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Wage and Pension Pressure on the Polish Budget

  • de Crombrugghe, Alain L

This paper studies the role of wage and pension pressures in explaining the budget deficit crisis of 1991–2 after the remarkable 1990 Polish economic stabilization and liberalization. It also explains the persistence of the high tax wedge that later helped overcome the budget crisis. The positive revenue effect of higher wages and higher tax rates could not compensate both the inevitable profit tax loss and the excessive growth of replacement income expenditure. Counterfactuals are constructed for revenue and expenditure. They show that the rising number of social benefit earners (pensions, unemployment) is responsible for a large part of the budgetary burden. Nevertheless, they also show that the better protection of social income compared to other income also explains part of the burden. Part of the employment loss and of the social expenditure can be ascribed to the excessive wage recovery of late 1990 and 1991. Insiders set wages ignoring the unemployed and exploiting the pension system in a context of uncertainty about profits and productivity and of strong popular support for the protection of replacement income.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1767.

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Date of creation: Dec 1997
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Handle: RePEc:cpr:ceprdp:1767
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  1. Coricelli, F. & Revenga, A., 1992. "Wage Policy During the Transition to a Market Economy: Poland 1990-91," World Bank - Discussion Papers _71, World Bank.
  2. Newbery, David M G, 1995. "Tax and Benefit Reform in Central and Eastern Europe," CEPR Discussion Papers 1167, C.E.P.R. Discussion Papers.
  3. Luca Barbone & Domenico J. Marchetti, 1995. "Transition and the Fiscal Crisis in Central Europe," CASE Network Studies and Analyses 0040, CASE-Center for Social and Economic Research.
  4. Xavier Maret & Gerd Schwartz, 1993. "Poland; The Social Safety Net During the Transition," IMF Working Papers 93/42, International Monetary Fund.
  5. Grootaert, Christiaan, 1995. "Poverty and social transfers in Poland," Policy Research Working Paper Series 1440, The World Bank.
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