EUROPEAN COMMISSION

Brussels, 22.2.2017

SWD(2017) 86 final

COMMISSION STAFF WORKING DOCUMENT

Country Report Poland 2017

Accompanying the document

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP

2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews
under Regulation (EU) No 1176/2011

{COM(2017) 90 final}
{SWD(2017) 67 final to SWD(2017) 93 final}

Contents

Executive summary1

1.Economic situation and outlook4

2.Progress with country-specific recommendations13

3.Reform priorities16

3.1.Public finances and taxation16

3.2.Financial sector20

3.3.Labour market, education and social policies22

3.4.Investment27

3.5.Sectoral policies30

3.6.Public administration34

A.Overview Table37

B.MIP Scoreboard40

C.Standard Tables41

References46

LIST OF Tables

1.1.Key economic, financial and social indicators12

2.1.Assessment of country-specific recommendations for 201614

3.2.1.Financial soundness indicators, all banks in Poland20

B.1.The MIP scoreboard for Poland40

C.1.Financial market indicators41

C.2.Labour market and social indicators - part 142

C.3.Labour market and social indicators - part 243

C.4.Product market performance and policy indicators44

C.5.Green growth45

LIST OF Graphs

1.1.Contributions to real GDP growth, 2006-20184

1.2.Estimated composition of potential GDP growth, 2006-20165

1.3.Working age (15-74) population, 2015-20805

1.4.Selected stock market indices, 2012-20166

1.5.Employment, wages and unemployment rate, 2012-20166

1.6.Current account balance by components, 2006-20167

1.7.Net international investment position by components, 2006-20168

1.8.Average quality rank in the 5 biggest exporting manufacturing sectors to the EU28, 2010 and 20158

1.9.GDP growth and fiscal balances (% of GDP)9

1.10.Yields of 10 year government bonds, 2015-20179

3.1.1.VAT gap in Poland and in EU-2717

3.1.2.Medium-term public debt scenarios18

3.2.1.Annual credit growth rates 21

3.3.1.Projected size of student cohort starting the 1st grade of general upper secondary schools24

3.3.2.Projected pension replacement rates – the impact of lowering of the retirement age26

3.4.1.Public and private investment, 2006-201827

3.4.2.Investment by components as a % of GDP, 2006-201627

3.4.3.Gross investment in intangible assets as a % share of total investment (2013-2015 average)28

3.4.4.Local government investment28

3.5.1.Highly-cited publications vs public R&D intensity30

3.5.2.Annual average concentrations of benzo[a]pirene (BaP) in 2014 in ng/m³33

3.6.1.Legislative practice: number of laws passed in the first year of subsequent governments by the promoter of the draft34

LIST OF Boxes

1.1.State-owned enterprises (SOEs)10

2.1.Contribution of the EU budget to structural change in Poland15

3.4.1.Investment challenges and reforms in Poland29

3.5.1.Selected highlights in Poland33

Executive summary

This report assesses Poland's economy in light of the European Commission’s Annual Growth Survey published on 16 November 2016. In the survey the Commission calls on EU Member States to redouble their efforts on the three elements of the virtuous triangle of economic policy – boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. In so doing, Member States should put the focus on enhancing social fairness in order to deliver more inclusive growth.

Poland has benefitted from a very fast catch up process. In 2015, Poland's GDP per capita expressed in purchasing power standards reached 69 % of the EU average, up from 53 % in 2007. Rising incomes and living standards have been accompanied by gains in employment, which reached an all-time high reducing unemployment to a record low.

The economy is experiencing strong growth despite some weakness in investment. Driven predominantly by domestic demand, especially private consumption, real GDP is expected to grow at robust rates between 3.1 % and 3.2 % per year in 2017 and 2018, well above the EU average. These growth rates add to a long period of uninterrupted economic expansion, since 1992 — with Poland being the only EU country that weathered the post2007 global financial and economic crises without undergoing a recession.

The overall economic outlook is positive, with risks mainly related to domestic policies. Private consumption is set to remain the main growth driver in 2017, given rising wages, employment and fiscal transfers. Private investment is expected to gradually recover from its 2016 weakness due to strong domestic demand and a high degree of capacity utilisation. The impact of policy and regulatory uncertainty is a key risk and may dent business confidence and investment. Public investment is expected to recover strongly following a decline in 2016, predominantly due to progress in the implementation of projects financed from the EU structural funds. Inflation is projected to pick up moderately, driven by global commodity prices and subdued domestic price pressures. Export performance is expected to remain robust. However, with strong domestic demand fuelling imports, the overall contribution of net exports to growth is projected to be close to zero.

There are significant structural challenges to the long term growth outlook. A continued improvement in living standards is more difficult when the population of working age is falling and when productivity growth, initially facilitated by transition and integration processes, becomes more challenging to achieve. This increases the importance of further gains in labour force participation and creating an environment conducive to investment and further productivity gains. Progress on these fronts depends on a range of policies that are discussed in this report.

Overall, Poland has made limited progress in addressing the 2016 country-specific recommendations ( 1 ). No progress was made in addressing the extensive use of reduced VAT rates and in establishing an independent fiscal council, although some progress was achieved in improving tax compliance. No progress was made on ensuring the sustainability and adequacy of the pension system, including for special pension regimes, and in fact a key recent measure goes in the opposite direction. No progress was made on increasing labour market participation and recent measures may also go in the opposite direction. Limited progress was reached on removing obstacles to investment in infrastructure and on spatial planning coverage.

Regarding progress on reaching the national targets under the Europe 2020 strategy, Poland is performing well in the following areas: emissions of greenhouse gases, poverty, energy efficiency, tertiary education, reducing early school leaving and the employment rate. Progress is limited in R&D investment and renewable energy.

The main findings of the analysis in this report and the related policy challenges are as follows:

Returning to fiscal consolidation in the short term and addressing long-term sustainability are key fiscal challenges. Although the 2016 general government headline deficit is estimated to have reached its lowest level since 2007, it is set to rebound and, without corrective measures, is expected to reach 3 % of GDP by 2018. This would happen in the context of strong GDP growth. Consequently, the structural balance is expected to widen significantly in 2017-2018. Poland faces no major fiscal sustainability risks in the short term. However, risks become more pronounced in the long term due to the unfavourable initial budgetary position and age-related spending, recently aggravated by the decision to significantly lower the statutory retirement age.

Despite significant steps taken, there is still scope to improve budget revenue. Tax compliance, in particular as regards VAT, is markedly below the EU average. Budget revenue could benefit from more efficient tax administration. Many reforms to address some of these issues have recently been put in place. Their impact on the costs of tax compliance and revenue collection remains to be felt. Poland continues to use reduced VAT rates extensively. The government has plans to create mechanisms to improve the efficiency and effectiveness of public spending. The public finance framework lacks an independent fiscal council.

The banking sector remains solid, and the capital market is the largest in the region. Credit institutions support the country's economic performance through balanced loan growth and the capital market is an important source of funding for companies. The impact on bank profitability of the new tax on financial institutions remained contained. Moreover, proposals concerning the mandatory conversion of foreign-currency mortgages, which could affect the stability of the financial sector, have not materialised. In turn, ownership changes have led to the state having an increasing role in the banking sector.

Investment seems to be dampened by policy uncertainty and other barriers. Legal certainty, trust in the quality and predictability of regulatory, tax and other policies and institutions are important factors that could allow an increase in the investment rate. The rule of law and an independent judiciary are also essential in this context. The current systemic threat to the rule of law creates legal uncertainty. With the government aiming to increase its role in the economy, ensuring the economic viability of investment decisions will be important.

Securing robust productivity growth is becoming increasingly challenging. Efficiency gains are harder to achieve as Poland gradually catches up with the more developed EU Members States. Long-term economic prospects will depend on the country's capacity to move from the production of relatively low-technology goods to more advanced products and services. This will emphasise the importance of inclusive education that provides people with adequate skills and competences, and of improving the quality of higher education and applied scientific research.

Despite its strong performance, the labour market faces constraints as regards participation, skills and mobility. Employment rates have continued to increase, but several recent policy measures may act towards reducing labour force participation going forward. These disincentives are likely to be concentrated on groups that are currently characterised by employment rates lower than the EU average: women, low-skilled people and older people. Labour market segmentation continues to be high with negative effects on productivity and the accumulation of human capital in the longer term. With unemployment at a record low, lifelong learning becomes even more crucial. Geographical and occupational labour mobility is hampered by factors such as housing policies, transport infrastructure, access to childcare, skills mismatches and preferential sector-specific social security arrangements — in particular the highly subsidised pension systems for farmers.

The efficiency of the social protection system merits monitoring. Poverty and income inequality were declining in recent years and the new child benefit is expected to further improve both indicators. However, there are still questions about the social protection system's overall efficiency, incentives for social integration through work, and the availability of resources to support other important social policy areas, such as long-term care.

Research and innovation are increasingly regarded as engines of long-term growth in Poland, but challenges remain. The quality of science and innovation' outputs are still far below EU standards. R&D investment has been gradually increasing supported by public financing with a large role of the EU structural funds.

Poland has been rapidly improving its infrastructure, but key structural bottlenecks persist. EU funding has facilitated the fast development of the road network, but the road fatality rate is still among the highest in the EU. The railway sector continues to face challenges and bottlenecks in project implementation. Despite a gradual improvement, the Polish economy remains energy- and carbon-intensive; the power generation infrastructure is ageing, power generation is heavily reliant on coal and may be insufficient to match projected growing electricity demand. Recent policy initiatives may limit the potential for the renewable energy generation. Improving Poland's air quality, currently among the worst in the EU, remains a major challenge.

Poland is gradually improving in international 'doing business' rankings, but the regulatory framework weighs on the business environment in some areas. Frequent changes in regulations often passed with limited public consultations impact on business confidence. The weakness of spatial planning increases administrative burden related to construction permits. The business environment is also affected by shortcomings in the justice system which contribute to lengthy legal proceedings and contract enforcement. In its Strategy for Responsible Development the government has proposed a number of measures to make it easier to do business.

1.    Economic situation and outlook

GDP growth

Poland is experiencing strong economic growth. Domestic demand has been the dominant growth driver since 2014. In 2016, following a contraction in investment activity, GDP growth supported by private consumption was 2.8 %, well above the EU average. Private consumption expenditure has benefited from very favourable labour market conditions, a significant increase of social transfers and low lending rates.

