits collected) in the banking sector declined from 15.2% in
2011 to 12.7% in 2012, as gradual deleveraging of foreign parent banks
ultimately led domestic banks to compete for deposits. However, some
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. To address this dependency, which could pose a risk to the
financial system, the KNF has recommended retaining 2011 and 2012 profits,
depending on the capital situation of individual banks. Moreover, both the National
Bank of Poland and the financial regulator are actively monitoring the financial
situation of banks and have taken steps to revive the market for long-term bank
securities. These steps are intended to strengthen the liquidity and capital
positions of banks and to facilitate access to long-term funding. Overall, the
country should continue with its prudent and pre-emptive regulatory policy,
though more ambitious efforts to increase domestic deposits, ultimately
lowering further the loan-to-deposit ratio, might be useful.

Poland made limited progress in improving
the availability of credit to small and medium enterprises (SMEs). The debt financing gap of SMEs was addressed by a national scheme of
credit guarantees operated by the BGK (public bank) and regional and local
guarantee or loan funds. However, the national guarantee system is still under
reconstruction and has so far been offering guarantees on a commercial basis
only, with guarantee fees too high to be attractive to businesses. Therefore, a
new guarantee scheme for SMEs (de minimis scheme) was put in place in 2013, targeting
working capital only, but at significantly improved conditions. The venture
capital market is still not well developed. Innovative companies at the early
stages of their development in particular have difficulties in getting
financing. The National Capital Fund active in this area became operational in
2010. By the end of 2012, 15 funds received co-financing and made investments
in 36 companies. Moreover, the Polish Growth Fund of Funds, created in 2013 by
the European Investment Fund (EIF) and BGK, intends to stimulate investments
into venture capital, private equity and mezzanine funds.

3.3.
Labour market, education and social policies

One
of the strengths of the Polish economy is its endowment with labour and the
regulatory set-up of the labour market. Compared to
the EU-27, the labour force is relatively cheap[8],
labour taxes are comparatively low[9]
and labour laws provide for a substantial degree of flexibility[10]. Employment
has been growing continuously since 2004, and the labour force has been growing
recently. However, the economic slowdown resulted in a rise in the unemployment
rate, especially among the young, and stagnating real wages, partly driven by
the nominal freeze on public sector employees’ salaries, contributing to an
increase in the poverty rate.

In
2012, the Council Recommendations for Poland included a CSR concerning
availability of apprenticeships and work-based learning, the quality of
vocational training, matching of education outcomes with labour market needs,
quality of teaching, and unjustified use of civil law contracts. There was also
a CSR addressing low female labour market participation and entrenched
practices of early retirement, as well as phasing out special pension schemes
for miners and farmers.

Labour market
policies

Poland has only partially addressed the
challenge of low employment rates of older workers and phasing out special
pension schemes for miners and farmers. The gradual
increase and equalisation of the statutory retirement age between men and women
will have a positive impact on the employment rates of older workers, but its
implementation is protracted (equalisation to be reached in 2040). Moreover, there
are still two remaining special retirement regimes. First, Poland has not delivered on the long-standing commitment  to reform the special pension
system for miners. The government, together with the social partners, has been
working for the past year on a draft law limiting the early retirement age of
miners who do not work underground, but the law has not yet been adopted. Second,
the oversized agricultural sector still employs almost 13% of the working
population. A major reason for this is an ineffective social security scheme
for farmers (KRUS) that hampers a sectoral shift away from agriculture towards
more productive sectors and hinders regional mobility. Minor temporary changes
introduced in 2011 (owners of farms larger than 6ha pay health contributions
themselves) will be prolonged into 2013, but no permanent and credible solution
has been proposed to solve the problem.

Poland started to implement a couple of
short-term measures to improve the social activity of people over 60 years. These measures are credible, but only partially relevant, as their
aim is not an increase in employment, but better participation of the elderly
in social life. An integrated active ageing strategy to encourage older workers
(notably women) to stay in employment longer and to raise the effective
retirement age is still not being pursued. Such an approach would combine
workplace improvements, labour market measures, reforms in the healthcare
system, tax-benefit incentives and lifelong learning.

In
terms of early childcare, government efforts concentrated on the implementation
of the ‘Toddler programme’. As a result, the number
of nurseries almost doubled over the last two years, but the total number remains
extremely low in relative terms[11]
and does not satisfy needs (36000 places compared to 400000 children born
annually in Poland). Furthermore, most investment is concentrated in
metropolitan areas and selected municipalities (more than 90% of the total). In
2013, expenditure on early childcare is expected to double, reaching EUR 25 million.
Despite a government declaration on increasing spending for pre-school
education to EUR 80 million in 2013, this has been postponed to 2014. Thus, the
government target of ensuring a place in pre-school education for every
eligible child by 2016 may not be met. In spite of growing demand for
pre-school education, Poland has not yet fully addressed the need for qualified
teaching staff. The measures targeting childcare facilities are only partially
relevant and lack credibility. Furthermore, they need to be sustained over time
to have a tangible impact on women's participation in the labour market. This
is all the more important considering the role that quality childcare can play in
supporting child development, breaking the cycle of disadvantage.

