Poland leaning left: Tusk signals an end to his economic liberalism

Donald Tusk, the longest serving Prime Minister in Polish history after 1989, now in the middle of his second term, is indicating a significant change to his economic philosophy and policy stating, “A Prime Minister should become a social-democrat, because he has to defend the weak.” It appears the former economic liberal is slowly becoming a statist.

Kancelaria Premiera

Tusk began his political career  in the 1990s as a free-marketeer in his Liberal-Democratic Congress Party (Kongres Liberalno-Demokratyczny), where he remained for many years, his position unchanged.At the beginning of the 2000s, Tusk helped launch the then new party, Civic Platform (Platforma Obywatelska, PO) that is currently in power, vigorously claiming that they would “unlock the energy of Poles” – in opposition to what was perceived as a non-functional state.

“The involvement of officials and politicians in economic life is an experiment,” he said in a presidential debate with Lech Kaczyński in 2005. PO supported a flat-tax, reducing the number of MP’s and a lightening of the administrative burdens on business. His first interviews in 2007 stayed on message. The declarative principles of his government’s economic policy were: keep taxes low and the state small, maintain budget discipline and continue privatization.

And during his first term the government seemed to stick to its basic liberal principles. Even after the onset of the global financial crisis, he avoided splurging on stimulus packages and remained faithful to fiscal discipline (at least in official statements). However after being successfully re-elected in 2011, the decisions and declarations of Tusk’s new government has put this direction in doubt. And the process has been picking up steam in recent months.

The state as an investor  

In August the government was forced to amend the budget for 2013, due to an economic slowdown in the first half of the year. Instead of cutting expenditures to the bone as liberal economic theory would recommend, it decided instead to significantly increase the budget deficit in order to not harm the anticipated fragile recovery in the latter half of the year. Any cuts that do take place will not hit public investment or social expenditures. The Keynesian idea of stimulating growth has prevailed over the liberal principle of ensuring balanced public finance.

Stimulating the economy through state investment has become a key slogan of this government. It has created a special state-owned company, the Polish Development Investment (PIR), to support strategic sector investments in energy, transport and telecommunications, among others. Topping the list are investments in the gas and power transmission sectors.

In 2012 Tusk announced a whole list of government programs, which were aimed at  supporting economic growth including the hugely expensive modernization  of the armed forces estimated to cost  139 billion PLN over a decade. Polish companies are certain to profit from these programs. Indeed, contracts with foreign companies related to the armed forces modernization contain a “Polanization” clause, requiring at least part of the production chain, and hence workforce, should be based in Poland.

The government has also announced substantial investment in the energy sector, including the building of new power plants. Recently, it pressured the partly state-owned company PGE to invest in the building of two new blocks at the Opole power plant, against the will of the board of directors who had rejected the expansion on the grounds that the ROI wouldn’t make the investment viable as current energy prices are so low. As in other sectors of the economy, the government has been getting much more involved.

How to be a champion

Another shift concerns privatization. In the 1990s liberals would argue that capital had no nationality and tended to sell state companies to strategic investors from abroad. At one point the share of foreign capital in the banking system reached 65 per cent. This changed in the first decade of the 21st century as the privatization of state firms mainly went through the Warsaw Stock Exchange and in many cases the government remained in control of those companies.

Now one of the trendy catch-phrases in Warsaw is creating national champions. The bank PKO BP, oil company PKN Orlen, the chemical firm Azoty and other energy groups are state-controlled and there are no plans to change this. On the one hand, these firms generate government revenue from dividends, while on the other, these same dividends are then used for the government’s investment plans. The ministry of finance has been consolidating companies in strategic sectors in the hope that they will be able to compete on the European market or expand abroad. This has already started to bear fruit with some firms such as KGHM and PKN Orlen now investing in Canada.

Last year instead of laying out new privatization plans the PM’s Economic Council, headed by one of the most influential men in Poland, former prime minister and leader of the Liberal-Democratic Congress Jan Krzysztof Bielecki, presented new rules for improving the management of state-controlled firms. A move that is a far cry from the liberal principle which states that in business a state is always a worse owner than a private owner.

