Poland: Policy continuity expected with ruling Law and Justice on track to win October’s election
Having recently surged in the polls after convincingly winning last May’s European elections, the ruling right-wing nationalist Law and Justice (PiS) party, supported by its partners in the United Right (ZP), seems on track to retain a majority in parliamentary elections scheduled for 13 October. Another four years of substantial social spending thus seems highly likely, which should support economic growth but could also strain government finances.
The PiS government campaigned on a platform to significantly raise the minimum wage, reduce taxes for young people and give more money to pensioners. While this would provide a short-term boost to spending, the budget deficit would most likely widen as a result, making PiS’ claim to reach a balanced budget for the first time in 30 years in 2020 unattainable. Moreover, the reduction in the retirement age approved during its years in government, combined with poor demographics, will weigh on employment growth and could pose economic challenges in the medium- to long-term. That said, the economy has performed strongly since PiS’s majority government came to power in 2015. And while it boosted public spending on social welfare programs—especially for pensioners, families with children and young people—the government also improved public finances and reduced the public debt-to-GDP ratio, as a robust domestic economy led to notable increases in tax collection.
The main competitor, the centrist Civic Platform (KO), is trailing significantly behind PiS in the polls. The aspect that most differentiates KO from PiS is its calls for an independent judicial system and to develop closer ties with the European Union, as opposed to the relative Eurosceptic stance of the ruling party. In this respect, a PiS government would probably continue to prioritize national sovereignty over European integration, and would likely go ahead with judicial reforms which the EU institutions have put under scrutiny. In light of the ongoing debate on the possibility of linking EU funds to the compliance of member states with the “rule of law”, this might possibly threaten Poland’s access to EU funds which could make the zloty more volatile.
Commenting on the PiS party likely staying in power, Dan Bucsa, chief CEE economist at Unicredit, noted:
“Large fiscal spending will continue to support private consumption but investment could be affected by higher tax and labor costs for companies and by poor foreign demand. […] Polish companies are likely to lose cost competitiveness against peers in the coming years, albeit from a good starting point.”
Consensus Forecast FocusEconomics analysts see growth at 4.2% in 2019 before decelerating to 3.5% in 2020, which is up 0.1 percentage points from last month’s forecast.