www.dev.obserwatofinansowy.pl: Can the government afford to increase its spending after voting the bill on the pension system reform?
Dariusz Rosati: No additional expenditure is possible. The reform of open pension funds will only decrease the cost of debt servicing and the cost of refunding open pension fund contributions – a total of approximately PLN 9 billion. For this reason, the budget for next year provides for 0.8 per cent decrease in total spending as compared to 2013. This is consistent with the new stabilizing expenditure rule. Savings from open pension funds will not be spent.
Professor Elżbieta Chojna-Duch who assessed the draft argued: „The effects of legal solutions contained in the bill and regarding changes in the system of pension insurance are a form quantitative easing”.
I do not know the context in which Professor Chojna-Duch made this statement. Perhaps it is unconventional in that it is just a one-off solution? It will lower the level of public debt once, replacing a portion of explicit public debt by future guaranteed obligations – the so-called implicit debt, which is not recorded in the accounting system, unlike the explicit public debt. This will lead to the reduction of the debt from nearly PLN 900 billion at the end of this year to approximately PLN 810 billion next year. But this is a one-off modification; the pace of spending will not be accelerated and no fiscal loosening is planned.
Does this mean that the main reason for the introduction of changes into open pension funds is the risk of public debt exceeding the level of 55 per cent GDP?
The main reason for the introduction of this reform is the difficult situation of Polish public finances. In fact, we are approaching the 55 per cent level; if it is exceeded, we will need to drastically reduce spending. Personally, I regard the government’s plan as an admission that in the situation of long-term crisis, Polish public finances are not in a position to bear the burden of financing open pension funds pursuant to the existing rules. Fifteen years ago, we embarked on an ambitious and necessary pension system reform but, for various reasons, we have not ensured its financing.
The government came to the conclusion that given the current crisis, further burdening of this generation of Poles with the double cost of the pension reform is not sustainable for economic and social reasons. I do not agree, however, with the argument that the open pension fund system is flawed, as it generates excessive debt and its profitability is lower than the indexation on the subaccount in the Social Insurance Company. Such theses, contained in the government’s report, are debatable at least.
Since the reform of the open pension fund is so important for public finances, what will happen if it is not adopted on time or challenged by the Constitutional Court? Will the budget for 2014 need amending?
The entry into force of changes to open pension funds depends at the moment on the President’s approval. The President has three options: he can sign, veto, or sign and submit the act – in whole or in part – to the Constitutional Court.
If the bill is referred to the Constitutional Court, I expect the final judgment to be issued no earlier than in mid-2014. If the Court finds that the bill is not consistent with the Constitution, the decision will probably be implemented in the next budget – that is, in 2015. The Constitutional Court would take into account the need to ensure the stability of public finances.
The European Commission wants Poland to come out of the excessive deficit procedure in 2015. It would reach the level of 2.8 per cent of GDP, following a decline from 3.9 per cent of GDP in 2014 and 4.8 per cent of GDP this year. Will Poland choose to follow this path?
At the next meeting, scheduled for December, the Council of the European Union will probably approve the Commission’s recommendations. I suppose, too, that Poland will be reprimanded for not following the path of fiscal consolidation from the excessive deficit procedure. If we continue to ignore these recommendations, Poland will face the suspension of payments from the EU funds. For this reason, the Polish government will strive to implement the recommendations. Next year, fiscal tightening is expected to reach the level of 1.4 per cent of GDP in structural terms. Given that new rules for calculating debt and deficit (ESA 2010) come into force in 2014, the effect of debt reduction through a reform of open pension funds will not be taken into account. This will require a stronger adjustment.
This year, the adjustment was not possible due to the second wave of the crisis in the euro area and the necessity to amend the budget; next year, however, it will have to be introduced. I hope that it will be facilitated by a more dynamic economic growth, although it is possible that further deficit reduction measures will prove necessary.
Further fiscal consolidation and debt reduction are necessary. It is out of the question to fritter away the money from open pension funds.
Interview by Marek Pielach
Dariusz Rosati is the Chairman of the Public Finance Committee; professor at Warsaw School of Economics, former member of the Monetary Policy Council (1998-2004) and Minister for Foreign Affairs (1995-1997).