Economist Michał Możdżeń dissects Poland’s widening budget gap, attributing it to post-pandemic normalization, not tax system failures.
Spending vs. Revenue Discrepancy
Michał Możdżeń notes that government spending surged by 70 billion złoty last year, with 20-30% pay raises across sectors. Despite these increases, tax revenues—particularly from corporate income tax (CIT)—failed to grow as expected, leaving a 25 billion złoty shortfall in VAT collections.
The government projected a 17% VAT revenue increase for 2024, but actual growth was just 8%, resulting in a 25 billion złoty deficit. Możdżeń dismisses claims of VAT mafia activity, instead pointing to overestimated consumer spending forecasts and lower-than-expected inflation (3.5% vs. the budgeted 5%).
Post-Pandemic Economic Normalization
Możdżeń argues that the revenue shortfall stems from the normalization of corporate profits after pandemic-era price surges. Firms’ record profits during COVID-19 led to higher CIT revenues, but these profits have since stabilized, reducing tax inflows. Rising wages, while beneficial for workers, also compressed corporate margins, further lowering CIT contributions.
Contrary to claims by former PM Morawiecki, the tax system’s integrity remains intact. The government’s tax collection efficiency, implemented under Morawiecki, continues under Tusk, with CIT revenues now slowly recovering. However, VAT revenues lag due to conservative consumer spending, as households prioritize savings over spending.
The Savings Paradox
Household savings rates have surged to 10% of disposable income, a 20-year high. This reluctance to spend—despite wage growth—has forced the government to increase borrowing to sustain economic growth. Możdżeń warns that if this trend persists, Poland’s public debt could rise to 75-80% of GDP, though he dismisses fears of a Greek-style crisis.
Possible explanations for higher savings include high deposit interest rates, economic uncertainty, or income redistribution favoring wealthier taxpayers. Możdżeń suggests that if the government had reduced spending to match lower revenues, it would have risked a recession and higher unemployment.
Foreign Capital Dependence
Możdżeń highlights Poland’s reliance on foreign capital, with multinational corporations accounting for 30% of domestic capital. While these firms boost productivity, their profits often leave Poland, contributing to a 4% of GDP outflow. He warns that this dependence makes Poland vulnerable to geopolitical shifts and capital flight.
Despite this, he argues that domestic firms would struggle to match the efficiency of foreign multinationals. Poland’s economic growth has been driven by foreign investment, but this model may need adjustment to reduce vulnerability.
Policy Recommendations
Możdżeń advocates for tax reforms, including a more progressive PIT system and a tax on third and subsequent properties. He also suggests raising the corporate tax rate (CIT) to reflect defense spending benefits. However, he emphasizes that the current deficit is a symptom of deeper structural issues, including income inequality and overreliance on foreign capital.
He stresses the need for a balanced approach, noting that while Poland’s debt is manageable, long-term sustainability requires addressing income distribution and reducing dependence on foreign investment.
