Republic of Poland: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix analyzes fiscal costs associated with Poland’s accession to the North Atlantic Treaty Organization and European Union (EU). The paper highlights that Poland’s accession to the EU could result in fiscal costs in certain areas, especially in upgrading the infrastructure in transportation and utilities, and improving the environment. The legislative reforms and the establishment of the regulatory and administrative structures are also likely to entail costs, though these costs are more difficult to quantify. This paper also discusses fiscal management and restructuring in Poland.


This Selected Issues paper and Statistical Appendix analyzes fiscal costs associated with Poland’s accession to the North Atlantic Treaty Organization and European Union (EU). The paper highlights that Poland’s accession to the EU could result in fiscal costs in certain areas, especially in upgrading the infrastructure in transportation and utilities, and improving the environment. The legislative reforms and the establishment of the regulatory and administrative structures are also likely to entail costs, though these costs are more difficult to quantify. This paper also discusses fiscal management and restructuring in Poland.

II. Directions for Fiscal Management and Restructuring in Poland3

A. Introduction

19. During the pretransition period, Poland had a system of government characterized by a strong state government with extensive powers, and local governments with little independent expenditure or revenue powers. Since 1990, Poland has been engaged in extensive fiscal restructuring. Two themes underlie recent reforms in fiscal management and intergovernmental relations. First, at the state budget level, the institutions for financial management, inherited from the pretransition system, are poorly suited to the requirements of a market economy, particularly the cumbersome and decentralized system of management of the state budget. One consequence of these institutional arrangements has been a persistent problem of expenditure arrears, most notably, in the health care area. A critical issue that Poland must address in the next few years is how to improve the management of the state budget both to achieve a reduction in the state budget deficit and to ensure a high level of public service provision. Second, with respect to intergovernmental relations, movement from a system of total reliance on the state government toward a system of decentralized local governments has been guided by the notion that this would improve the provision of public services. There is still considerable uncertainty as to how many levels of government would be most effective in Poland and the ultimate evolution of the intergovernmental system.

B. Current System

20. Poland’s state government consists of a central administration, mainly organized into powerful ministries, and geographic units, divided into 49 voivods and 267 rayons. The basic unit of local government is the gmina, of which there are 2,489. Warsaw consists of 11 gminas while all other cities and towns consist of only 1 gmina.

21. The state government’s main responsibilities are for national defense, income transfers, the social insurance system, health care, higher education, state roads, and the police and judicial system. The state relies heavily on personal income and payroll taxes, corporate profits tax, a value-added tax, excises, trade duties, and nontax revenues. The gminas’ main responsibilities are for primary education, local roads, communal services, and basic utilities, such as water and sewerage. Gminas rely primarily on the local property tax and an array of smaller tax and nontax sources.

22. The government is currently considering several major reforms in the intergovernmental system. As part of the proposed health care reform, state primary and secondary (nonspecialized) health agencies, now managed by voivods, would become autonomous though they would still be funded primarily by state tax revenues. Voivods would be consolidated into perhaps 12 regions, which would supervise the autonomous health agencies. The government is also considering the creation of a middle tier of government, termed powiats, which would be independent from both the state government and gminas, and these would replace rayons. There would be about 320 powiats. The expenditure responsibilities are envisioned to be roughly comparable to counties in the United States and would include authority over secondary schools, some health services, and some roads. There is not yet any identified means of financing powiats, since the other levels of government are reluctant to cede revenue sources to powiats.

23. In order to achieve sustainable, noninflationary growth, it is important that the overall general government deficit be reduced over the medium term. It is thus essential that policies at the local government level contribute to reducing the state budget deficit, and that the reforms within the state budget and among the different levels of government not threaten the ultimate objective of a balanced budget.

C. Health Care Reform4

24. As part of the process of economic transition, Poland’s system of health care provision has been under stress. Poland has not experienced the serious drop in spending on health care and in life expectancy that some other transition economies have experienced.5 Nevertheless, the health care system is poorly structured and does not provide the quality of care that is typically found in a developed economy.