In
parallel, the government has decided to extend parental leave by six months, paid at 60% of salary, in addition to the current six months of
maternity leave with full pay and unpaid parental leave of maximum three years.
This prolonged six-month leave is optional, can be shared between both parents
and combined with part-time work. The effects of the planned increase of
parental leave on the re-integration of mothers into the labour market should
be assessed. Furthermore, given the substantial funding for the proposed
solution (rising from a maximum of EUR 850 million in 2014 to EUR 1.1 billion
in 2018) and the lack of childcare infrastructure, the question arises as to
whether funding priorities are set correctly.

Another
major concern is growing unemployment among the young, reaching 26.7% (2012). The government has acknowledged this
and a further EUR 163 million in ESF funding has been deployed to support young
people. Through the Youth Employment Initiative, the ESF will reinforce its
action targeting to young people not in employment, education or training. It
will be important to successfully implement a Youth Guarantee.[12] In addition,
the Ministry of Labour has been implementing a pilot project ‘Your Career –
Your Choice’, which aims to test innovative tools for labour offices to deal
with young unemployed people. The pilot project is relevant and credible, but
its scale remains limited, given the importance of the problem.

Further
efforts were undertaken to improve placement services and to reduce the
workload of the Public Employment Services. A pilot
project, ‘Partnership for Jobs’ for outsourcing employment services to private
agencies, has been implemented in three regions. A draft law introducing job
efficiency monitoring of active labour market policies through rewarding the
most successful labour offices has been sent to social consultations. Proposed
changes are relevant and ambitious, but the reform is as yet at a very early stage
and its effects remain to be seen.

Poland
took only minor steps to address the extensive use of temporary employment. The country has the third highest share of involuntary
fixed-term employment in the EU, especially in the 15-24 age group.
Often seen as an instrument for the unemployed to re-enter the labour market
and later move into a permanent contract, this does not appear to be the case
for most workers in Poland. Contracts with a probationary period, which could
be used as a ‘screening device’ by employers and might allow for a smoother
transition between unemployment and permanent employment, cannot pay this role,
as they are of limited duration. The extensive use of fixed-term contracts appears
to work against the quality of human capital and productivity, as temporary
employees tend to have less access to vocational training. In addition, the use
of so-called civil law contracts that have significantly reduced social
protection rights compared to standard employment contracts is widespread.
According to the government report ‘Youth 2011’, over 50% of young workers
(18-32 years) are employed on the basis of civil law contracts. The government is
taking part in a discussion with social partners on possible changes to labour
law as regards fixed-term contracts, permanent contracts and a contract for a probationary
period. However, these discussions have not yet led to concrete results and the
issue of labour market segmentation in Poland remains unaddressed.

Education policies

There
is growing unemployment among the young because the low quality of teaching
does not match labour market needs. The reform of
the education and science system introduced in 2010-2011 was a first step in
addressing the skills-jobs mismatch, strengthening university-business links
and making the courses available more flexible. This was followed by further
legislative amendments presented by the authorities in 2012, which
differentiate between academic and vocational higher education institutions and
introduce dual studies linking academic studies with practical training in
companies. The authorities plan to reduce the number of graduates without jobs
by publishing a list of faculties that received a negative opinion from accreditors.
Finally, the European Social Fund (ESF) and the European Regional Development
Fund (ERDF) are contributing to raising student numbers in mathematics, science
and technology. All of these reforms are going in the right direction, but there
needs to be more emphasis on enhancing structured and formalised cooperation
between higher education institutions and enterprises, raising the qualifications
of teachers and improving the quality of teaching materials, teaching soft
skills and career guidance.

Regarding the
need to increase the availability of apprenticeships and work-based learning, a
reform of vocational education and training came into force in September 2012. This aims to involve employers in the education and examination
system and to encourage schools to customise their curricula to labour market
requirements. A new flexible formula of vocational exams has been introduced.
The reform is credible, but companies need to be more involved in creating curricula
and to be invited to sit on vocational education and training (VET) schools
boards, and there need to be more quality training. Participants need to focus
on improving transversal skills (ICT, communication, problem solving).

