Poland Social Sector and Public Wages Public Expenditure Review From Maastricht to Vision 2030 Overview

Warsaw, Poland May 17, 2010

From Maastricht to Vision 2030

Poland spends fairly well
Recent reforms lowered spending High efficiency and good equity Cheque is in the mail Poland 2030 Crisis 2009 Fiscal Structural

But there is need for change Directions of reform

Poland Spends Fairly Well

Poland lowered social spending recently

EU general government expenditures on social sectors, percent of GDP
40 2003 2008 EU27 Average in 2008

35

30

25

20

15

Source: Eurostat, World Bank staff calculations

K S G B Y C V L O R T L E S E U L Z C T M L P E I L N U H I S R G K U T P E D U E 7 2 T I 5 1 U E E B T A I F R F E S K D

Poland net social spending is less than thought

EU net and gross social protection benefits in 2005, percent of GDP

Source: Eurostat, World Bank staff calculations

Efficiency in Education

Source: Verhoeven et al. 2007.

Efficiency in Health

Source: Verhoeven et al. 2007.

Equity across Gminas

Fiscal Equalization in Gminas by Own Revenue Per Capita Quartiles in 2006 (PLN Per Capita)
2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Bottom 2 3 T op Own Revenues T otal Revenues 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0

Source: World Bank staff calculations

Equity in Education
Access to Schooling by Household Per Capita Consumption Quintile in 2007
100 90 80 70 60 50 40 30 20 10 0 Bottom 2 3 4 T op Public School No School Private School

Source: HBS, World Bank staff calculations

Equity in Health
Access to General Practitioner by Household Income Per Capita Quintile in 2007

Source: PORCS, World Bank staff calculations

Poland spends (& taxes) fairly well Cheque is in the mail

Fiscal Costs of Structural Reform (% of GDP)
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 Pension reform 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Taxwedge reduction

Source: Eurostat, Central statistical Office, World Bank Staff Calculations

Poland spends (& taxes) fairly well Cheque is in the mail

Tax wedge on Labor Cost in 2008 for an Employed Person with Low Earnings
60 50 40

EU27 Average
30 20 10 0

Source: Eurostat, World Bank staff calculations

Y C E I T M U L K U T P S E G B K S R G 9 0 L P E I F 8 0 L P K D V L Z C T L I S 5 1 U E 7 2 U E L N O R E S 6 0 L P T I T A R F U H E D E B

Poland spends (& taxes) fairly well Cheque is in the mail

Employment Rate (Persons in employment divided by the total population of the same age group)

Source: Eurostat, World Bank staff calculations

Poland spends fairly well Cheque is in the mail

Age-Related General Government Spending in 2007 and 2060 (% of GDP)
40 35 30 25 20 15 10 5 0

EU27 2060 Average

Source: Eurostat, Central statistical Office, World Bank Staff Calculations

0 1 U E O R Z C K U U H E I Y C K D T I 7 2 U E T P S E E D T M T A E S L N I F R F E B I S R G U L

V L E L P G B K S T L

Need for Change

Poland 2030

Polands social sector is large relative to its income level

Social Sector Expenditures as Percent of GDP Relative to GDP per capita in PPS (EU27=100 in 2008)
40 DK 35 FR PT 30 HU PL 25 LT EE LU CZ AT SI GR ES EU15 IT EU27 BE DE SE MT IE FI NL

P D G f % s r u t d n e p x E l a i c o S

20

RO BG

LV

SK

CY

15 20 40 60 80 PPSper capita 100 120 140

Source: Eurostat, Central statistical Office, World Bank Staff Calculations

Gradual Unwinding to meet Maastricht 3%

Projected general government deficit, percent of GDP
2009 0 -1 -2 -3 -4 -5 -6 -7 -8 -7.2 -7.2 -6.9 -7.5 -7.1 -7.3 -7.0 -2.9 2010 2011 2012

Global Financial Crisis 2009

Gov. CP EC IMF

-5.9 -6.9

-5.8

Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, WEO April 2010, World Bank staff calculations

 and public debt targets

Projected general government debt, percent of GDP
62 60 58 56 54 52 50 48 46 44 2009 2010 2011 2012 50.7 51 51 53.1 53.9 55 59.3 56.3 58.3 55.8 Gov. CP EC IMF 60.5

Source: Convergence and Stability Program Updates from January/February 2010, WEO April 2010, World Bank staff calculations.

Fiscal Development and Consolidation Strategy By 2012: fiscal deficit of 2.9% of GDP
Discretionary Expenditures Non-Discretionary Expenditures Revenues

Beyond 2012: 1% structural fiscal deficit and 40% government expenditures

Fiscal Rule

Growth
Average 2003-2008 6 5 4 3 2 1 0 Gov. CP IMF EC
1.7 1.7 5.1 4.5 4.2 3.2 2.7 1.7 2.7 5.1 5.1

2009

2010

2011

2012

3.9 3.3

3.0

Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, IMF Article IV, World Bank staff calculations

Revenue
Average 2003-2008 41 40 39 38 37 36 35 Gov. CP IMF EC
37.4 37.4 37.4 39.6 39.1 39.1 40.3 40.3 39.4 39.7 39.1 38.7 39.3 40.2

2009

2010

2011

2012

Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, IMF Article IV, World Bank staff calculations

Expenditures
Average 2003-2008 48 47 46 45 44 43 42 41 Gov. CP IMF EC
43.3 44.6 43.3 43.3 44.6 43.3 44.5 46.5 46.8 46.2 46.6 45.9 46.0 46.2

2009

2010

2011

2012

Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, IMF Article IV, World Bank staff calculations

