PiS' preelection spending spree

Poland's ruling Law and Justice (PiS) government on Thursday announced plans to cut the lowest rate of income tax rate to 17% from 19%.

On the back of a successful Euro poll in May and with national elections in October, the government also pledged to cut income tax for people under 26 to zero. Recent polls suggest younger voters are inclined to vote for the party tagged by many as illiberal.

Draft bills will soon be submitted to the meeting of the Council of Ministers, the newspaper Dziennik Gazeta Prawna reported. "The government wants voters to use the changes before they go to the polls in the parliamentary elections," the paper wrote.

The political message is clear

PiS made a package of new social welfare spending pledges and tax cuts the centerpiece of its recent campaign. 

These were carefully targeted at key groups of its own core voters and included: extending the popular "500+" child program to cover all children; a 1,100-złoty (€250 or $289) bonus payment for retirees; exempting workers under 26 from income tax; cutting the lower income tax rate from 19% to 17%; and reinstating rural bus services. 

New faces

Prime Minister Mateusz Morawiecki on Tuesday replaced Finance Minister Teresa Czerwinska with her deputy Marian Banas, a previous head of the country's tax administration and known as a keen closer of tax loopholes, in particular liquidation of the notorious so-called "VAT gap." 

The change led to a few jitters in the markets, with benchmark Polish yields near 3-year lows on Tuesday.

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"This is a continuation team," Morawiecki said. Unlike Czerwinska, Banas has been associated with PiS for many years, serving in its earlier government between 2005 and 2007. 

"The government needs an efficient clerk who will squeeze out of the economy as much as possible without raising taxes. I think that this will be Banas's main task," Professor Stanislaw Gomulka, chief economist at the Business Center Club in Warsaw, said.

Czerwinska's head rolls

Czerwinska, chosen by Morawiecki 17 months ago, dared to argue with her boss over the $11-billion (€9.7-billion) package of welfare spending and tax cuts that she said would widen the budget deficit.

An anonymous PiS politician told the money.pl website that instead of "Kaczynski's five" one could talk about the "Czerwinska three," a reference to her desire to limit any damage to public finances. 

In the Czerwinska version the cut in income tax for younger people was to include only full-time employees and not those earning over 42,764 złoty per year and no reduction of the lowest tax rate to 17%. 

"The shape of the 2020 budget will be key for the new minister," Jaroslaw Janecki, chief economist at Societe Generale in Warsaw, told the news agency Bloomberg. "Certainly before elections there will be new programs" in terms of tax policies, which will affect next year's budget, he said.

Czerwinska's exit in fact clears the way for the prime minister to potentially order another increase in welfare spending.

Morawiecki is widely seen as positioning himself  as second only to PiS party boss Jaroslaw Kaczynski

and his clash with Czerwinska over election-year fiscal stimuli will do him no harm. Several of his potential rivals, including his ex-Prime Minister Beata Szydlo and Interior Minister Joachim Brudzinski, also left the cabinet after winning seats in the European Parliament.

Growth funded?

The European Bank for Reconstruction and Development (EBRD) recently raised Poland's GDP growth forecast for 2019 to 4.1%, up by 0.5%. It estimated annual growth in 2020 at 3.6%.

"Amid a deteriorating external environment, domestic demand is expected to remain the key engine of growth, additionally boosted by generous government spending, starting from 2019, which is a double election year in Poland [EU and general elections]," said the EBRD report, published in May.

According to the EBRD, the "PiS Five" social reform package "uses up much of whatever fiscal space was left, constituting a permanent upward shift in the structural budget deficit."

Both the national expenditure rule and the EU Stability and Growth Pact will already be exceedingly difficult to meet in 2019, the bank said.

But representatives of the government have argued that national and EU fiscal rules will not be broken.

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PiS, the ruling party since 2015, won the European Parliament election in Poland in May, securing 45% of the votes and 27 seats. Aleks Szczerbiak, a professor at Sussex University says the ruling party won a "major boost" ahead of the more significant autumn parliamentary poll, but adds: "Doubts remain if it can retain an outright majority." So,if PiS's poll numbers sag, expect more fiscal boosts.