Further
efforts are also required to enhance the skills profile of the workforce,
focusing on older workers, low-skilled workers and the unemployed. The draft strategic document ‘Prospects for Lifelong Learning’ has
not yet been approved and the responsibility for the strategy is continuously
shifting between ministries. Thus, the recommendation calling on Poland to adopt
a lifelong learning strategy has not been implemented.

Social policies

Poland
is among the countries with the lowest real household income per capita and
with one of the lowest statutory minimum wages in the EU. The wage penalty (the difference between average pay of employees
on open-ended and fixed-term contracts) on fixed-term contracts, at nearly 28%,
is the highest in the EU. Thus, nearly 12% of employees with fixed-term
contracts face in-work poverty, which is double the rate among employees who
hold a permanent contract[13].
Poland increased its minimum wage from PLN 1500 (EUR 375) to PLN 1600 (EUR 400)
and the raised income ceilings for social assistance and family benefits,
thereby raising the level of benefits. These measures are only partially
relevant and are not sufficient to address the scale of the challenge, as many workers
employed on civil law contracts are not covered by the minimum wage. The higher
income ceilings conferring entitlement to social assistance and family
allowances (the first since 2006) are only a partial adjustment. The change has
not been coupled with any significant changes to the social protection system.
Poland is one of the Member States whose spending on social transfers is the
lowest and has the lowest impact on poverty reduction. The coverage of the
unemployment benefit system in Poland is one of the lowest in EU (23.3%
compared to the EU-average of 53.5%). The situation is not getting better, if
one takes into account other benefits (such as sickness and disability): the
rate is 34.2% - the lowest in the EU. The system is also characterised by low
adequacy and coverage of social assistance and housing support.

Although
the pension system in Poland currently provides a high degree of adequacy, this
may become an issue in future, notably for low-wage earners and those with
short working careers, predominantly women. The
average duration of women’s working life is only 29 years, thus adversely
affecting their future pension entitlements, since accruals are tied to
earnings-related lifetime contributions. The recent pension reform gradually
increasing and equalising retirement age is a step in the right direction,
though the so-called partial early retirement is available to men at 65 and
women at 62. However, its long implementation period will have less favourable implications
both for sustainability and for the adequacy of women’s pension entitlements.

3.4.
Structural measures
promoting growth and competitiveness

Poland
has steadily experienced gains in its external competitiveness and further
improvement is likely over the near term, though at a slower pace. The real effective exchange rate based on unit labour costs depreciated
by nearly 7% over the last two years, while Poland’s world export market share
stabilised at around 1%. Further advances can be expected, but at a slower pace,
as Poland is already close to the technology frontier. Although the business
environment in Poland has improved in recent years (the country advanced 19 ranks
in the World Bank’s 2013 Doing Business survey from 74th to 55th, out of 183
economies), Poland still significantly lags behind compared to the rest of the
EU.

In
2012, the Council Recommendations for Poland included two CSRs concerning
structural measures promoting growth and competitiveness. These refer to creating
an innovation-friendly business environment and to access to finance for
research and innovation activities. The CSRs also cover investment in energy
generation and efficiency, development of the electricity grid, cross-border
exchange of electricity and competition in the gas sector.

Transport
infrastructure

Despite
some progress, Poland’s underdeveloped transport infrastructure remains a major
bottleneck to growth. While major road
infrastructure projects advanced, railway investment projects are still largely
delayed.

The
degraded rail infrastructure requires substantial and increasing investment
since only 36% of approximately 20000 km of rail lines in operation are in good
technical condition.[14] Improving the railway infrastructure through effective and swift
implementation of co-financed railway projects still requires a lot of effort.
In 2012, the government replaced the management board of the state-owned
railway operator holding (PKP SA); the new management is expected to improve
PKP’s corporate governance and profitability and presented a reform plan in
late 2012. While actions are indeed required, the plan to reduce costs by
closing several thousand kilometres of unprofitable railway lines raised some
controversies[15]
and would be likely to lead to a further displacement of rail transport onto roads.
The functioning of the railway market also poses a significant challenge, with
obstacles such as high railway infrastructure charges (despite its very poor
state), the weak position of the rail regulator (UTK) and problems with access
to freight terminals and rail-related services faced by new entrants.

As
regards road infrastructure, progress has been made, but not all regions have benefited
to the same extent. Overall, more than 620 km of
new motorways and expressways were completed in 2012, and another 600 km are
currently under construction. The government has substantially improved traffic
conditions and road safety on some of the major transport corridors, including the
TEN-T network. However, due to higher-than-expected construction costs, the
network is still quite underdeveloped in a number of regions, hampering their
attractiveness for businesses. Problems with the road infrastructure programme
included the bankruptcies of several road construction companies due to fierce
price competition, often in public tenders, and allegations of irregularities
in tender procedures, leading to a suspension of some EU funds in December
2012.

