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Economic growth in Poland is likely to slow down as a result of new policies that the incoming government has vowed to implement.
The center-right Law and Justice party won the October 25 elections with nearly 40 percent of the vote, becoming the first to win a parliamentary majority since the fall of communism in 1989. The governing Civic Platform, also a center-right party, came in second, at 24 percent, despite the fact that the cumulative economic growth during the party's eight years in power, from 2007 to 2015, was 30 percent—the highest growth of any EU country. A third center-right party, Modern, a spin-off from Civic Platform, gained 8 percent. The elections mark the first time that left-of-center parties did not manage to enter parliament.
With such a preponderance of center-right parties in the new parliament, one might think that economic policies boosting growth would be the main focus in Poland. Election programs suggest quite the opposite.
First, the Law and Justice party has won on an election platform of imposing a new bank tax, similar to the one levied in Hungary by the government of Prime Minister Viktor Orban. (For details on the Hungarian bank tax, see my recent Policy Brief.) Should this happen, bank loans may become more expensive, thus retarding investment and economic growth.
Second, Law and Justice has been an ardent opponent of euro adoption and intends to break the 3 percent fiscal deficit rule prescribed in the Maastricht criteria. Such monetary and fiscal policy would increase pressure on the Polish currency, leading to increased prices of imported machinery and equipment and hence the likelihood of slowed growth.
Third, Law and Justice favors investments by Central European companies in its economy and closer economic integration with the Czech Republic, Hungary, and Slovakia. This focus can be beneficial if it creates regional business leaders, as argued in a previous blog post. If it comes at the expense of Western European and Chinese investors, however, it may have negative consequences on growth. The previous government pursued foreign investors and in particular did a lot to attract Chinese investment under the New Silk Road initiative. This effort will now cease.
The main worry over economic growth prospects concerns EU cohesion funds. Law and Justice leader Jaroslaw Kaczynski sparred repeatedly with European institutions during his term as prime minister in 2006–07. This antipathy resulted in difficult negotiations with the European Union over what cohesion funds could be used for and led to slower disbursement. European funds have accounted for about 4 percent of Polish GDP in recent years and for two-thirds of total investment. Should such investment be adversely affected by arguments with Brussels, the economy will suffer.