In 2016, investment activity declined significantly due to a low utilisation of the EU structural funds and increased uncertainty. Investment fell by 5.5 % in 2016, with a particularly strong contraction of public investment (estimated at around -15 %). This was mainly related to the slow start of projects financed by the EU structural funds in the 2014-2020 programming period. Private investment also weakened substantially, especially due to decreased activity by state-owned and state-influenced enterprises. The slowdown of private investment appears to be related to increased uncertainty about the future course of economic policies (e.g. changes to taxation, strategic decisions on energy policy and the role of state-owned enterprises).

The short-term growth outlook remains favourable, with some risks to the downside. GDP growth is projected at 3.2 % in 2017 and 3.1 % in 2018, just above potential. Private consumption is set to rise strongly in 2017, and moderate in 2018 as employment growth decelerates and the temporary effects of new social transfers fade out. Public investment is expected to rebound strongly in 2017 and 2018 on the back of a higher utilisation of EU funds. Private investment is projected to recover gradually, helped by solid domestic demand and an outlook for further export gains. This will also be driven by relatively high capacity utilisation, still solid corporate profits and low interest rates. However, investment decisions are likely to be affected by uncertainty about the future direction of economic policies. The main risks in this scenario are the prolongation of uncertainty, which may start affecting not only business but also household spending decisions, and the very limited fiscal space available to react to possible negative shocks.

Potential growth

Poland has experienced fast per-capita income convergence with the EU in recent years. GDP per capita in purchasing power standards increased from 53 % of the EU-28 average in 2007 to 69 % in 2015 ( 2 ). Poland (alongside Lithuania and Romania) was thus the country with the fastest catch-up process. Estimated potential growth has stabilised at around 3 % since 2013. Together with stable capital accumulation and solid gains in total factor productivity (despite the slowdown observed since 2012), labour has also contributed positively to potential growth (see Graph 1.2). This was mainly driven by a falling natural unemployment rate and rising labour force participation that more than compensated for a decrease in the working age population.

A decrease in the working age population is expected to limit growth potential in the decades to come. Fewer people aged 15-45 means that even if fertility rates were at the highest level currently observed in the EU (2 instead of 1.32, as in 2014), this would not change the negative outlook for the working age population (see Graph 1.3). With the natural unemployment rate already low, labour force participation is a key factor in at least partly mitigating the effects of a decreasing working age population. Immigration can be another factor improving the employment outlook.

The medium- to long-term investment outlook hinges on a number of policy-related factors. Significant contributions from EU funds should help support public investments in coming years, but fiscal space will be needed to maintain public investments after the end of the 2014-2020 programming period for EU funding. A stable development of the banking sector, but also of capital markets, would secure sources of funding and create conditions conducive for household savings increase. Legal certainty, trust in the quality and predictability of regulatory, tax and other policies and institutions are an important factor in the assessment of risks related to investment decisions. All these factors, alongside the macroeconomic outlook and stability, will ultimately determine investment decisions. There are also strong links between investment and the availability of skilled labour and productivity growth (see Section 3.4.).

After several years of fast productivity growth, further increases will be more difficult to achieve. The slowdown in productivity in recent years is a phenomenon observed in many advanced economies. Continued productivity gains depend, inter alia, on the inter-sectoral mobility of factors of production, including the reallocation of labour from low-productive agriculture to other sectors. This emphasises the importance of addressing mobility barriers caused by e.g. very limited skills upgrades and some features of the special pension regime for farmers. Other important factors include improvements in the quality of human and physical capital and business’ ability to adopt new technologies and to innovate.

Macroeconomic stability and the implementation of structural reforms are crucial for keeping potential growth high. As reiterated in the 2017 Annual Growth Survey, pursuing structural reforms and ensuring responsible fiscal policies are important elements of economic policy. Whether Poland’s economy will be able to continue the catching-up process will depend on the extent to which the sustainability of public finances can be ensured, taking into account expected future costs related to an ageing population and the adequacy of future pensions. This will also depend on maintaining the soundness of the financial sector, ensuring social fairness, including by stronger promotion of labour market participation in the social protection system, and success in implementing a range of other structural reforms. Key reform areas include addressing challenges related to ageing, the adequacy of skills, quality of the public administration, and functioning of state-owned enterprises (see Section 3 and Box 1.1).

Price developments

The period of consumer price deflation has come to an end, but price pressures are set to remain subdued. The deflation that started in mid-2014 came to an end in late 2016, with inflation standing at 0.9 % in December 2016. Recent price developments were to a significant extent driven by swings in global prices of energy commodities. In 2017 and 2018, consumer prices are expected to pick up only moderately remaining below 2.5 %, which reflects very limited demand pressure, low foreign inflation, and a gradual rise of wages.

Asset prices remained stable in 2016. House prices have remained broadly flat throughout 2016, with both demand and supply at historically high levels. Mortgage lending increased modestly, with a substantial proportion of transactions financed without the use of bank loans. In 2016, the stock market did not recover from heavy losses in the second half of 2015 (Graph 1.4). The weakness of the Warsaw Stock Exchange was related to a combination of factors, including low commodity prices, uncertainty regarding government influence on listed companies with a substantial share of state ownership (see Box 1.1), uncertainty about future fate of the open pension funds, and on future government regulation of the financial sector, in particular concerning foreign currency mortgages.

Labour market

Labour market conditions continued to improve in 2016. Employment increased by an estimated 0.9 %, which marked the third year of strong job growth (Graph 1.5). Employment rates reached record highs, while still staying below the EU average due to the low labour force participation of certain groups. The unemployment rate continued to decline in 2016, reaching 5.9 % in the third quarter, a record low since comparable data are available. This was accompanied by rather modest nominal wage growth of around 3 % throughout 2015 and into early 2016. From the second quarter of 2016 onwards, wage growth in the whole economy increased to above 4 % in nominal terms. However, since wages have increased broadly in line with productivity over recent years, Poland has experienced only moderate growth in unit labour costs with little effect on cost competitiveness.

Several recently introduced or announced measures are expected to limit labour force participation. A lowering of the retirement age, an increase of the school starting age, a new universal child benefit, the abolition of the preschool obligation for fiveyearolds and a significant increase of the minimum wage are all expected to limit labour force participation. The relative importance and time horizon of these effects will differ. Work disincentives are expected in particular for groups that already have employment rates below the EU average. This includes the population aged 55 and over, lowskilled people, and women including those of childbearing age (see Section 3.3).

Labour market tightening is expected to lead to faster wage increases and the possibility of labour shortages. The combination of a falling working age population, record low unemployment, measures discouraging labour force participation and skill shortages among people who are currently economically inactive leads to projected employment growth decelerating further in 2017 and stagnating in 2018. This is expected to be accompanied by faster wage growth, as employers find it increasingly difficult to fill vacancies with workers who have the necessary skills and competencies. In subsequent years, labour market trends are set to be determined by migration flows, both outward and inward, and the mobility of labour both across sectors and geographically (see Section 3.3). Other important factors are encouraging the employment of older people and equipping people with better skills and competencies, ranging from basic skills in numeracy and literacy to entrepreneurial and digital skills.

Inequality

Inequality has fallen below the EU average, following several years of robust income growth. Income inequality has steadily decreased since the mid-2000s to stand slightly below the EU average in 2015 ( 3 ). This accompanied fast growth of median income and the income of the lowest 10 % income group (1st income decile), even if in real terms median income growth was minimally slower than the growth of GDP per capita. The gap between incomes in the 1st income decile and the median was below the EU average. The upward income mobility for people in the 1st income decile improved substantially in 2015 ( 4 ). The improvement in various inequality indicators for Poland up to 2015 may be linked to the substantial growth of employment and some wage growth in a deflationary environment. Changes in the benefit system (mainly a new child benefit) introduced since 2016 are likely to have further lowered inequality, but relevant data are not yet available (see Section 3.3). Inequality in net wealth ( 5 ) was within the range observed in several other EU countries for which data were collected in 2013-2014 (ECB 2016).

External position

Poland’s external position improved with a current account close to balance in 2015 and stable thereafter. This was mainly driven by a gradual increase in the services trade surplus (Graph 1.6). The performance of telecommunications, computer, information and business services has been particularly strong in 2015-2016. Strong merchandise exports and a fall in energy commodity prices translated into a positive balance of trade in goods in 2015.

Poland’s negative net international investment position (NIIP) narrowed visibly in 2015-2016. The private sector’s large contribution decreased during this period. An accumulated stock of foreign direct investments constitutes the major part of the NIIP, amounting to close to 36 % of GDP and more than half of the NIIP (Graph 1.7). This limits the potential risks associated with a highly negative position, as rapid and large swings in international capital flows that can destabilise markets are less likely in the case of direct investments. The NIIP is expected to further decline in coming years.

Poland’s export market share has continued to rise. Poland’s share of world exports increased by close to 40 % between 2005 and 2015, which was one of the fastest improvements in the EU. Cost competitiveness was supported by the contained growth of unit labour costs and the relative stability of the eurozloty exchange rate, with some weakening in 20152016. Export growth gradually decelerated during 2016.

Some sectors are moving towards hightech, highquality exports, but overall exports remain concentrated in low- and medium-technology products. Relatively low production costs in Poland due to low labour and other input costs imply that export gains were in general concentrated on low- and mediumtechnology products. The average quality of Polish exports in the five sectors with the most exports to the EU market was below the average for EU imports (Graph 1.8) ( 6 ). Nevertheless, there was a gradual move towards higher value added, higher quality products in some sectors, such as computer, electronic and optical products and furniture products. The continuation and intensification of this trend will be an important driving factor for the export outlook, given that the expected acceleration of wage growth is likely to put pressure on cost competitiveness.

Public finances

The gradual growth-friendly fiscal consolidation has come to an end. Between 2012 and 2015, Poland succeeded in significantly reducing its structural fiscal deficit, while at the same time ensuring a rebound and subsequent strengthening of economic growth with a gradually closing output gap. This appears to have come to an end in 2016 and the winter 2017 Commission forecast suggests a strong widening of the structural deficit despite a stabilisation of GDP growth rates close to Poland’s potential growth rate (Graph 1.9).