Information and
Communication Technologies

Despite
recent efforts, Poland still lags considerably behind other Member States when
it comes to seizing the growth potential of information and communication
technologies (ICT). Fixed broadband coverage is among
the lowest in the EU, both at national level and for rural areas.[16] In addition,
the actual award of spectrum to operators for the rollout of mobile broadband has
been delayed and aggravates the problem of low fixed broadband coverage,
especially in rural areas.[17]
Broadband and e-service projects co-financed from structural funds are delayed
and are at risk of non-implementation. Although Poland has lately advanced to
ensure full implementation of over EUR 1 billion of Structural Funds for broadband
roll-out and has developed a first draft of the National Broadband Plan for the
Commission, significant implementation difficulties remain. These could be
addressed through better governance and coordination at national level.

R&D and
innovation

Poland is among the EU countries with
the lowest level of R&D expenditure and one of the worst performers in broader
innovativeness indicators. The overall ratio of (public
and private) R&D expenditures to GDP in Poland, at 0.77% in 2011, was among
the lowest in the EU (EU average is approximately 2%). Polish enterprises have
relied largely on technology absorption, i.e. application of already existing
technologies through fixed capital investment[18].
While this has been successful in ensuring productivity gains and economic
growth, a transition towards a more indigenous innovation-based model is needed
in future. However, business R&D expenditure accounted for only 0.2% of GDP
in 2011.[19]
Poland is ranked among the modest innovation performers according to the
Innovation Union Scoreboard 2013 (forth worse performer in the EU). Moreover, Poland is relatively weak in terms of high-impact scientific publications, patent
applications, intensity of business researchers and in the number of
public-private co-publications.[20]

The
country has started to act. However, further efforts are needed if Poland is to reach the national R&D target of 1.7% in 2020. Reforms of the science and higher education systems initiated a
major restructuring, including support mechanisms to induce science-industry
cooperation. The creation of two executive agencies — the National Science
Centre for basic research and the National Centre for R&D for applied
research — is intended to boost more competitive allocation of funding. However,
no concrete evaluations are available on the real effect of these reforms. A more
holistic approach is needed, linking efforts under research, innovation and
industrial policy, and ensuring that there are adequate instruments supporting
the whole innovation cycle.

In
particular, public policy instruments are not well targeted and are not
tailored to different stages of the innovation cycle. Public R&D funding has been concentrated largely on the absorption
of new technologies, and has been less successful in promoting indigenous
research and innovation, especially at regional level. It is also mostly
distributed through grants, supporting less risky stages of the innovation
cycle. However, grant financing would be more beneficial for early high-risk
stages of technology development, whereas less risky projects would benefit
from equity and debt financing. Moreover, fiscal instruments, such as tax
incentives or credits, are hardly used. Appropriate mobilisation of public
funds, including EU funds in 2014-2020, to stimulate business R&D is
crucial in this context. More broadly, an appropriate business environment
enabling successful SMEs to grow, innovate and move to higher value added is
also important.

Environment and energy

Environmental
challenges identified in the 2012 SWD remain valid. Recent reforms in the municipal waste system are expected to improve
its coverage and separate collection. However, low landfill taxes and
insufficient use of other economic instruments such as ‘Pay-as-You-Throw’ and
producer responsibility schemes continue to compromise the potential of waste
recycling. Insufficient investments in largely outdated water networks,
especially in big cities, endanger continued water availability for households
and industry. Exposure of the urban population to air pollutants from energy
production, transport and solid fuel-based residential heating remains high.

Poland could face difficulties in delivering
on its commitment to limit the increase of greenhouse gas (GHG) emissions in
non-ETS sectors. According to Poland’s own projections, there will be no change in emissions by 2020 compared to 2005,
but inventory data for 2011 show that emissions are higher than expected.
Therefore, the accuracy of the projections needs to be reassessed and further
measures might be required to meet its target.

With
respect to energy generation, coal still remains the dominant source of fuel,
while renewables remain at low levels. The share of
renewable energy sources in final energy consumption was 10.4% in 2011; Poland was on track to meet its national action plan trajectory, with the exception of the
electricity sector. However, the country still has to make a considerable
effort to ensure continuous growth of its renewable energy sector to reach
renewable energy targets for 2020. Thus, there needs to be faster removal of
non-cost barriers to large-scale development of renewable energy, especially in
the electricity sector, which is furthest from Europe 2020 target. However, the
necessary legal requirements have not yet been implemented, because the
legislation including the Draft Law on Renewable Energy proposed by Ministry of
Economy in December 2011 has still not been adopted.