25. As an important step toward modernizing its health care system, in 1997, Poland enacted the General Health Insurance Law, which would create a health financing system based on public and private insurance, to go into effect in 1999. Because of inconsistencies and unresolved issues in the law, the Ministry of Health has now drafted an Amending Act. The precise plan for implementation is still in flux. Under the proposed new system of health care, governmental health units would be turned into autonomous health units and directors of these units would sign contracts with the state. The aim is to establish a system by which all units would have access to public finances and competition between them would lead to an improvement in quality.

26. A main component of the reform is the creation of a public insurance scheme. Under the proposed system, Poles would be able to choose from regional (public), trade, and private insurance funds, and which doctors and hospitals to use. The authorities describe the plan as one in which “money would follow the patient.” The division of the insurance market into distinct public and private insurance options exists in a number of countries. One advantage of choice is that it could create an atmosphere in which health care providers would be more likely to compete to provide a high level of care. The disadvantages are that it could be more administratively complex, particularly if it combines both public and private elements, and it could require a higher level of regulatory oversight. The proposed amendments deal only with oversight of the regional insurance funds.

27. The proposed insurance funds would be supported by a tax on personal income. The proposed amendments provide for a health insurance premium defined as a given percentage of income, which could change over time. The tax would apply to income at a flat rate.6 The tax would be offset against personal income tax liabilities, so that there would be no net increase in tax.7 For taxpayers who are not subject to the personal income tax, the government would make a payment on their behalf.

28. The proposed financing mechanism raises several important issues. First, while dedicated payroll taxes for health insurance are common in Europe, it is questionable whether it would be wise to introduce a dedicated income tax for health insurance in Poland in light of the already very high payroll tax burden to support social insurance programs. Dedicated taxes that are linked to income (such as the proposed tax) build automatic inflation into health care appropriations in the budget. The proposed amendments allow the Board of the Union of Health Funds to increase the percentage contribution rate, even without the concurrence of the Ministry of Finance. To a possibly large extent, this removes the determination of the level of health care spending in the budget from the general considerations that apply to other competing uses of public funds. In an environment where the state budget is faced with a difficult challenge to rein in public spending, this built-in increase in health care appropriations in the budget would only make this task more difficult. And since, according to the proposed amendments, any increase in the taxes dedicated to health insurance premiums must be matched by an equal reduction of personal income taxes, this would make difficult the achievement of other budget goals (though, presumably, there is nothing to stop the Parliament for legislating an increase in other taxes or the personal income tax for “other” reasons). The proposed amendments do not indicate what would be the relationship between the proposed financing and the expenditure needs.

29. Second, the proposed financing provides little in the way of incentives for health care providers to contain the growth in health care expenditures. Providers would be paid on a fee for service basis, which gives them incentives to offer more services to patients than might strictly be necessary. Hospitals would be reimbursed under a “global” budget, which could lead to a decline in the quality of care, if hospital management is poor. Drawing upon international experience, there are several ways in which the health care system could provide strong incentives for cost containment. For hospital reimbursements, the development of a system of diagnosis related groups (DRGs) has been successful in the United States in slowing hospital cost inflation. Under this system, hospitals are not reimbursed at cost for the treatment of patients. Instead, diseases and treatments are divided into related groups and hospitals are reimbursed for patient care depending on the diagnosis and treatment. Also, it may be desirable for Poland as part of the reform to develop a notion of core health care services that would be provided on demand to the population and another set of services that would be provided with limits, and to determine the appropriate level of technology that would be consistent with expected demand. Finally, one important method of controlling health care cost growth is to impose some marginal cost on the patient of additional treatment through copayments and deductibles. The proposed financing mechanism imposes no direct marginal cost at all on the patient since any increase in the premium is offset by a decrease in the personal income tax liability (though the proposed amendments do allow for the possibility of requiring a copayment). There may, however, be indirect costs if other taxes rise or if expenditures on other public services are cut.