The pursuit of an expansionary fiscal policy in 2017-2018 comes with certain risks. Poland’s headline general government deficit has been gradually decreasing for the last five years, to stand at an estimated 2.3 % of GDP in 2016, its lowest level since 2007. The 2016 decrease resulted mainly from one-off revenue from the sale of mobile internet frequencies (0.5 % of GDP) and a significant drop in public investment expenditure. Looking forward, based on the Commission winter 2017 forecast, the deficit is projected to widen to 2.9 % of GDP in 2017 and 3.0 % of GDP in 2018. This development is expected to be driven mainly by increased social spending (a lowering of the retirement age and a universal child benefit). Simultaneously, the outcome of Poland’s continued efforts to further improve tax collection remains uncertain. The current expansionary fiscal stance risks leaving very limited fiscal space to absorb potential negative shocks.

The general government debt-to-GDP ratio continued its upward trend but remains below 60 %. Since a drop to 50.2 % of GDP in 2014, which was mainly due to a one-off transfer of funds from the private pension system ( 7 ), the general government debt level has continued to rise. It reached more than 51 % of GDP in 2015 and according to Commission estimates exceeded 53 % of GDP in 2016. The public debt is expected to reach around 56 % of GDP in 2018, mainly as a result of the increasing deficits.

Interest rates on government debt increased relative to other EU countries with negative implications for future debt service costs. Interest rates on Polish debt rose substantially relative to regional peers during the period 2015-2016 (Graph 1.10). In late 2016, interest rates on Polish debt were among the highest in the EU. This appears to be partly driven by internal factors, notably the worsening fiscal outlook.

2.    Progress with country-specific recommendations

Progress with implementing the recommendations addressed to Poland in 2016 ( 8 ) has to be seen as part of a process which started with the introduction of the European Semester in 2011. Poland corrected its excessive fiscal deficit and the corresponding excessive deficit procedure was closed in 2015. The country also strengthened its fiscal framework by enacting a permanent expenditure rule in 2013. It didn't, however, establish an independent fiscal council. Although efforts were made to tackle the long-term sustainability of public finances with a gradual increase of the statutory retirement age to 67 years (reversed in 2016, see below), only limited action was taken to reform special pension regimes, but not for miners and farmers. No measures were put in place to limit the extensive use of reduced VAT rates.

Poland took action to tackle labour market segmentation. Its measures included an amendment to the Labour Code to reduce flexibility in the take-up of temporary contracts, an increase of social security contributions connected to certain civil law contracts and most recently the introduction of a minimum hourly remuneration for those working under civil law mandate contracts. Poland increased the availability of childcare to foster the labour market participation of women, although recent measures (see Section 3.3) may have the opposite effect. Some steps were taken to address the recommendations related to vocational education and training. The lifelong learning strategy was adopted in September 2013, but subsequently there has been limited progress in increasing participation. Finally, in recent years Poland was successful in liberalising several professional services.

Progress was made on infrastructure. Thanks to massive EU investments over the past decade, Poland has significantly upgraded its transport networks, while progress was more limited in railway projects. Progress was also observed in the development of transmission and distribution networks.

Overall, Poland has made limited progress ( 9 ) in addressing the 2016 CSRs. Except for some progress achieved in improving tax compliance, no progress was made in addressing recommendations related to public finance. Additionally, a new challenge to the long-term sustainability of the pension system due to lowering of the retirement age is in striking contrast to the CSR. At the same time, no progress was made on increased participation in the labour market. What is more, several measures in this area go in the opposite direction. There was limited progress on removing obstacles to investment in infrastructure and on spatial planning coverage.

3.    Reform priorities

3.1.    Public finances and taxation

Tax system

The Polish tax system underwent many changes in 2016. Two new sectoral taxes, on assets of certain financial institutions and on retail sales, were introduced with the aim of increasing budget revenues. The application of the higher VAT rates (previously legislated to expire at end-2016) has been extended for 2017-2018 to limit the fiscal deficit. The tax on assets of certain financial institutions entered into force in February 2016 and is levied on assets of mainly banks and insurance companies whose assets value exceeds a certain threshold. The tax on retail sales was suspended before it was actually levied (see below). Simultaneously, Poland implemented and legislated several changes to the value added tax (VAT) and corporate income tax (CIT). They aimed at reducing tax fraud and at improving tax collection. Additionally, Poland reduced to 15% from 19% CIT rates for the smallest taxpayers and the taxpayers in the first year of their activity. Finally, tax free allowance in personal income tax (PIT) was amended and works to reform PIT and social contributions were launched.

The high number and rapid pace of these changes may lead to increased uncertainty for businesses. Some business stakeholders point to increased uncertainty about the stability and credibility of the Polish tax system, given that changes are often introduced quickly and without broad consultations (see Section 3.6). Data from the National Bank of Poland show that since 2015 in enterprises' assessment, taxes and regulations have advanced from fifth to second place on the list of barriers to their development (NBP, 2015; NBP, 2016a). At the same time, according to the Global Competitiveness Report 2016-17, tax regulations were the most problematic factor for doing business in Poland in 2015 and 2016 (World Economic Forum, 2016). The number of changes introduced to the tax laws (including VAT, CIT, excise duties and others) and the pace of their implementation are the most likely reasons for the increased uncertainty and are ultimately likely to indirectly influence also the propensity to invest. They may also impact on the quality of the corresponding laws and of their effective outcome. For example, in the case of the retail sales tax, the legislative process from its submission to the parliament to its signing into law by the President lasted 1.5 months. However, the tax featured a progressive rate structure based on turnover with a tax-free threshold and two different brackets and rates. Therefore it might breach the EU competition rules as it favoured companies with low turnover. Consequently, the European Commission opened an in-depth investigation and Poland suspended the tax before it was actually levied.

Foregone revenues resulted from the continued application of reduced VAT rates on an extensive number of goods and services. Reduced VAT rates limit the efficiency of the VAT system and, as pointed out in the 2016 Commission Country Report for Poland, are not an efficient social policy instrument. According to an EU wide study, in Poland 15.9% of potential VAT revenue was foregone in 2014 due to an application of reduced rates (CASE/IAS, 2016). This was the second highest loss in the EU, three times higher than the EU average. Nonetheless, despite the repeated country specific recommendations in this area, at the current stage Poland has announced no intention to change the system of reduced VAT rates.

Fighting tax fraud remains a challenge. The VAT gap results from a combination of many factors that require a systemic response. Part is due to organised criminal activity and part to undeclared revenues, overstatement of VAT invoices, tax optimisation, bankruptcies and errors. There was a very slight decrease of the VAT compliance gap in 2014 compared to 2013. However, the 2014 VAT compliance gap of 24 % of the theoretical VAT liability remained significantly above the EU average of 14 % (Graph 3.1.1). Authorities' own estimations do not suggest a decrease of the VAT gap in 2015. However, the authorities expect a significant decrease of the VAT gap as from 2016, due to the introduction of a number of measures focused on fighting VAT fraud ( 10 ). Poland also faces significant fraud related to excise products. Ernst and Young estimated the size of the shadow economy at 18.6 % of the total use of gas oil in 2013 and 24 % of tobacco consumption in 2015 (EY, 2016). CASE/IAS (2016) assessed that the smuggling of excise goods accounted for 6 % of the VAT gap in 2014.

A number of reforms aimed at tightening the tax system with a view to tackling tax fraud were undertaken in 2016. Amendments to several laws, called the "fuel package", which entered into force in August 2016, changed the rules on VAT chargeability for intra-EU acquisitions of fuels and is supposed to fight tax fraud in the fuel sector. It was accompanied by changes in the energy law regarding fuel licences. It is expected to be complemented by a so-called transit package which has been approved by the government in early 2017. This package would require the registration of excise products transiting through Polish territory. Furthermore, many changes to VAT legislation entered into force as from 1 January 2017. They include a number of tools to tackle VAT fraud, for instance an extension of the reverse charge mechanism, the extension of joint liability, limitation of quarterly VAT returns and introduction of fines in cases of lowering the payment of VAT. To fight excise duties and VAT fraud, additional reforms are being prepared: a so-called alcohol package focusing on trade in denatured alcohol as well as a so-called tobacco package. Criminal sanctions are expected to be introduced for VAT fraud and the relevant draft law is at final stages of the legislative process. Simultaneously, the implementation in 2016 of a general tax anti-avoidance rule aims at limiting tax avoidance.

Recent reforms may increase tax compliance costs. Poland has made strong efforts to strengthen its legal framework to curb tax evasion and avoidance. However, patterns of tax fraud are constantly changing as fraudsters adapt to new rules, exploit loopholes and move to new sectors. Stricter rules and numerous changes to legislation can disproportionately affect compliant and smaller businesses. This is particularly important in the context where Polish businesses already face high costs of compliance with their tax obligations (World Bank, 2016a). Simplifying and strengthening voluntary compliance, also by means of a more efficient and customer-oriented administration, is an important element to complement actions on tackling tax fraud. In late 2016, the authorities presented a number of proposals under the Strategy for Responsible Development with a number of tax simplification measures and an exemption from social security contributions for new entrepreneurs.

Work is ongoing in the area of tax administration reform to increase flexibility and efficiency. The European Commission assessment highlighted structural weaknesses in the Polish tax administration which limited its efficiency and effectiveness (for instance European Commission, 2016a). To tackle this issue, regulations establishing the National Revenue Administration were passed in late 2016. They will enter into force in March 2017. The objective of the changes is to improve tax collection and simplify tax obligations for taxpayers via consolidation of tax and customs administrations. The law implies a profound change to the functioning of the tax administration and requires careful transition to avoid uncertainty and instability. It is crucial for the modernisation of the Polish tax administration to i) ensure that authorities' actions are coordinated and ii) focus on fraudsters while facilitating tax compliance for honest taxpayers.

Labour taxation remained broadly unchanged in 2016. The degree of progressivity of labour taxation in Poland is limited (European Commission, 2016b). Poland was considering a major reform of its labour taxation that would have seen an introduction of a single progressive tax combining personal income tax, social contributions and health insurance premium. Ultimately, the government decided not to implement the reform. In parallel, a reform of the tax-free allowance in PIT was voted on in late 2016 and entered into force in 2017. It followed the 2015 judgement of the Constitutional Tribunal. The reform increased the tax-free allowance for the lowest income earners (with annual earnings equivalent to below 50 % of the minimum wage). For the small group of taxpayers with the highest revenue, the allowance was removed.