As
far as energy efficiency is considered, potential gains remain very high in all
sectors of Poland’s economy and achieving them could support green growth. Poland set an indicative national energy efficiency target to
stabilise its primary energy consumption at the level of 96 Mtoe[21] in 2020.
According to Eurostat, in 2010, primary energy consumption excluding non-energy
uses in Poland had already reached 96.9 Mtoe. Keeping this level for 2020 could
be a challenge because of projected economic growth, so further efforts in
strengthening energy efficiency might be required. Large reductions could be
achieved in the building sector through better insulation. In January 2013, Poland started a new white certificate scheme intended to deliver at least half the overall
targeted energy savings. The start of the scheme is an important step in
achieving energy efficiency. However, its progress requires close monitoring so
that it is adjusted if the desired results are not delivered.

The
domestic electricity grid is still congested, but plans are advancing to create
more interconnection capacity with neighbouring markets. The Polish transmission system operator (TSO) — Polskie Sieci
Energetyczne (PSE) — has prepared an ambitious investment programme, which envisages
a new Poland-Germany interconnector and an upgrade of the two existing
interconnections. A new 500MW link between Poland and Lithuania (LitPolLink, a part
of the Baltic Energy Market Interconnection Plan (BEMIP)) is to be completed by
October 2015. It remains to be seen whether the ambitious programme can be
implemented in a timely fashion.

The
key problem in the natural gas market remains a lack of diversification and lack
of competition. Almost 90% of natural gas imports
come from Russia. However, once new investments are finalised, this situation
is expected to improve. These investments, co-financed by the EU, comprise an LNG
import terminal (to be completed in 2014), a new interconnection with the Czech Republic and Germany, and new storage facilities. Furthermore, in an effort to introduce more
competition, the Polish authorities strongly encourage the exploration of shale
gas and have granted over 100 shale gas exploration licences. Although a gas
exchange platform was initiated in December 2012, the phasing out of regulated
prices is still to be implemented. This would stimulate competition in the gas
sector, which remains very strongly concentrated, with the incumbent holding a
share of around 97% in both wholesale and retail markets.

Professional
services and competition

Unjustified
restrictions in the field of professional services have been hampering economic
growth. According to the European Commission database
on regulated professions, Poland has the second highest number of regulated
professions in the EU, more than double the EU average (368 in Poland compared to about 150 in the EU on average). In many cases, the requirements for access
to a profession create unnecessary barriers to job creation and competition
with a negative impact on the competitiveness of the sector. At the same time,
these barriers to entry allow incumbents charging high prices thereby
increasing the costs for doing business in other sectors and undermining the
competitiveness and growth potential of the whole economy.

In
2012, Poland initiated a reform to facilitate access to regulated professions. However, the reform is less ambitious than initially announced,
and behind schedule. The draft of the first (out of planned three) liberalising
laws, covering 50 professions, was adopted by the Council of Ministers in
September and is in the process of being adopted by parliament (according to
the initial schedule, it was supposed to have been enacted by the end of January
2013). It should have been followed by two other laws covering the remaining
targeted professions. Competition in postal services still encounters
substantive regulatory barriers, notably with the broad VAT exemptions given to
the incumbent which, in effect, prevent competitors from entering the postal
market.

3.5.
Modernisation of public administration

In
the field of modernisation of public administration, the 2012 Council
Recommendations for Poland mentioned a need to
improve tax compliance as well as to simplify contract enforcement and
requirements for construction permits.

Overall,
Poland’s performance in terms of the efficiency
of its public administration is below the EU
average[22].
Key problems include transparency of the public administration, complexity of
tax compliance, increasing average length of proceedings in civil and
commercial cases, long insolvency proceedings and low recovery rates. The use
of e-Government in the public administration also remains below the EU average.

Improvements
in public administration and policy design and delivery continue to be crucial
to enhance the business environment. Although Poland has lowered its regulatory burden in 2012,[23]
the country still scores significantly below the EU average on the costs and
time needed to start up and wind up a business, the number of procedures and
time necessary to obtain a construction permit, and the ease of dealing with
the tax administration. Tax compliance rules remain complex, and taxpayers, as
well as tax authorities, have difficulties in dealing with them. The
construction sector is still waiting for the highly anticipated reform of the
cumbersome legislation covering construction permits. The standard procedure to
obtain all necessary registrations when setting up a limited liability company is
overly lengthy, and take-up of internet-based registration is low. Bureaucracy
and unproductive activities persist in dealings with public authorities, as the
legislation on the reduction of administrative burdens does not envisage monitoring
mechanisms, while the deregulation agenda lacks coordination. The deployment of
e-services and e-administration is slow and lacks coherence, and citizens’ use
of e-government is also below the EU average. The November 2012 report on the e-tax
system (e-podatki) notes these issues and proposes solutions. The finalisation
of significant investments made to set up the Polish Point of Single Contact
would bring efficiency gains and savings both for public administration and
businesses.