30. Third, the proposed reforms only partly address the potential problem with adverse selection that is common in insurance markets. Trade and private insurers are likely to try to attract only the healthier and higher income elements of the population. As a result, regional insurance funds are likely to end up with a disproportionate share of the least healthy people, which is likely to increase their costs relative to the other funds. Although the financing of the system builds in an equalization mechanism for transferring money to funds that are facing deficits, it is unclear that the transfers would be sufficient to ensure that people covered by the regional funds receive the same quality of care that those covered by the other funds receive. This adverse selection may make it difficult to establish a set of norms for average costs of treatment, which are important in setting goals to contain the growth of costs (such as, for instance, under a system of DRGs).

31. Fourth, the proposed amendments obligate the state budget to extinguish the debts of public health care establishments prior to concluding agreements with the health funds. As previous efforts with eliminating health care arrears attest, paying off debts alone does little to impose discipline on health care establishments or prevent a recurrence of this persistent problem.

32. The proposed system of health care provision offers some improvements over the current system, but it does not satisfactorily address the fiscal burden of health care. Shortcomings in the design and financing of the proposed system should be addressed before the system is implemented.

D. Restructuring the Intergovernmental System

33. The intergovernmental system in Poland is evolving in other dimensions as well. One important change is the devolution of responsibility from higher to lower levels of government for some public services.

Expenditure assignments

34. From an efficiency perspective, there are certain advantages of more decentralized forms of intergovernmental fiscal relations. A federal system is likely to be more sensitive to local differences in preferences. It is thus appropriate to devolve responsibility for some expenditure decisions to lower levels of government to reflect local preferences. International experience would suggest that for countries such as Poland, there is some scope for decentralization. One disadvantage of a more decentralized intergovernmental system is that it typically leads to greater inequalities between wealthier and poorer localities, though most intergovernmental systems try to address these inequalities through shared revenues and intergovernmental grants.

35. The main advantage of creating a middle level of government is that it could more efficiently provide public services that have spillovers extending beyond individual localities. The government should reallocate certain local functions with spillovers to this middle level and then provide financing by a combination of shared state or local taxes, user charges, and grants from the state government. Apart from the introduction of a new middle level of government, there is a need to consolidate the smallest of the gminas into larger local entities to achieve economies of scale in public service provision.

Revenue assignments

36. Assigning expenditures to lower levels of government raises the issue of how to finance those expenditures. There are persuasive arguments linking the provision of local public services with local financing.8 Local governments in Poland rely on several sources of revenue including: own-source taxes; a share of the personal income tax collected by the central government; a share of the corporate income tax collected by the central government; grants and transfers from the central government; and local fees and user charges. By international standards, the own-source revenue of local governments in Poland is quite low. Strengthening the Polish local revenue system would contribute to government accountability by more closely linking the decision to spend with the decision to raise revenues to pay for that spending.

37. The local property tax is in many countries the mainstay of local finance. The property tax is an effective tax for local governments to use because it is levied on a relatively immobile tax base. The more mobile the tax base, the greater the risk that interjurisdictional differences in tax burdens would cause taxpayers to move to reduce their tax burdens, though to the extent that taxpayers perceive a link between their local taxes and the supply of local public goods, they may be less likely to try to avoid the tax. The main local tax in Poland is property taxes on real property. There is no up-to-date register of ownership and market valuations for property in Poland. Hence the existing property tax relies on specific charges levied on area. Modern property taxes are based on registers, which are regularly revised, and the tax is levied on an ad valorem basis on property value, typically at an effective rate of 1-2 percent. Poland plans to implement a property tax based on market valuation for property in the near future, though there remains political opposition to strengthening this tax.

38. Shared revenues from the personal income tax and corporate income tax are a major source of revenues for local governments. All gtninas receive a predetermined share of personal income tax and corporate income tax revenues. In 1998, the gminas are receiving 17 percent of personal income tax revenue collected in the locality, an increase over 16 percent in 1997. In the past, the gminas’ share of personal income tax revenues was proportional to population and this method has been only slowly phased out for gminas with low incomes, which have been hit hard by the switch to a transfer based on income earned in the community. In 1998, the gminas are also receiving a 5 percent share of the corporate income tax based on employment of each corporation in a locality.