Long-term sustainability

No major risks to fiscal sustainability have been identified in the short term; risks are more pronounced over a longer-term perspective. According to the recent Commission analysis, Poland does not face significant short-term fiscal sustainability risks (European Commission, 2017). However, the debt sustainability analysis in line with the Commission framework indicates high risks over the medium term. This reflects the still increasing debt ratio at the end of the projections under the various scenarios considered (Graph 3.1.2). The S1 sustainability gap indicator points to medium risks, reflecting mainly the unfavourable initial budget position but also age-related expenditure. Long-term fiscal sustainability risks are also identified, according to the Commission framework (the S2 sustainability gap indicator points to medium risks, also driven by the unfavourable initial budgetary position and age-related expenditure ( 11 )).

The lowering of the statutory retirement age will have a negative impact on the sustainability of public finances. As discussed in the 2016 country report for Poland, the key challenge for improving fiscal sustainability is to contain the projected increases of age-related expenditure. This issue has gained further importance with the recent law to lower the statutory retirement age as from late 2017. This change (lowering the legal retirement age to 60 years for women and 65 years for men from a gradual increase to 67 years for both sexes) will increase age-related expenditure and have negative consequences for the labour market (see Section 3.3). The direct impact of the bill will require additional fiscal means for supporting the pension system equivalent to around 0.4 % – 0.9 % of GDP per year up to 2050. Hence, unless effective measures are taken to encourage people to extend their careers above the statutory retirement age, the recent change will worsen the sustainability of public finances. The law lowering the statutory retirement age did not include any measures going in this direction.

Fiscal sustainability risks are exacerbated by a projected fall in pension adequacy ratios. The projected pension replacement rate in the long run is very low. The amount of the projected pension in 2050 does not exceed one fourth of a person's last salary (see Section 3.3). Transposing these assumptions into today's framework, suggests that the pension benefit of those earning the average salary (around PLN 4,600 gross in December 2016) would be close to the minimum pension of PLN 1,000. Simultaneously, according to the latest official data (GUS, 2016), 66 % of employees earned salaries lower or equal to the national average ( 12 ). This suggests that the government may have to support the pension system for about half of beneficiaries in order to avoid their pension benefits falling below the minimum level. This would result in additional fiscal costs. Moreover, it cannot be ruled out that such a low replacement rate may be perceived as unsustainable – requiring either the statutory retirement age to be increased sharply or the pension system to be supported by significant additional fiscal means.

No material changes were made to special pension regimes in 2016. The special pension regime for farmers (KRUS) continues to benefit compared to the general pension regime (ZUS). This not only constitutes a fiscal burden (currently, the KRUS subsidy amounts to around 1 % of GDP), but may also hamper labour mobility (see Section 3.3). Similarly, Poland has not yet tackled the issue of the special pension regime for miners.

Fiscal framework

Numerical fiscal rules are robust, while the medium-term planning plays a limited role. Fiscal rules (debt and expenditure rules for almost the entire general government as well as individual spending limits for local governments) are the strongest part of the fiscal framework in Poland. One of the fiscal rules – limiting government debt to 60 % of GDP – is embedded in the Constitution which ensures its stability ( 13 ). The rule is supplemented by so called prudential thresholds specified in the Public Finance Act, defining specific actions to be undertaken when the public debt exceeds the thresholds of 55 % of GDP and 60 % of GDP. There exists also a medium-term budgetary framework (called the Multiannual State Financial Plan, MSFP). However its effectiveness as an instrument for long-term planning is limited, for example the budget for a given year can include a deficit higher than the one specified in the most recent MSFP.

The credibility of fiscal rules has been affected by their frequent past changes. The most recent modification of the expenditure rule (December 2015) adjusted the expenditure ceiling to the medium-term inflation target of the central bank and allowed for increased expenditure in the event of one-off and temporary revenue measures. These changes significantly raised the expenditure ceiling given current inflation levels. This created additional space for higher expenditure in the 2016 budget, as also underlined by the National Bank of Poland (NBP, 2016b).

The Polish fiscal framework lacks a fully-fledged, independent fiscal council. Currently Poland remains the only EU country ( 14 ) that has not adopted a legal basis establishing a dedicated fiscal council or assigned such a role to an existing body. Some of the typical tasks of fiscal councils are being carried out by various institutions, but they are scattered and some are not covered. As a result, amendments to the fiscal framework or fiscal implications of important policy measures go largely unnoticed even though they have significant consequences for public finances ( 15 ).

In 2016, Poland announced plans to strengthen its budgetary process. These plans aim at improving medium-term budgetary planning by reforming the medium-term budgetary framework, more closely linking annual budgeting to medium-term planning, redefining the role of the government and ministries, reforming the budget classification of expenditure and incorporating spending reviews in the budgetary process. Given the current situation in which an effective and efficient management and reallocation of funds poses challenges, the reform has a potential to substantially improve public finance management. In particular, it may allow a better control of the budget, including an earlier identification of inefficient spending and facilitating the reallocation of funds.

3.2.    Financial sector

The banking sector remains stable, liquid and profitable. Over the past 18 months, system wide capital continued to rise. The regulatory Core Equity Tier 1 capital – a ratio that shows banks' readiness to face shocks – reached 15.8 % at the end of the first half of 2016, up by over 2 percentage points from end-2014. The loan-to-deposit ratio of Polish banks continued to decline and stood at 98.5 % at the end of June 2016 (3.2.1). Polish banks are funded mostly through domestic deposits and benefit from a balanced funding mix of retail and corporate deposits, which made up over 58 % of the balance sheet total. Longer-term wholesale funding reliance through senior and subordinated bonds is low, at about 5 % of the banks' aggregated balance sheet. The profitability of the sector declined in 2015 but broadly stabilised thereafter. Looking forward, challenges to profitability include low interest rates environment, the possible revision of the bank tax and a proposal to deal with foreign currency mortgages (currently under discussion).

The new tax on financial institutions has not affected sector stability. The asset tax on financial institutions was introduced in February 2016 and is one of the highest bank sector levies in Europe. To date, the tax is calculated on the basis of an end-month value of taxable assets, which, in the case of banks, excludes own funds and Polish sovereign bond holdings. Although receipts from the tax are not meeting budgeted revenue, the feared economic and financial stability effects of the levy are so far limited. Nevertheless, at the turn of 2015 and 2016 banks have substantially increased their holdings of Polish sovereign bonds, a by-product of the bank levy. As a result, local lenders have overtaken foreign investors as the biggest holders of PLN denominated bonds, for the first time since 2010.

The ongoing discussion on foreign currency mortgages is nearing a conclusion. Foreign currency mortgages do not generate systemic risks for the banking sector in Poland. At system level, these loans represent about 8 % of the aggregated balance sheet and account for less than 40 % of the mortgage loan book. However, some banks still have a sizeable mortgage loan book denominated in foreign currency, which has dual consequences. On the one hand, some banks are exposed to valuation and compensation losses should their loan book be converted into the domestic currency, either through legislation or court judgement. On the other hand, a sizeable foreign currency-denominated position forces lenders to rely either on a foreign parent bank, foreign currency bonds or the derivative market for funding. The absence of foreign currency deposit funding is apparent from the loan-to-deposit ratio in foreign currency, which reached a level of 250 % at the end of June 2016, more than twice the same ratio for the domestic currency.

Ownership changes see an increasing role of the State in the shareholding of domestic banks. As in all four Visegrad countries, the development of the Polish economy over the past two decades was based on attracting foreign direct investment (FDI) to support economic growth and the development of various industries. Foreign investors brought capital, increased access to funds and financial intermediation in an economy that is still catching up with the core EU economies. In Poland, the ratio of foreign-owned banks amounted to about 65 % between 1998 and 2008. After the outbreak of the crisis in 2008, this share gradually decreased and reached 49 % in 2016, taking into account the acquisition of Pekao SA shares by PZU SA. On the one hand, this trend is a natural result of the growing importance of domestic enterprises increasingly able to compete on international markets. On the other hand, the government has signalled its readiness to purchase foreign-owned credit institutions. As a result a growing proportion of lenders is controlled by the Polish State. With the acquisition of Pekao SA by PZU SA, the share of direct and indirect state-controlled banks has increased to 36 % of the sector's total assets. In addition, the two largest banks will be under direct or indirect state control. It remains to be seen how the state ownership will influence the sector (see Box 1.1 in Section 1).

Credit institutions support the country's economic performance through balanced loan growth. The pace of loan growth to the private sector has been broadly in line with nominal GDP growth. The increase in loans to non-financial corporations has decelerated during 2016 possibly reflecting investment slowdown (see Graph 3.2.1 and Section 1). The ratio of non-financial corporation loans to GDP remained stable at about 51 %. Many firms finance working capital needs and smaller operations either through own funds or the use of some alternative means of funding business (intercompany loans, leasing, factoring).

Poland’s capital market is the largest and most developed in central Europe. Total market capitalisation amounts to EUR 150 billion, about a quarter of Poland's GDP. The Warsaw Stock Exchange has become a hub for foreign institutional investors targeting equity investments in the region. In addition to the equity market, Poland has a special wholesale market dedicated to the trading of treasury bills and bonds – Treasury BondSpot Poland. This treasury market is an integral part of the Primary Dealers System organised by the Finance Ministry and part of the pan-European bond platform. All wholesale treasury bonds and bills denominated in PLN and some securities denominated in EUR are traded on the Treasury BondSpot market, while most non-government bonds, now worth about EUR 18 billion, are traded on Catalyst, a Warsaw Stock Exchange managed platform.

The capital market is an important source of funding for Polish companies. Companies raise slightly more funds on the stock market (17 % of GDP) than they receive from bank loans (16 % of GDP). The role of corporate bond issuance is also relatively high compared to other countries in the region, with the total value of outstanding bonds corresponding to 5 % of GDP. Yet, Polish non-financial corporations are in general less leveraged than all companies on average in the EU. Also, the venture capital market is lagging behind, with total investment of this type reaching only one fifth of the EU average level. Besides financial market funding, the annual gross operating surplus of Polish firms (26 % of GDP) is higher than on average in the EU, suggesting that companies have the capacity to finance investment from retained profits.