There
is scope for improvement in the justice system. The
number of judicial proceedings is relatively high. Although the average length
of proceedings in civil and commercial cases is still reasonable, it has been increasing
steadily since 2007, which could become a matter of concern. In the same
period, the duration of appeal procedures for administrative cases has doubled
(445 days in the second and highest instances), and the clearance rate is very
low (75%). Insolvency proceedings are long and recovery rates low. ICT tools
for communication between courts and parties, which could help shorten
proceedings and improve access to justice for businesses and citizens, are not
very well developed. In 2012, a legislative amendment to the code of civil
procedure entered into force, making proceedings in business cases simpler and
less formal.

4.
 Overview
table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs) ||

CSR 1: Ensure planned progress towards the correction of the excessive deficit. To this end, fully implement the budget for the year 2012 and achieve the structural adjustment effort specified in the Council recommendations under the EDP. Thereafter, specify the measures necessary to ensure implementation of the budgetary strategy for the year 2013 and beyond as envisaged, ensuring an adequate structural adjustment effort to make sufficient progress towards the MTO, including meeting the expenditure benchmark. Minimise cuts in growth-enhancing expenditure in the future and improve tax compliance. || Limited progress in the implementation of the CSR. Poland did not correct the excessive deficit in 2012, which came in at 3.9% of GDP. It made very limited progress in minimising cuts in growth-enhancing expenditure as significant part of deficit reduction comes from cuts in investments (driven in turn by the EU funds cycle). The same applies to tax compliance — tax compliance rules will be relaxed as, upon taxpayer’s request, the tax authorities will have to reduce the tax advances payable and tax base will be broadened. On 1 October 2012, the list of e-declarations which can be transmitted without a secure e-signature has been extended to some declarations for VAT and for civil law actions tax.

CSR 2: Speed up the reform of the fiscal framework by enacting legislation with a view to introducing a permanent expenditure rule by 2013. This rule should be consistent with the ESA. Take measures to strengthen the mechanisms of coordination among the different levels of government in the medium-term and annual budgetary processes. || Limited progress in the implementation of the CSR. The permanent expenditure rule is still pending and the government plans to enact it by the end of 2013. The current draft is not consistent with ESA. Very limited progress on strengthening mechanisms of coordination among different levels of government, government argues that no further effort required.

CSR 3: To reduce youth unemployment, increase the availability of apprenticeships and work-based learning, improve the quality of vocational training and adopt the proposed lifelong learning strategy. Better match education outcomes with the needs of the labour market and improve the quality of teaching. To combat labour market segmentation and in-work poverty, limit excessive use of civil law contracts and extend the probationary period to permanent contracts. || Some progress in the implementation of the CSR. While efforts have been undertaken to reduce youth unemployment, they should have been more ambitious given the scale of the challenge, and in light of establishing a Youth Guarantee. Poland has introduced several reforms in the area of education and training, which are relevant to tackle the challenges identified in the CSR. There need to be more efforts to enhance better cooperation between companies and schools and to raise the quality of the teaching offer. Improving the access to apprenticeships and work-based learning remains a priority. The adoption of the lifelong learning strategy is pending. The Government participated in a discussion with the social partners on the issue of labour market segmentation, but these discussions did not lead to concrete results. Some measures have been taken to combat in-work poverty, but they are unlikely to bring any noticeable effect.

CSR 4: Reinforce efforts to increase the labour market participation of women and raise enrolment rates of children in both early childcare and pre-school education, by ensuring stable funding and investment in public infrastructure, the provision of qualified staff, and affordable access. Tackle entrenched practices of early retirement to increase exit ages from the labour market. Phase out the special pension scheme for miners with a view to integrating them into the general scheme. Take more ambitious, permanent steps to reform the KRUS to better reflect individual incomes. || Some progress in the implementation of the CSR The number of childcare places is growing, but the offer of nurseries remains far too low to satisfy the needs. Poland has set a target to offer a place in pre-school education for every eligible child by 2016 but the funding to meet this target has not been increased. The Government proposal to extend the parental leave to 12 months could make it more difficult for mothers to come back onto the labour market and will also absorb substantial costs. A permanent and credible reform of KRUS still needs to be implemented. The draft Law reducing early retirement possibilities only for miners working underground has not yet been adopted.

