Wage and Pension Pressure on the Polish Budget

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.