Poland is a large insurance market in the region. With over EUR 13 billion in underwritten premiums and close to EUR 1.3 billion in profits the Polish insurance sector represents nearly 40 % of the Central and Eastern European market. The top five insurers represent about 58 % of the life insurance market, dominated by the publically-owned PZU Zycie SA. The concentration ratio of the top five insurers in the non-life segment is slightly higher at 70 %, with PZU SA occupying 34 % of the market. Competition in the market is high and profitability levels are forecast to be low in 2016-2017. The sector performed well in the recent stress test carried by the European Insurance and Occupational Pensions Authority and remains stable and profitable.

Bank supervision and macro-supervision may be merged. Over the crisis years Poland's financial supervision proved to be prudent and forward looking, ensuring a stable banking sector (see above). Discussions continue on some form of merging financial supervision with the NBP. The reasons given for this are synergies between the micro-supervision of banks and macro-supervision of the banking sector. A continuous, efficient and independent supervision function is key, also in light of the ongoing restructuring process in the financial sector.

3.3.    Labour market, education and social policies

Labour market

Labour market conditions have improved significantly but labour force participation remains low for some groups. Following a substantial and steady improvement over the last decade the employment rate stood at 69.7 % in Q3-2016 (for the 20-64 age group) slightly below the EU average of 71.5 %. The gap is mainly due to the significantly lower participation rates of specific groups (see Section 1). As outlined in the previous country report for Poland, the lower labour market participation of older workers is linked to low skills and educational attainment levels (European Commission, 2016a). The employment rate of disabled people has hardly changed in recent years, further widening the gap with the gradually increasing employment rate of people without disabilities. Barriers to geographic mobility also reduce employment and activity.

A gender gap in employment is related to early retirement, limited access to care facilities, and disincentives in the tax and benefit systems. Female participation and employment rates continued to rise in 2015 and 2016, and for the 55-64 age group both increased faster than they did for men. Still, the gender employment gap widened and, at 14.5 pps. for the 15-74 age group in Q3-2016, was 3.5 pps. above the EU average. This was driven by women’s longer participation in formal education and earlier retirement. However, the gender gap also widened and was particularly high in the 25-29 age group, a situation that is likely to be linked to young mothers’ prolonged periods of labour market withdrawal. The low participation of women and notably mothers may be related to insufficient use of childcare (see education subsection) and a fully transferable parental leave, which encourages women, as second earners, to stay out of the labour market. Another important factor is the design of financial support for families that provide longterm care to family members; in practice, it discourages the taking up of any paid employment.

Migration plays an increasingly important role in the Polish labour market. Following significant emigration, especially in the years after EU accession, the number of Polish citizens residing temporarily abroad remains high (estimated at around 2.4 million at the end of 2015 ( 16 )). There is little evidence of emigrants returning in significant numbers. At the same time, temporary immigration, mostly from Ukraine, and to a lesser extent from Belarus and other countries, is an increasingly important phenomenon ( 17 ).

The special pension regime for farmers has had an impact on labour mobility and undeclared work. The special social insurance system for farmers (KRUS) is among the reasons for low labour mobility and hidden unemployment in agriculture. Some KRUS design features, e.g. the conditions of transitioning from KRUS to the general pension system, discourages farmers working on low-productivity farms to take up registered employment in other sectors. Average old-age and disability benefits from KRUS are close to the poverty threshold and often constitute the main source of income, especially for single beneficiaries. This limits the anti-poverty function of KRUS and explains the geographical concentration of at-risk-of-poverty households in rural areas. At the same time, no durable systemic solutions are in place to exclude high-income farmers from the scheme (European Commission, 2016a).

Several recent measures may further reduce labour force participation. Lowering the statutory retirement age in late 2017 is expected to lead to some older workers withdrawing from the labour force. The new child benefit may have a negative effect on the labour market participation of parents, mostly women. This applies particularly to the low-skilled because of two factors: first, the means-testing applicable to the benefit for the first child may make some households choose to reduce working hours to lower their labour income and, second, the increase in household income may tilt some parents’ preference for leisure time. Microsimulation modelling results suggest the incentives to work can decrease the strongest for parents of two or more children and single mothers ( 18 ). Surveys on intentions to work also confirm the risk of inactivity (Work Service, 2016). The government’s ex-ante impact assessment of the programme did not address this. From September 2016 the obligation for fiveyearolds to attend preschool was removed. This could induce some parents to stay at home with their children for one more year; in particular in families with low incomes (see also European Commission, 2016a).

A significant increase of the minimum wage may reduce in-work poverty and have a small negative effect on employment. The minimum wage increased by 8 % in nominal terms in January 2017, up to PLN 2000 per month. For recent graduates taking up their first job, the increase was as high as 35 %. The minimum wage rise was higher than what was originally proposed by social partners. The ratio of minimum to average wage is now at around 47-48 % and some 10-15 % of employees earn close to the minimum wage. Its increase may have a small negative effect on employment for vulnerable groups and could trigger shifts to non-standard labour contracts (Kaminska and Lewandowski, 2015). On the other hand, it could contribute to poverty reduction, in particular in-work poverty.

Job creation in 2015-2016 was driven by hiring on permanent contracts, but the proportion of temporary employment remains high. At 27.3 % in the third quarter of 2016 (for the age group 15-64) Poland continues to have a very high proportion of fixed-term employment ( 19 ). This is particularly true for young people aged 15-24. A significant proportion of all temporary workers have civil law contracts, rather than usual labour code contracts. As highlighted in the previous country reports for Poland, high levels of labour market segmentation can hamper productivity and human capital accumulation (see European Commission, 2016a). However, since early 2015 permanent employment has been rising strongly.

Measures have been taken to reduce segmentation, but the use of open-ended contracts remains discouraged. Obstacles to wider use of permanent contracts include in particular high implicit costs associated with lengthy and uncertain dispute resolution mechanisms, the special protection against dismissal for certain categories of workers ( 20 ), the heavy reinstatement obligations in case of unfair dismissal and the lack of differentiation in protection against dismissal in large and small firms. Two codification committees, which include representatives of the government, experts and social partners, were set up to prepare new draft individual and collective labour codes by early 2018( 21 ).

Some features limit the overall high flexibility of the labour market. Non-EU nationals can be employed on a temporary basis with very limited formalities. The ease of arranging atypical work contracts, i.e. other than open-ended contracts based on the labour code, also contributes to flexibility. On average, Poland also appears to have not very strict employment protection legislation (Box 2.2.1 in European Commission, 2016a). However, the use of part-time employment arrangements is limited (only 6.9 % of all employed in 2016-Q3, one-third of the EU average). This limited flexibility in terms of working time arrangements may be particularly problematic for older workers or people with care obligations (often women).

Education

Educational performance has remained strong over recent years. Poland is one of the best EU performers on reducing the number of early school leavers at 5.3 % in 2015, compared to the EU average of 11 %. Overall performance in basic skills remains strong in comparison to other EU countries (OECD, 2016b). Following a substantial improvement in average results of the Programme for International Student Assessment (PISA) between 2000 and 2002 and then again between 2009 and 2012, in 2015 the performance of Poland in PISA worsened somewhat in all fields, and especially in science. However, the country still scored above both the EU and OECD averages in all areas tested. The impact of socioeconomic status on performance was rather limited and has continued to fall since 2006 (OECD, 2016b).

The school system overhaul from September 2017 onwards raises a number of concerns among stakeholders. The key change phases out lower secondary schools, practically returning to the pre-1999 structure. This policy change has raised concerns among many stakeholders, including teachers, local governments, and educational researchers. Two main risks have been indicated. First, earlier tracking into either the general or the vocational stream could negatively affect the basic literacy and numeracy skills of the most disadvantages students (IBE, 2014). Evidence suggests that extending common general education in 1999 played a role in improving the performance of the weakest students in the PISA survey between 2000 and 2012 (Sitek, 2016; Jakubowski et al. 2016). Second, significant changes in the organisation of the schools are likely to have disruptive and long-lasting effects on the organisation of education provision. In particular, a strong variation in the size of school cohorts is projected, especially at the upper secondary level (Graph 3.3.1). There is also a risk of suboptimal use of certain past investments in lower-secondary schools. Changing the school system does not appear to address the underlying weaknesses of Poland’s education system and its rationale does not seem to be based on recommendations stemming from existing research and comprehensive evaluation.

Participation in early childhood education and care has increased but challenges remain in quality and inequalities of access. Since 2008, the number of preschools has increased by around 40 %. At present, all four- and five-year-olds are entitled to a preschool place and from September 2017 this right will also be extended to three-year-olds. Abolishing the preschool obligation for five-year-olds may weaken the educational chances of children from socially disadvantaged backgrounds. Formal childcare enrolment for children under the age of three remained among the lowest in the EU.

The government has launched consultations on the higher education reform to improve quality and labour market relevance. The tertiary education attainment rate has increased rapidly over the last 15 years. In 2015, it stood at 43 % in the 30-34 age group, above the EU average of 39 %. A new algorithm for financing higher education institutions will be implemented from the academic year 2017/2018, with an aim to strengthen the incentives for teaching quality. Wide-ranging consultations on the planned broader reforms have started including with academics and researchers (see Section 3.5). The new law on higher education is expected to enter into force in the 2018/2019 academic year.

The average level of older adults’ basic skills is low, hampering their employability. In the OECD Survey of Adult Skills (PIAAC), scores testing the numeracy of Polish adults were on average lower than for their OECD peers (OECD 2016c). In terms of basic digital skills, Poland ranks only 26th among EU28 Member States, though slightly better for advanced digital skills (European Commission, 2016c). Various employers' surveys indicate increasing difficulty to fill in vacancies (e.g. Manpower, 2016; NBP, 2016a). Migration also affects skill distribution in the labour force, given that Polish emigrants are on average better educated than the rest of the population. At the same time, many immigrants to Poland work below their qualifications.

Adults rarely engage in job relevant learning and every third adult does not see the need for further education or training. In 2015, only 3.5 % of those aged 25-64 reported participation in education and training in a month before the survey, down from 4 % in 2014. The percentage of adults (aged 25-59/64) who in 2014 reported having learned to improve their competences in the previous 12 months was at 31 %, only minimally increased from 2012 (PARP, 2016). Participation is lowest among people who could benefit the most, i.e. those with basic levels of education, those aged over 50 and those who are inactive. The results of the recent initiatives such as the National Qualifications Register and the Database of Development Services remain to be seen.