CSR 5: Take additional measures to ensure an innovation-friendly business environment, by ensuring better links between research, innovation and industry, and by establishing common priority areas and instruments supporting the whole innovation cycle; improve access to finance for research and innovation activities through guarantees and bridge financing. || Limited progress in the implementation of the CSR. The reform of science and higher education has been a step in the right direction but only partially addresses the problem of poor innovation performance of Polish companies through fostering science-industry cooperation. More holistic approach is needed linking efforts under research, innovation and industry policy. There are no new initiatives in terms of facilitating access to finance. Delays in the adoption of key strategic documents (SIEG, PRP) hamper the implementation of possible improvements in access to finance, especially for innovative SMEs.

CSR 6: Intensify efforts to improve incentives for investment in electricity generation capacity and energy efficiency in the whole energy chain, and strengthen competition in the gas sector by phasing out regulated prices. Strengthen the role and resources of the railway market regulator and ensure effective and swift implementation of railway investment projects Reduce restrictions on professional services and simplify contract enforcement and requirement for construction permits. || Some progress in the implementation of the CSR. The reforms in the area of energy are delayed. Most of the measures in this sector are only at the preparation stage and therefore the outcome is unclear. However, in both electricity and gas sector some progress has been noticed, with launch of some projects in development and upgrade of the electricity grid (including interconnectors) and gas trading platform opened in December 2012. Minor progress with expected increase of resources of the railway regulator in 2013; railway investment projects are still largely delayed and a Task Force (Poland-European Commission) has been set up to monitor the progress and identify obstacles to implementation (some, but not sufficient progress in 2012). Poland has set a serious reform agenda to eliminate or reduce qualification requirements for up to 230 professions, although the reform is behind schedule. Contract enforcement: Implemented changes to the legal procedure, greater resources for enforcement lead to quicker procedures. Construction permits: no changes and progress. Concerning energy efficiency, there was some progress in 2012 mainly as regards investments in energy efficiency of public buildings using support from ERDF. However, in the view of the large needs for energy efficiency improvements in all sectors of economy, it may be necessary to consider a major increasing of energy efficiency allocations under the in the future financial framework 2014-2020 for EU Cohesion Policy Funds. One of the new main energy efficiency measure aimed to help Poland its 2020 target is the White Certificate system and it started its operation in January 2013 with first tenders for delivering energy savings planned to be launched in April 2013.

||

|| Europe 2020 (national targets and progress) ||

|| Employment rate target: 71% || Employment rate reached 64.6% in 2010 and 64.8% in 2011. Government’s efforts concentrated rather on the supply side of the labour market. Resources directed into pro-employment investment are still limited. Simple measures aimed at stimulating GDP growth may not translate into an increase in stable jobs and to reaching of the employment target

|| R&D target: 1.7% || Gross domestic expenditure on R&D (in % of GDP) reached 0.74% in 2010 and 0.77% in 2011. Marginal progress has been made towards the achievement of the target. ||

|| Greenhouse gas (GHG) emissions target: 14% (compared to 2005 emissions, ETS emissions not covered by this national target). || Change in non-ETS greenhouse gas emissions between 2005 and 2010: + 9% [provisional data] According to the latest national projections submitted to the Commission and when existing measures are taken into account, the target is expected to be reached: 0% in 2020 compared to 2005 (with a margin of 14 percentage points). However, provisional inventory data for the year 2011 show that emissions are higher than expected in the projection. With a 9% increase since 2005, emissions are indeed already slightly higher than required as of 2013 under the Effort Sharing Decision. Therefore, projections need to be revised to assess whether Poland will be able to meet its 2020 GHG emission target. ||

|| Renewable energy target: 15% Share of renewable energy in all modes of transport: 10% || Share of total renewable energy in gross final energy consumption was 10.4 % in 2011 and 6.5 % in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 2009/28/EC are included). In 2011, Poland was on track of its national action plan trajectory, except electricity sector. No progress has been made on transposition of the Renewable Energy Directive and development of national legislation in energy sector including renewable energy. ||

|| Indicative national energy efficiency target for 2020: 13.6 Mtoe primary energy savings in 2020. The preliminary data suggests that the primary energy consumption level in 2020 would be 96 Mtoe. || Poland has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). However, it has neither expressed it, as required, in terms of an absolute level of primary and final energy consumption in 2020, nor has provided information on the basis on which data this has been calculated. ||

|| Early school leaving target: 4.5 % || The share of early leavers from education and training has slightly increased from 5.4% in 2010 to 5.7% in 2012. Poland is already well below the target set for 2020 for the EU average (10%). However, the national target is very ambitious and progress towards reaching the target has been reversed recently. ||

|| Tertiary education target: 45% || Tertiary educational attainment reached 35.3% in 2010 and 39.1% in 2012. More effort is needed to reach the ambitious national target set above the EU target. ||

|| Target on the reduction of population at risk of poverty or social exclusion in number of persons: 1.500.000 || In 2011 the number of people at risk of poverty and social exclusion was reduced by 213.000. Poland has made a limited progress towards reaching the target. More efforts are needed to develop a comprehensive strategy of reducing poverty and fighting social exclusion. ||