A liberal no more

The liberal’s mantra has always been to keep taxes low and to cut them whenever possible. The Civic Platform party, together with its fierce rival, Jarosław Kaczyński’s Law and Justice party, cut the disability insurance contributions for companies and workers just before the crisis. During the crisis Tusk’s government had to backtrack and even went so far as to increase taxes, notably pushing the VAT tax up from 22% to 23% in 2011. Although the cabinet promised to return to the former rate in 2014, it now appears the rate is unlikely to drop back before 2016.

Another example of his new attitude can be seen in Tusk’s changed views on the size of the administration. Tusk “the Liberal” won his first election calling for deep cuts to the bureaucracy and his first government planned cuts in government expenditures of 10 per cent across the board. In fact, however, from 2008-2012 the number of officials in government increased by 12 per cent. Once a fashionable term bandied about by every party including Tusk’s PO, the “cheap state” has since been dropped.

Is there anything left of Tusk “the Liberal”? He does remain a steady advocate for deregulation. His government has produced four packages on deregulating the economy, and his former and present ministers of justice are diligently working on eliminating the barriers to access of regulated professions.

Recently the government has angered foreign investors by partly nationalizing the assets of private pension funds (OFE), a similar move to that taken by Victor Orban’s Hungary. OFE was introduced to Poland during the pension reform of the late 1990s, as it did in many countries of Central and Eastern Europe. Only a very few OFE’s, notably Prague’s private pension fund, have moved in the right direction. Most of the funds have closed their doors, and those that remain have been losing premium payers. Poland’s OFEs, like most others, have followed suit.

Originally, the pension reform had been one of the ”four great reforms” carried out by Jerzy Buzek’s centre-right government, which was in power in 1997-2001 with the support of the Solidarity movement. Buzek is now a popular PO Member of the European Parliament and he has come out strongly against the latest cabinet proposal.

New definition of Tusk

This change in the direction of economic policy has stirred up many vocal critics among the Polish elite, one of the most important of these being Leszek Balcerowicz, the architect of Poland’s economic reform in the 1990s. Another important sign of dissatisfaction is that the ruling PO party is losing the rank and file with defections from the party by members such as Jarosław Gowin, a liberal-conservative politician who has recently called for the creation of a new movement which would return to advocating the party’s core ideas of free market solutions, deregulation and the encouragement of private enterprise.

But the prime minister’s new policies do have their defenders. Jacek Żakowski, a commentator for the Polish weekly Polityka has said in defense of Tusk’s shift that “Donald Tusk has a distinctive feature which differentiates him from other politicians in Poland – he is able to learn . . . Buzek and Balcerowicz have been saying the same thing since the 1990s, he continues to adjust his views to whatever the current situation is.”

The once liberal Tusk is now calling himself a centrist. He insists in statements that he intends to chart a middle path in leading Poland through difficult economic conditions, avoiding excesses proposed by both left and right wing parties and politicians. In a recent interview with Polityka  he noted: “Once I said that you get conservative with age, as your daughter grows up. Now I must add that the longer you are a prime minister, the more you become in some sense a social-democrat.” Half jokingly adding that he became a liberal-conservative socialist after reading Leszek Kołakowski’s essays.

In the same interview he suggested that he would be prepared to create a ruling coalition with the Democratic Left Alliance (SLD), if the current coalition failed to deliver him a majority after elections in 2015. This signal of a possible future alliance with the SLD, whom Tusk called a “moderate and predictable partner”. Some time ago, when still strongly sticking to his liberal views, Tusk would not think about it.

Donald Tusk’s key political advantages have always been his pragmatism and his need to get things done. He has always been a member of the leadership of reform parties – the Liberal-Democratic Congress (Kongres Liberalno – Demokratyczny) and the Union of Freedom (Unia Wolności) – were reform parties, but were unable to gain significant support. That was why in creating Civic Platform he made the switch to “soft populism” (his own term) at a time when his party was still in the opposition.

Now, with the experience of being a Prime Minister for six years and having had to rely on the state and its administration to achieve his goals, Tusk has changed from a liberal to a statist. The experience of the economic crisis has also played an important role in compelling him to defend the state against the problems created by the market.

This use of the state as a tool to influence the market is something which Tusk once called “an experiment”. We’ll have to wait and see what the result will be.

Łukasz Lipiński

Łukasz Lipiński

is the vice-director of Polityka Insight, a centre for political analysis based in Warsaw. From 1998-2012 he was an editor on the national, foreign and economics desks of the Polish daily Gazeta Wyborcza.