The labour market relevance of vocational education is still limited. Vocational education and training (VET) often does not provide students with basic skills and key competencies. The OECD PIAAC survey revealed that graduates of basic vocational schools have insufficient literacy and numeracy skills. At the same time, the results for technical secondary schools are considerably better than for basic vocational schools. Employment rates of recent vocational school graduates were still slightly below the EU average in 2015. Local governments are often unsuccessful in putting in place strategies linking VET with sectors of strategic importance for regional development (Brandt, 2016). The organisation of vocational schools will change as part of the overhaul of the school system in September 2017. The potential of this change to address shortcomings of the VET system remains unknown.

Poverty and social assistance

Poverty is declining fast but making work pay remains a challenge in Poland. The rate of people at risk of poverty or social exclusion has decreased significantly in recent years. At 23.4 % in 2015 it was slightly below the EU average of 23.7 %. At the same time in-work poverty for those above 18 stayed at 11.2 % in 2015 (1.7 pps. above the EU average). This is true mostly for self-employed people and in the agriculture sector. Among employees, the incidence of in-work poverty is concentrated on those with fixed-term employment contracts.

Social benefits provide little incentives to take up work. The social protection system, due to its limited resources, used to have little impact on poverty reduction (European Commission, 2016a). It also did not sufficiently promote social integration through take-up of economic activity, although the extension of child tax credits in 2015 and the tapered withdrawal of family benefits from January 2016 (‘zloty for the zloty’ rule) improved the situation to some extent. Still, the system provides few incentives to take up work, especially for second earners (Kurowska et al, 2015).

The universal child benefit programme is expected to reduce poverty and inequality but raises questions in terms of cost-effectiveness. It is estimated that the benefit could reduce inequality as measured by the Gini coefficient by 0.02 and the at-risk-of-poverty rate by 5.2 percentage points. In particular, the reform is expected to considerably reduce poverty among households with three or more children and among single parents ( 22 ). The cost of the programme is substantial, at around 1.2 % of GDP in 2017. Its size and limited means-testing leads to overlaps with other social benefits offsetting limited work incentives built into these programmes, and raises questions of costeffectiveness. The government has announced an impact assessment of the programme in 2017.

Pensions currently provide an adequate protection against poverty, but the change in statutory retirement age will further cut future benefit levels. The relationship between pensions and average wages was projected to fall steeply even if the statutory retirement age was increased to 67 years (Graph 3.3.2). The legislated reversal of the retirement age increase will further erode future pensions. Women would be most affected if they choose to retire close to the new retirement age of 60, which seems likely in light of international evidence. For women retiring from 2040 onwards, the statutory retirement age will be reduced by seven years compared to the current situation. This will have major implications on pension levels given that retiring just two years below 67 is projected to result in pensions that are lower by around 10 % ( 23 ). A significant proportion of women would then receive only a minimum pension that depending on its indexation over the years is likely to fall below the poverty threshold. The government announced also plan to introduce auto-enrolment into occupational pension schemes.

The system of long-term care has a number of weaknesses. Long-term care is predominantly provided by family members who receive limited institutional support and who are effectively discouraged from reconciling employment and care responsibilities. Formal care provision is very low, reaching only 4.6 % of the dependent population for home care and 3.4 % for residential care. At 0.8 % of GDP, funding for formal care is half the EU average (1.6 %). There is no efficient integration between healthcare and social care systems with regard to long-term care. With an old-age dependency ratio expected to double from 22 % in 2015 to 45 % in 2045, long-care needs are bound to increase substantially and securing sufficient institutional support will be a challenge.

Healthcare

Health outcomes stand below the EU average with a potential impact on labour market participation and poverty. Life expectancy for men and women and healthy life years for men are below the EU average while infant mortality and both amenable and preventable mortality are above the EU average. Poland faces challenges to further improving the cost-effectiveness of healthcare spending. These challenges include strengthening primary care, further development of co-ordinated care, curbing the excessive use of specialist care, improving cost-efficiency within the over-supplied hospital care, improving governance including by developing health-technology assessment for medical equipment, and developing more comprehensive public health policies (European Commission/Economic Policy Committee, 2016).

Access to healthcare services remains an issue. The system is characterised by low public spending and few medical staff. In 2015, 7.8 % of the population self-reported unmet healthcare needs due to cost and distance, compared to the EU average of 3.6 %. The authorities are trying to improve access, for example by fast-track waiting lists for cancer patients introduced in 2015 ( 24 ). Staff shortages are particularly perceptible in some regions and for some specialisations, hence regional and subsectoral differences in care availability are significant. The Ministry of Health intends to increase public health expenditure up to 6 % of GDP by 2025.

Efforts are being made to tackle some existing challenges. The Ministry of Health has started a mapping exercise of healthcare needs with an aim to improve the efficiency of resource allocation. Other plans such as the liquidation of the National Health Fund, if implemented, could facilitate governance but could lead to conflicts of interest between different roles (regulator, payer and provider) fulfilled by the same institution. It remains to be seen whether changes in hospital financing rules do not slow down the process of hospital restructuring, impeding the needed consolidation of the sector.

3.4. Investment

In 2016, the investment-to-GDP ratio fell below the EU average. This was driven by a significant contraction of public investment activity (see Section 1). However, private investment-to-GDP ratio also declined in 2016, widening the gap to the EU average. The outlook for only a gradual investment recovery (see Section 1) implies a projected widening of this gap (Graph 3.4.1).

Several factors can explain the relatively low private investment-to-GDP ratio. In terms of the composition of investment expenditure, Poland differs markedly from the EU average (Graph 3.4.2). Housing investment is significantly lower than the EU average, possibly reflecting different preferences concerning current consumption versus housing investment and existing barriers to the development of the private rental market. In addition, as compared with other EU countries, low labour costs encourage a predominantly labour-intensive development model for the business sector, limiting investment. However, this factor seems to be more than compensated by the still low capital stock in Poland compared with the EU average, which encourages investment. Equipment investment is well above the EU average reflecting the high share of industry in gross value added and on-going technological catching-up. Investment in intangible assets (software, intellectual property rights and R&D) is particularly low in comparison to the EU average and to some other Member States that are in the catching-up process (Graph 3.4.3). A recent fall in private investment activity appears to be related to increased uncertainty (see Section 1), but this factor could be transitory. Finally, there are several structural barriers to investment (see Box 3.4.1).

Key determinants of future investment are identified in the government's responsible development strategy. The government has outlined its objective to raise the investment rate to above 25 % of GDP by 2030, yet its sources remain to be determined. The key enabling factors include improving the investment climate, also for foreign investors, a stable macroeconomic and regulatory environment, high-quality corporate governance, including in state-owned enterprises. The government also explicitly acknowledges the important role of the capital market. However, as highlighted in various parts of this report Poland faces significant challenges in many of these areas and some policy measures taken in 2016 may worsen the investment climate. These include the threat to the rule of law (see Section 3.6), instability of the regulatory environment, e.g. for the renewable energy sector (see Section 3.5), risks from fiscal sustainability and the governance of SOEs (see Section 1).

Local governments play an important role in public investment and their capacity matters for effectiveness and efficiency of spending. Around half of gross fixed capital formation by the public sector is undertaken by local governments ( 25 ) and investment expenditure stood at around 20 % of their total expenditure in the five years preceding 2016. In terms of share of GDP, Polish local governments manage much higher funds than the EU average (Graph 3.4.4). They carry out large, infrastructure projects, which requires relevant coordination, processing and oversight. Hence, local governments' administrative, operational and management capacity largely determines efficiency and value added by investment projects.

Structural funds strongly affect overall investment performance. Poland has fully used the available funding for 2007-2013. At EUR 68 billion, EU transfers to Poland were among the largest in Europe as a share of GDP (22 % of 2007 GDP). These funds significantly accelerated the convergence processes by stimulating domestic demand, boosting technological absorption and improving connectivity. It is estimated that, in 2015, investment supported by Cohesion Policy have increased the GDP level by around 4.3 % compared to the counterfactual scenario of the absence of the funding (Altus Consortium, 2016).

The 2014-2020 European Structural and Investment Funds (ESIF) envisage mobilising much more private investment and focus on smart specialisation strategies. This change of approach is expected to strengthen impact on productivity growth and innovation in the economy. It is expected that support will reach nearly one third of Polish SMEs (excluding micro-firms), cumulatively responsible for the creation of one third of added-value and jobs in the Polish economy. Poland started inducing further investment through a complementary use of the ESIF and the European Fund for Strategic Investments (EFSI). The capacity of authorities, in particular at regional level, to identify more value-added projects and to embrace higher risks will be important for this to maximise possible positive effects. Generally, the administrative capacity of managers handling infrastructure projects will be critical to their successful implementation.

The preparations for launching projects in the 2014-20 programming period are progressing quickly. By the end of January 2017 the value of contracts signed amounted to EUR 18.8 billion (EU share) representing about 22 % of the total ESIF allocation for Poland. Poland’s Action Plan for increasing effectiveness of EU funds envisages higher volumes of certification in the coming years. This creates the basis for future growth of investment (see Section 1).

3.5. Sectoral policies

R&D and innovation

Poland’s research and innovation performance has marginally improved over the last decade. R&D intensity increased from 0.6 % of GDP in 2007 to 1 % of GDP in 2015, which is still below half of the EU average. The government is committed to reaching the EU2020 national R&D intensity target by 2020 (1.7 % of GDP). Poland´s performance in all dimensions of the European Innovation Scoreboard remains below the EU average (EIS, 2016). R&D investment in Poland currently relies predominantly on public financing, with important support provided by the European Structural and Investment Funds (ESIF).

Boosting innovation in the business sector remains a key challenge for Poland. Despite recent increases, business enterprise expenditure on R&D (BERD) remains one of the lowest in the EU, although non-R&D expenditures significantly exceed the EU average. R&D outlays of foreign firms accounted for a large part of the rise in the overall BERD in Poland. BERD dynamics in recent years does not match the increases in availability of public co-funding, as distributed by NCBiR. ( 26 ). The 2016 ‘White Paper on Innovation’ sets out legislative and organisational proposals to improve the business environment for innovation (MNiSW, 2016). Two new laws on innovation will be entering into force in 2017 and 2018. As from 2016, companies benefit from new R&D tax incentives. Although it is too early to assess the uptake of these incentives, their availability and size have been already extended in 2017, when the first Act on Innovativeness entered into force (see Box 3.6.1 on Selected highlights).