5.
Annex

Table I. Macroeconomic indicators

Table II. Comparison
of macroeconomic developments and forecasts

Table III.
Composition of the budgetary adjustment

Table IV. Debt
dynamics

Table V. Sustainability
indicators

Table VI. Taxation
indicators

Table VII. Financial market indicators

Table VIII. Labour market and social
indicators

Table IX. Product market performance and policy indicators

Table X. Green Growth

[1] COM (2012) 750 final.

[2] COM (2012) 751 final.

[3] 13 in-depth reviews were published on 10 April 2013. While selected
for an in-depth review in the AMR, Cyprus was ultimately not reviewed under the
Macroeconomic Imbalance Procedure in view of the advanced preparations for a
financial assistance programme.

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

[5] See: Joint EC(ECFIN)-EPC Report on Health Systems at:

http://ec.europa.eu/economy\_finance/publications/occasional\_paper/2010/pdf/ocp74\_en.pdf,         
and Annual National Report 2012: Pensions, Health Care and Long-term Care at   
http://www.socialprotection.eu/files\_db/1276/asisp\_ANR12\_POLAND.pdf

[6] Recommendation S, enacted by the KNF, sets the rules to be followed
by the banks granting mortgages.

[7] Recommendation T, enacted by the KNF, sets the rules to be followed
by the banks granting consumption loans.

[8] Real unit labour costs in Poland declined by 3.4% between 2005 and
2011, while remained unchanged in the EU.

[9] Tax wedge on labour (amounting to 35.5% for a single individual in
2012) is slightly below the OECD average and much below the average for those
EU member states which are also members of the OECD (41.8%).

[10] Poland's rules for hiring and firing workers are relatively
flexible, as measured by the OECD employment protection legislation (EPL 2008)
indicators which for Poland amounts to 2.4 (OECD average is 2.25), the level of
unionization is low and the wage bargaining system is highly decentralised
(conducted mostly at the company level).

[11] 2% of children aged 0-3 years have a place, while the EU-average is
28% (Eurostat, EU-SILC 2010)

[12] Council Recommendation of 22 April 2013 on establishing a Youth
Guarantee (2013/C 120/01) to ensure that all young people under the age of 25
years receive a good-quality offer of employment, continued education, an apprenticeship
or a traineeship within four months of becoming unemployed or leaving formal
education.

[13] Source: SILC, 2011

[14] The condition of railway infrastructure is reflected by poor
consumer assessment of train services (second lowest in the EU). Trust in
providers, comparability of offers and overall consumer satisfaction are
amongst the four lowest ratings in the EU and the incidence of problems is
above EU average. See 8th Consumer Markets Scoreboard, December 2012, European
Commission, DG SANCO,    
http://ec.europa.eu/consumers/consumer\_research/editions/cms8\_en.htm.

[15] First, the plan might constitute a breach of the rule on durability
of EU co-financed operations, second, it would contravene various national and
EU plans and objectives, including to increase the share of rail in passengers
and freight transport and third, several of the lines have important feeder
functions to the TEN-T network.

[16] Based on the latest available EU-wide data (as of December 2011),validated
in the Commissions’ Digital Agenda Scoreboard, 24 and 50 pps. below the EU
average respectively.

[17] Poland has until 2015 to meet the requirements of Art. 6 of the
Radio Spectrum Policy Programme (RSPP). So far, the country has assigned only
472 MHz of the required 1200MHz radio spectrum for wireless broadband. In
particular, the 800 MHz band, essential for rural area coverage, has not been
cleared and made available yet.

[18] According to ‘Science and Technology 2011’ by Polish Statistical
Office (2013), R&D represented 13% of Polish firms’ innovation spending in
2011. The rest was capital expenditure on fixed assets, acquisition of external
knowledge and software, training and marketing of new or improved products.

[19] However, these statistics might underestimate private R&D due
to the lack of appropriate incentives for business to declare them.

[20] European Commission, Directorate-General for Research and
Innovation, ‘Research and Innovation performance in EU Member States and
Associated countries. Innovation Union progress at country level 2013’.

[21] Million tonnes of oil equivalent.

[22] World Bank government effectiveness ranking (2012) ranks Poland
23rd among EU-27 member states.

[23] World Bank, Doing Business report 2013.

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