Expenditure and revenue-based consolidation

Composition of fiscal deficit reduction from 2009 to 2012, percent of GDP
Expenditures 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 EU15 EU10 PL Revenues Fiscal deficit

Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

 including of social benefits and public wages Composition of general government expenditure reduction from 2009 to 2012, percent of GDP

Source: Convergence and Stability Program Update 2010, World Bank staff calculations

 and structural adjustment

Composition of primary deficit reduction from 2009 to 2012, percent of GDP
Cyclical com ponent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 EU10 PL Structural prim balance ary Prim balance ary

Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

 as actual output remains below potential output

Output Gap, actual output as percent of potential output, 2008-12

Source: World Bank staff based on CP updates

Fiscal consolidation measures in 2010 Visegrad Countries

Pensions PL CZ HU SK No Minor Yes No Public wages Minor Minor Yes Yes Revenues Minor Major Major Minor

Source: World Bank staff based on CP updates

Directions of Reform

Reform Directions - Sectors

Public Wages Pension Education Health Social Assistance Labor Public Financial Management

Reform Directions Public Wages

Adjust employment limits in the budget to reflect actual utilization Allow adjusted wage bill to grow with CPI over medium term Increase transparency of public wage bill
Nominal Growth Rates of Wages and Wage Bill (2004 to 2009)
100 99 98 97 96 95 94 93 92 91 90 2003 2004 2005 2006 2007 2008

Budget Execution of Employment Limits and Wage Expenditures (2003 to 2008)

Filled Posts Wage Expenditures

Source: World Bank staff calculations

Source: World Bank staff calculations

Reform Directions Pensions

Raise retirement age, especially for women Align disability benefits with pension benefits Integrate special schemes, phase out pensions priviledges Shift to full CPI indexation Strengthen 2nd pillar through reduction in management fees and adoption of multiple portfolios

Shares and Expenditure Levels of Households by Household Head (2008 HBS)

Population Share, (LHS) Share below Income Threshold PLN504, (LHS) Per Capita Expenditure (PLN), (RHS)

State Budget Subsidy Per Beneficiary (PLN)

60 50 40 30 20 10 0

1000 900 800 700 600 500 400 300 200 100 0

f l e Sd y o l p m e

d r i t e R

e y o l p m E

& e v i t c a n I n e d u t S

Source: World Bank Staff calculations based on HBS 2008

d y o l p m e n U

Source: World Bank Staff calculations

Reform Directions Pensions in Fiscal Consolidation Strategy

Increase o f retirement age, especially for women Alignment of disability benefits with pension benefits Integratio n of special schemes Pensions Initiate gradual increase and equalization of the retirement age for women and men which would not include people over 55 Introduce uniform principles of calculation of disability benefits and retirement benefits in the pension system Integrate uniformed services (soldiers, policemen, firemen, and others) into public pension, disability and health care systems from January 1 , 2012 onwards Consider equalizing retirement age for newcomers from January 1, 2012 onwards Initiate gradual reform of the farmers retirement and disab ility pension system while maintaining KRUS as stand-alone entity Consider reforms to increase the effectiveness of pension pillars through external benchmark for OPF investments; life-cycle approach; and phasing out OFE investment limits. Introduce ban on promotion and advertising activities of OFE and further reduce administration fees Resolve the problem of rising accounting public debts generated due to different classification of pension contrib utions collected in OFE and on individual pension account in ZUS.

Strengthening of 2nd pillar

Source: Government Convergence Program Update 2010

Reform Directions Education

Increase coverage of preschool education Determine per-student allocation of education subvention based on standard class sizes etc Enhance equitable and fiscally sustainable financing of higher education
Education Subvention and Primary and Secondary Students (2000/01 to 2007/08)
7.0 6.5 6.0 21 5.5 5.0 20 19 Pupils(mn), (LHS) Education Subvention (PLN bn, constant prices), (RHS) 24 23 22

1 / 0 2

/ 1 0 2

3 / 0 2

4 / 3 0 2

5 / 4 0 2

6 / 5 0 2

7 / 6 0 2

Source: World Bank Staff calculations

8 / 7 0 2

Reform Directions Health

Large increases in health spending over the recent years allow for savings in NHF subsidy Use hospital corporatization, DRGs, accreditation to improve spending efficiency
Public and Private Health Spending as % of GDP
8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 Private Public

Source: OECD, World Bank Staff calculations

Reform Directions Social Assistance

Enhance outreach to vulnerable groups to limit coverage gaps Step up central monitoring and supervision to ensure consistent application of standards Enhance cross-checking of databases to limit leakage Fund increased family benefit entitlements

Reform Directions Labor Market Programs

Ensure adequate financing of unemployment benefits Introduce system for monitoring and evaluation of labor market programs Develop activation policies
Labor Fund Balance as % of Revenues, 2009-2011 Projection (Sc1: 8.7%; Sc2: 11.2%)
35 30 25 20 15 10 5 0 -5 -10 -15 2005 2006 2007 2008 2009 2010 2011 Scenario 1 Scenario 2 16 14 12 10 8 6 4 2 0 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Distribution of Expenditures on Unemployment Benefit by Consumption Decile 2005 and 2007

2005 2007

Source: World Bank Staff calculations

Source: World Bank Staff calculations

Reform Directions Public Financial Management

Implement roadmap for performance-based and medium-term budgeting

Indicative Composition of Public Expenditure Savings

Summary Achieving medium-term fiscal consolidation targets depends on

Demographic dividend Moderate wage growth Strong revenue growth High economic growth

Achieving long-term structural targets requires additional entitlement and fiscal reforms

THANKS

kri te r@w o rl b a n k ch d .org

Indicative Medium-term Public Expenditure Savings