A limited commercialisation of research results and weak science-business links limit the innovative capacity of the economy. Recent counts of joint patent applications and co-publications are insignificant, as is the number of enterprises declaring cooperation with scientific organisations. The share of R&D expenditures in higher education and research institutions funded by business enterprises is also subdued (EIS 2016). Poland is catching up in numbers of business enterprise researchers. Work is on-going to introduce a new legal framework to better adapt academia to market needs (see Section 3.3. on education).

Despite measures taken, strengthening the quality of science and its internationalisation remains a key challenge. The quality of scientific activities in Poland is still far below EU standards. With only 5.0 % of Polish scientific publications among the 10 % most-cited worldwide Poland ranks 24th in the EU (Graph 3.5.1). Only two Polish universities were included in the 2016 Academic Ranking of World Universities (and both were in the last five hundred). Poland ranks 26th and 27th in the EU in terms of the number of PhD graduates and non-EU PhD students, respectively. Recent initiatives (e.g. Pact for Horizon 2020) are to support the internationalisation by e.g. moving the evaluation focus from the quantity to the quality of publications. Moreover, The Strategy for Science and Higher Education comprises three key pillars of reforms, focusing on higher education and science system (‘Law 2.0’), science's links with business and its societal impact. The first elements of the reforms came into force in October 2016. Reform of the Higher Education Sector is being prepared with the Horizon 2020 Policy Support Facility ( 27 ).

Although R&D is increasingly regarded as an engine of long-term economic growth, the effective design and implementation of policies remains challenging. The government has launched a comprehensive revision of the whole strategic and legislative R&D framework, as presented in the Responsible Development Plan. The Plan identifies the economy’s limited capacity to innovate as one of five major growth barriers in Poland and includes a number of measures to overcome barriers to innovation. It proposes a stronger thematic focus of R&D investment by prioritising national and regional smart specialisations. The delivery of this complex revision of the whole R&D framework, will be challenging in terms of avoiding discrepancies between policy concepts and their implementation ( 28 ) and limiting overlaps between numerous support measures.

Infrastructure and network industries

The road network continues to develop with the strong support of EU investments. In 2015-2016, 115.8 km of new or modernised motorways and expressways were built. The EU funds allocation for Polish roads in 2014-2020 is EUR 15 billion. Moving further from public funding towards new financial schemes remains challenging. Mobilising additional private financing would enable Poland to concentrate public funding on the parts of the network that are key to ensuring territorial cohesion and cross-border connections.

Poland’s road fatality rate remains well above the EU average and is of a particular concern for vulnerable users in urban areas. Currently, with 77 deaths per million inhabitants against 51.5 on average in the EU as a whole, addressing road fatalities is a pressing challenge in Poland. At municipal level, the high rate of road accidents and fatalities is accompanied by increasing congestion, which is due to the development of individual motorised transport. The preference for such transport also generates negative safety loopbacks; transport in cities is characterised by a very high share of vulnerable users like pedestrians and cyclists among all fatal victims of road accidents. In 2015, pedestrians and cyclists accounted for 42 % of all people killed in road accidents, both in and outside cities, much above of the EU average of 29 %.

Despite the significant availability of EU funds, the railway sector continues to face major bottlenecks in project implementation. Significant agglomeration railway lines are still awaiting modernisation to allow more passenger traffic. Rail freight remains uncompetitive, with a daily average speed as slow as 27 km/h, and main modernisation projects are being further delayed. Infrastructure (track access) charges remain relatively high and cover the entirety of the rail network, while only a fraction of road network is subject to them. Cumbersome legal, financial and administrative procedures linked with bottlenecks within the railway infrastructure manager (PKP PLK S.A.) still persist and lead to project delays and insufficient investment.

Structural challenges in the rail sector remain. Compared to the road sector, problems with national co-funding for EU railway projects seem to remain systemic. Equally, the effectiveness of the railway infrastructure manager remains subdued despite numerous restructuring attempts. All this contributes to a very slow progress on using the 2014-2020 EU funds in the railway sector, with key contracts still to be concluded. In light of these deficiencies, the timely spending of earmarked budget and avoiding investment bottlenecks at the end of the programming period might be challenging. In addition, ensuring the long-term effects of the current investment is uncertain due to a lack of clarity if the long-awaited multi-annual railway infrastructure maintenance programme is introduced.

Energy

Poland is among the most energy-intensive EU economies, but improvements in energy efficiency have also been among the fastest. Strong economic growth over the last decade implied that, despite reduction of primary energy intensity, Poland was among few Member States that did not reduce their final energy consumption since 2005. The energy intensity remains high in all final energy consumption sectors. Potential for significant energy efficiency gains exists in residential buildings (some 70 % of houses are poorly insulated) as well as in the transport sector, with Poland having one of the oldest passenger cars fleets in Europe.

Polish power generation is heavily coal-reliant, ageing, and risks being insufficient to match the projected growth of electricity demand. Still, around 60 % of the installed fossil fuels capacity is older than 30 years implying significant investment for modernisation and extension of the power infrastructure in coming years. Around, 80 % of power generation is still coal-fired. The use of domestic coal has benefits for the security of supply but ensuring economic sustainability remains challenging. Poland is currently restructuring its mining sector but a number of mines may prove to be unprofitable in the context of low global coal prices. Several Polish generators have plans for new coal-fired generation units (up to over 3GW of capacity). In the long term, this may expose the sector to volatility of allowances prices under the EU Emissions Trading System (ETS). An update of the long-term vision for the Polish energy system is missing.

Achievement of the binding national 2020 target for renewable energy is at risk. According to government plans, 4 GW of additional capacity (as compared to 2014 data) are to be installed in the electricity sector by 2020 ( 29 ).The remaining investment demands legal certainty and a stable investment framework. In 2016, framework conditions have, however, worsened as a result of a long delayed revision of the Renewable Energy Law introducing first auctions for new capacity and a new law on investment in on-shore wind. The latter creates prohibitive conditions for establishing new wind farms, new burdensome and costly administrative requirements for existing installations, and a high degree of legal uncertainty concerning several new provisions (notably taxation). Consequently, the law entails significant losses for generators engaging in new projects and the banks underwriting them.

Securing energy interconnectivity remains crucial. Following the launch of the LNG terminal, Poland has significantly improved its security of gas supply. The country also developed its national gas transmission and distribution network. However, work on gas interconnectors of regional importance has not advanced according to the timetable ( 30 ). For the electricity sector, in 2016 the interconnection level was 4 % — the lowest in the EU, exposing Poland to a risk of supply shortages. The LitPolink electricity connection with Lithuania became operational in 2016 and improved the situation, but reaching the goal of 10 % of production capacity by 2020 seems challenging. The current national arrangements for congestion management and bidding zone definition in central Europe do not necessarily reflect actual congestion accurately. This is leading to increasing limitations on cross-border flows of electricity and there is no joint regional solution agreed by all affected neighbouring countries.

Polish energy markets are becoming more competitive, although progress is uneven. In recent years, the Polish electricity wholesale market has become increasingly competitive, but the gas wholesale market remains relatively closed. Wholesale electricity prices are slightly higher than in most neighbouring central European countries. In 2015, wholesale gas prices were comparable to those of neighbouring central European countries, but higher than in Germany and Austria. On the retail markets, Poland continues to regulate electricity and gas prices for households and gas prices for companies. The gas retail market is dominated by the incumbent company. On the retail electricity market, the supply is dominated by regional power suppliers with low competition pressures between and within the regions.

Climate and environmental issues

Poland is well on track to deliver on the target for greenhouse gas (GHG) emissions in sectors outside the Emissions Trading System. In 2014, Poland’s non-ETS emissions increased by 2 % compared to 2005 and the country already performed better than the interim target for 2014 (+10 %). According to national projections, Poland will reach its 2020 target by a wide margin, achieving only a 6.5 % increase against a +14 % target. Transport emissions in Poland still remain a source of major concern, as emissions and energy consumption from transport have increased in recent years.

Poland does not yet use environmental taxes to stimulate a more efficient energy usage and a reduction of GHG emissions. The implicit tax rate on energy and fuels remains comparatively low in Poland. There is a number of tax exemptions (e.g. agriculture and energy-intensive industries) and environmental taxes are not automatically indexed. Vehicles' taxation in Poland is not linked to environmental performance (CO2 emissions).

Air quality continues to be a major concern, with air quality standards among the lowest in the EU-28. Poland has not yet taken sufficient measures to limit the emission of pollutants from its main sources, which include heating of individual houses by obsolete boilers and low- quality coal. In 2014, the EU air quality standards were often severely breached by pollutants mostly emitted via the combustion of solid fuels, including, e.g. emissions of particulate matter and benzo[a]pirene limits (Graph 3.5.2). The recent evidence confirms a further deterioration, with an increasing number of premature deaths per year associated with bad air quality in Poland (EEA, 2016).

Waste management has improved, although the separate waste collection system for all municipalities is not yet launched. In 2014, at 16 % the incineration rate almost doubled in comparison with the previous year. Also the recycling rate increased to 21 % (from 16 % in 2013) though still remains well below the EU average of 28 %. The recently adopted Ministry for Environment regulation setting out common requirements for the collection of five waste streams (paper, glass, metal, plastic and biowaste) for all municipalities is expected to significantly improve the quality of recyclables and their economic value.

3.6. Public administration

Regulatory business environment

The ease of doing business in Poland has been gradually improving. The country ranked 24th in the 2017 World Bank ‘Doing Business’ report, an improvement of one position compared to 2016. This is mainly due to the introduction of the new insolvency law, faster procedures for property registration, and amendments to the construction law. Poland fell in the 2017 World Bank report rankings on setting-up firms (from 84th to 107th place) and protection of minority shareholders rights (World Bank, 2016a). The government has plans to further simplify certain business procedures with a range of proposals put forward within the Strategy for Responsible Development.

The quality of the regulatory framework continues to be a weak element in the otherwise generally favourable business environment. This positive environment has been supporting strong economic growth over the last years. International rankings, such as the Global Entrepreneurship Index identify key strengths including export performance, human capital development, delivering innovative products and the size of the capital market (Global Entrepreneurship Development Institute, 2016). In contrast, the quality of various regulations and institutions brings Poland's ranking down. For instance, the top five most problematic factors for doing business as identified in the Global Competitiveness Report are all regulatory in nature (World Economic Forum, 2016).