39. The shared personal income tax collected by the central government is another way of strengthening local revenues in the short term. Transferring a fixed share of a centrally administered tax such as the personal income tax to the localities is practiced in other countries. The shared tax could, however, be made more flexible. Each local government could be allowed to set its own tax rate (on the tax base set by the central government) and therefore be accountable to its citizens for this tax burden. Allowing local governments to “piggy back” on existing taxes is another alternative. Depending on the degree of autonomy granted as regards setting the additional rates for these taxes, there is the possibility both of straining administrative capabilities and compromising the competitiveness of some regions.

Intergovernmental grants

40. Grants from the central government are also an important component of local public finance in Poland. Transfers from the state budget consist of four types: (a) a general subvention, equal to 0.9 percent of planned revenues. Part of this subvention is an equalization subsidy, which helps equalize the potential of poorer gminas to pay for public services. It is given to gminas where the per capita income is less than 85 percent of the total and the equalization covers 90 percent of the difference between 85 percent and 100 percent; (b) an educational subsidy, categorized under the general subvention, equal to 7.5 percent of planned revenues. This subvention compensates for the transfer of responsibility for primary education to gminas; (c) targeted subsidies which can only be spent on targeted projects. Voivods establish the projects and amounts. The list of possible projects is extensive, including investments, social assistance, and other governmental purposes; and (d) a road subsidy, which replaced the local road tax in 1997.

41. Many federal systems use equalization grants to “level the playing field” for the range of jurisdictions.9 However, equalization grants are technically difficult to implement because they entail determining whether the objective is to equalize the taxable capacity or actual public service provision of differing localities and then to devise an appropriate measure of taxable capacity, which is not easily manipulated by the local administration—for example, if the indicator of taxable capacity is based on a limited set of taxes, there is an incentive for lower level jurisdictions to raise revenue by using taxes not included in the indicator base. Finally, equalization grants in many countries often prove to be politically contentious.

Local government borrowing

42. Gminas are, in principle, free to borrow without central government interference or control. In practice, however, most local governments have been reluctant to incur debt, even for capital purposes, reflecting a combination of prudent behavior and the absence of an established mechanism and market for issuing this debt. The localities face a limit that the sum of interest, principal and payments for debt guarantees cannot exceed 15 percent of total revenues, including intergovernmental grants. Although no locality has yet reached this limit, the use of municipal debt has begun to grow rapidly, with the outstanding amount of municipal debt nearly doubling from Zl 447 million to Zl 897 million, from 1995 to 1996 (still, however, only ¼ percent of GDP).10 This debt is likely to continue to grow in the next few years as localities face pressures for substantial investments in infrastructure and other capital projects. Since reliance on market forces alone at this stage of transition may not ensure that sufficient discipline is maintained on subnational borrowing, it is important to impose formal constraints as well. Subnational external borrowing should be strictly limited to avoid an accumulation of external debt by local governments, which may require a state bailout in the event of a severe economic downturn or fall in the exchange rate.


Prepared by Janet Stotsky.


This discussion substantially benefited from the analysis of a World Bank Health team that visited Poland in January 1998.


Ellen Goldstein, Alexander S. Preker, Olusoji Adeyi, and Gnanaraj Chellaraj, “Trends In Health Status, Services, and Finance: The Transition in Central and Eastern Europe,” World Bank Technical Paper, No. 341, 1996.


The amendments are unclear as to whether the income would be gross or net as defined in the personal income tax law or just wages, as is typically found in other European countries.


The amendments are also unclear as to how this offset would work, whether through a credit or some other means. The amendments do not specify what would happen if the health insurance premium were greater than the personal income tax liability, if, for instance, the premium were levied on gross wages and net taxable income were considerably smaller than gross wages.


A distinction also needs to be maintained between the assignment of the revenues of a particular tax to a level of government and the assignment of the responsibility to collect that tax. It may be more efficient and effective for a higher level of government’s tax administration to collect the tax.


The case for equalization grants presumes that the instruments available to the central government through tax and transfer programs, are insufficient to achieve overall distributional objectives.


Tony Levitas, “The Development of the Polish Municipal Capital Market: 1994-96,” Research Triangle Institute, 1997.