Thursday, May 7, 2009

How to restructure public finances in Poland

Today I was on the radio TOK FM (recording available) discussing, inter alia, the issue of how to restructure Polish public finances. One of the debaters, Mr. Andrzej Sadowski from the Adam Smith Center, argued--populistically--that most public money is being wasted, but couldn't provide any specific example of what public expenditure needs to be cut except for his favorite topic of public subsidies to Ochotnicze Hufcy Pracy/Voluntary Labor Corps of PLN 200 million, which, however, represents less than 0.1% of total central budget expenditure. When asked to provide more examples, he said that there wasn't enough time...:-)

I think this provides an illustration of how many populists, like Mr. Andrzej Sadowski (and I am trying hard not to get myself started on discussing his persona... I doubt whether he even has a Master's degree in economics --couldn't find his bio-note anywhere, which looks fishy to me... How such a guy, who never wrote a single economic paper, can continue to be invited to serious economic discussions escapes me..), who come up with various weird examples and ideas on how to save public finances without any economic rationale to back it up. That's just nuts.

So, below is my list of what needs to be done in the medium-term (in the short term, as I was arguing before, we should try to increase spending, subject to available financing, to offset falling private demand):

On the expenditure side:

1. Raise retirement for men (65 years now) and women (only 60 years). Equalize both retirement ages (because currently women's pensions end up being much lower than men's) and link the retirement age to life expetancy (like the UK and other countries did): any increase in life expetancy should 1 to 1 increase the official retirement age for both sexes. In time, we would gradually reach 70 years for retirement. This would save billions in spending on pensions and in all kinds of pre-retirement benefits and provide additional tax and social security revenue (that said, the government should help older people find/retain jobs, but this is a different topic). In addition, eliminate or reform priviliged pension systems for the military (one can retire when only 35 years old after 15 years of service, often behind a desk!)

2. Cut the number of extra-budgetary funds and agencies and move their functions to local government (and responsible central government's ministries, where necessary). Which agencies to cut? Check out Kolodko's fiscal reform program for 2003, to which I contributed back then.

3. Eliminate automatic indexation to tens of various social entitlements, such as a funeral allowance (Polish state subsidizes funerals with some PLN 5000, which is indexed to inflation and a couple of other things..). Decrease indexation of pensions and disability allowances to inflation only (now it is indexed to inflation and 20% of the increase in wages), at least temporarily until we come out from the crisis.

4. Implement fully centralized cash management - today some public sector insitutions maintain their accounts with commercial banks rather than--like the rest of the public sector--at the National Bank of Poland. As a result, various public funds and agencies have billions of PLN sitting on their accounts, while the central budget struggles to sell new bonds...

5. Cut spending on the military -there is no need to spend 2% on GDP on it. A lot of this money is being wasted on feeding temporarily drafted soldiers, buying tanks and imported anti-aircraft missiles to defend the sea coast, on procurement which is prone to corruption. We need the military (for many reasons, from the need to comply with promises to NATO to strenghtening our international role through engagement in peacekeeping operations), but we don't need to spend so much on it during the crisis. In the future, armies will be much smaller, more agile, fighting with joysticks directing unmanned aircraft than with boots on the ground (I read it in Friedman's "The Next 100 Years: A Forecast for the XXI Century" )

6. Introduce target-oriented budgets to monitor the efficiency of public spending (and cut spending where it is being wasted).

On the revenue side:

1. Temporarily increase PIT rates for the richest (up from current 32% to 40% from 2008) and increase or eliminate the social security treshold (30 times average monthly wage) over which the richest stop paying security contributions (leading to a tax system which is more or less flat rather than progressive.. more on it in a separate post).

2. Introduce real estate tax asap, based on market values. We have been trying to do that for more than a decade now, with no success. I wonder why???

3. Reform KRUS by increasing social security contributions of the richest farmers to that of people with equivalent incomes in ZUS. This will not only be a source of revenue, but will also help accelerate restructuring of the farm sector: today it doesn't pay for farmers to leave farms and get (much more productive) jobs elsewhere.

that's the list for now.

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