Uncertainty related to the regulatory environment is increasingly weighing on business confidence. In 2016, policy instability became the third most problematic factor for doing business, from a previous ranking of 10th (World Economic Forum, 2016). Business confidence may be affected by the limited public consultation on several new laws. In contrast to the situation in the two previous terms of Parliament, since November 2015 almost half of all laws passed were formally initiated by parliamentarians from the ruling party and not the government and hence were not subject to the typical consultation process (Graph 3.6.1). In addition, changes to the government’s rules of procedure, introduced in June 2016, reduced the requirements concerning preparations for an initial outline of new legislation and regulatory tests. This in fact limits the extent of consultation on legal changes initiated by the government.

Multiple business inspections add to the administrative burden for businesses. The mandates of numerous non-tax inspection services are not always clearly delineated, which may lead to an unnecessary number of controls. For example, Polish food retailers, caterers and restaurants are inspected more often than in some other EU countries for which data are available ( 31 ). A relatively weak point of the inspection system is the limited availability of guidance on how to comply with the existing regulations, which particularly impacts small- and medium-sized enterprises (SMEs).

Weaknesses in spatial planning increase administrative burden related to the need for construction permits. Land-use plans cover limited part of Poland’s territory and are often of low quality. In areas without them, construction permits are granted on the basis of one-off administrative decisions on land development conditions. The extensive use of these acts, combined with limitations on local authorities’ capacity to handle the necessary procedures within regulatory deadlines, creates uncertainty and financial burden for investors obliged to document their land rights (NIK, 2016). Poland recently initiated a reform of its spatial planning legislation. The draft construction code, currently under revision, entails fundamental changes aimed at consolidating spatial planning processes and easing the burden for investors. While this reform offers the chance for significant improvement, its benefits depend on the code's final details. Furthermore, the implementation may take several years due to the complexity of revising some 120 legal acts and introducing transitional rules.

There continues to be a systemic threat to the rule of law in Poland and the Polish justice system suffers from lengthy proceedings and contract enforcement. The recent events in Poland have led the European Commission to adopt two Rule of Law Recommendations in order to ensure that Poland's Constitutional Tribunal is able to fully carry out its responsibilities under the Constitution. This ongoing crisis undermines trust in the Polish legal system. In addition, the length of proceedings remains a challenge. In first instance courts, the average length of civil litigation proceedings is 10 months, while commercial cases take over 13 months. The clearance rate of civil cases is below 93 %, while the EU average is over 103 % (MS, 2016) ( 32 ). The time needed to deal with insolvency cases is among the highest in the EU — Poland ranks 32nd in a worldwide comparison, with insolvency proceedings taking up to 36 months on average. The length of contract enforcement also remains a challenge, with 685 days needed to enforce a contract.

Despite recent progress in public procurement, the limited administrative capacity of local governments remains a source of concern. Local governments undertake a large share of public infrastructure projects (see Section 3.3), yet they often lack the relevant administrative capacity to ensure efficiency (OECD, 2016d). The central authorities do not support local governments with structured technical assistance to carry out and implement large procurement projects. The July 2016 amendment of the public procurement law could improve the efficiency of public procurement, transposing two EU procurement-related directives and implementing a number of measures aimed at facilitating the procurement process and cutting red tape. The changes include, inter alia, authorities’ obligation to consider splitting of works and non-price criteria to gain more importance. The law is set to trigger public procurement procedures that were put on hold before its entry into force.

Significant progress was achieved in deregulation of professions, but some restrictive barriers remain. Poland has undertaken ambitious reforms of regulated professions in recent years (European Commission, 2016a) and some positive results can already be seen in terms of employment and entrepreneurship for certain professions (Rojek and Masior, 2017). However, the recent Commission study covering seven professions shows that differences between professions exist. For example, the level of restrictiveness is higher in Poland compared to the EU weighted average for lawyers and tax advisers, while it is significantly lower for tourist guides and real estate agents (European Commission, 2016e). In turn, for nearly all the reviewed sectors, business churn rates in Poland are similar to the EU average ( 33 ). This may indicate relatively high dynamism and competitive pressure within regulated professions in these sectors in Poland.

Digitalisation of public administration

Online interaction between public authorities and citizens remains one of the lowest in the EU. With 26.6% of citizens using e-government services, Poland ranks among the worst performers in the EU. In contrast, e-services for business were used by 92% of enterprises in 2015. The fragmentation, complexity and at times unstable operation of e-government services are still the main obstacles to their effective use by citizens. The updated Programme of the Integrated Digitalisation of the State aims to enhance policy coordination and strategic planning and addresses a number of challenges, including fragmentation, user-friendliness and public visibility of e-services (Ministerstwo Cyfryzacji, 2016). It is currently at the initial state of implementation.

Annex B

MIP Scoreboard

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(1) ()This overall assessment does not include an assessment of compliance with the Stability and Growth Pact.

(2) ()Purchasing power standards is the artificial common reference currency unit that eliminates price level differences between countries.

(3) ()As measured by the Gini coefficient of income, as well as by the ratio of income of high earners to low earners (S80/S20). In 2015, the latter ratio equalled 4.9, below the EU average of 5.2. S80/S20 is the ratio of total income received by the 20 % of the population with the highest income to that received by the 20 % of the population with the lowest income.

(4) ()An upward income mobility is measured by the share of population who were in the 1st income decile but moved upwards over the three year period (up to 2015).

(5) ()Difference between total assets and total liabilities.

(6) ()The quality is proxied by an index estimated using the methodology of Vandenbussche (2014).

(7) ()Under ESA 2010 rules this statistically counted as a public debt reducing measure.

(8) ()For the assessment of other reforms implemented in the past, see in particular section 3.

(9) ()Information on the level of progress and actions taken to address the policy advice in each respective subpart of a CSR is presented in the Overview Table in the Annex. This overall assessment does not include an assessment of compliance with the Stability and Growth Pact.

(10) ()PwC in its recent analysis (PwC, 2016) expects the 2016 VAT gap in Poland to decrease to 2.5% of GDP, as compared to 2.8% of GDP in 2015.

(11) ()Based on European Commission projections which do not take into account the lowering of the statutory retirement age entering into force in 2017 (European Commission, 2015).

(12) ()Data covering companies with more than nine employees, with microenterprises generally paying lower salaries.

(13) ()National definition, lower by around 3pps than ESA definition.

(14) ()In the Czech Republic the parliament works on the relevant legislation.

(15) ()This is even more important in the context of the limited parliamentary and public debate on the key fiscal measures, as illustrated by the process of adopting the 2017 budget law and the law lowering the statutory retirement age.

(16) ()An indicative measure: the number of people who retained their registration in Poland but reside abroad for more than 3 months.

(17) ()The majority of immigrants work on the basis of the so-called simplified procedure, which requires them to return to their country of origin after 6 months, making the exact assessment of the number difficult. Indirectly, the number of issued visas could be used as an indicator. In 2015, 925 000 visas type D with working permit were issued, while 2016 saw another sharp increase in this number.

(18) ()Tax-benefit microsimulations conducted by the European Commission Joint Research Centre using the Euromod model. See also Myck (2016).

(19) ()The temporary employment category covers a broad range of agreements, from fixed-term regular labour code contracts, to various civil law contracts, to informal work without a written contract.

(20) ()Including older workers with less than four years until retirement age, but also e.g. workers during their absence (leave or sick leave, pregnancy and maternity/paternity leave), trade union activists and other particular categories.

(21) ()In addition, the Social Dialogue Council has been operating since October 2015 and can create an opportunity for social partners to play a bigger role in shaping the labour code.

(22) ()The analysis is based on the tax-benefit microsimulations conducted by the European Commission Joint Research Centre using the Euromod model.

(23) ()Calculations based on scenarios developed in European Commission and Social Protection Committee (2015).

(24) ()Diagnostics and treatment within specified times is now guaranteed, with no financing limits. Healthcare providers, who ensure the timeliness and comprehensiveness of healthcare services, face no financing ceilings.

(25) ()In recent years, this ratio fluctuated between 45 % and 52 %.

(26) ()Given the recognised issue of the BERD underreporting, the data do not allow for full analysis of the public R&D support effectiveness; for more details see: Klincewicz et al. (forthcoming).

(27) ()Policy Support Facility website, https://rio.jrc.ec.europa.eu/en/policy-support-facility

(28) ()For example the recent amendments in the Act on Research Institutes withdraws, among others, the requirement of open procedures for the directors' post.

(29) ()2015 update of the Polish National Renewable Energy Action Plan. In 2010-2014, 2.7 GW wind capacity was installed, but this dynamic development has now come to a halt.

(30) ()Notably the gas interconnector Poland – Lithuania (GIPL) and the gas interconnectors Poland – Czechia (Stork II) that are critical for the establishment of the North-South gas corridor, are delayed.

(31) ()In 2014/2015 the inspections ratio (number of inspections/number of firms) in Poland amounted to 0.82, compared to 0.45 in the Netherlands and 0.64 in the UK. The differences may be partly explained by differences in market structures (World Bank, 2016b).

(32) ()100% clearance rate is when the number of incoming cases equals the number of cases closed.

(33) ()Business churn rate is calculated as the ratio of the sum of newly founded and closed enterprises to the total number of enterprises in a given year.

(34) ()The following categories are used to assess progress in implementing the 2016 country-specific recommendations:No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. Below a number of non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account country-specific conditions:• no legal, administrative, or budgetary measures have been announced in the National Reform Programme or in other official communication to the national Parliament / relevant parliamentary committees, the European Commission, or announced in public (e.g. in a press statement, information on government's website); • no non-legislative acts have been presented by the governing or legislator body; • the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study group to analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), while clearly-specified measure(s) to address the CSR has not been proposed.Limited progress: The Member State has:• announced certain measures but these only address the CSR to a limited extent; and/or• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative further work is needed before the CSR will be implemented; • presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR.Some progress: The Member State has adopted measures that partly address the CSR and/or the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as only a few of the adopted measures have been implemented. For instance: adopted by national parliament; by ministerial decision; but no implementing decisions are in place.Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have been implemented.Full implementation: The Member State has implemented all measures needed to address the CSR appropriately.