As the depths of winter beckon in high-tax, low-growth Britain, I have been busy planning my next trip to Poland. I visited Warsaw in late September and found it to be one of Europe’s most dynamic, vibrant and interesting cities.
The sensitively reconstructed Old Town is complemented by bold and innovative modern architecture such as the Cosmopolitan, one of Poland’s tallest residential skyscrapers, designed by German-American architect Helmut Jahn and completed in 2014. Strolling through Warsaw’s city centre, I sampled excellent street food and visited local landmarks like the ethereal and haunting Polin Museum, which commemorates the destruction of the Warsaw Ghetto.
Back in London, the bond markets were in meltdown after Liz Truss’s tax cutting budget. Under Truss’ successor, Rishi Sunak, Britain has hiked the tax burden to a new peacetime record, leaving households facing a triple whammy of higher taxes, rising prices and higher interest rates.
Meanwhile, Poland is launching a fresh round of tax cuts this month. Like all of Europe, Poland has been hit by the energy crisis, precipitated by Russia’s illegal invasion of Ukraine and the lifting of lockdown restrictions. These events have significantly increased demand for dwindling supplies of natural gas and caused a cost-of-living squeeze across Europe. But rather than punishing the taxpayer, the Polish government has done something alien to British policymakers by delivering tax cuts for workers.
The measures, several of which have already been announced, include a cut in VAT on basic food items, cut to VAT on fuel and reducing the basic rate of income tax from 17 per cent to 12 per cent for those earning up to 120,000 zloty (£22,400) annually. Prime Minister, Mateusz Morawiecki, claims that 25 million taxpayers will benefit from the changes.
At the same time, the Polish government will make a portion of the health insurance contribution tax deductible for certain entrepreneurs.
“This is the most significant tax cut in years,” the Polish PM declared, arguing that millions of Poles will get to keep more of their earnings, encouraging people to get back into work and be entrepreneurial. It’s hard to disagree with him.
Poland’s latest overhaul of the tax system is just a footnote on its journey from scrappy, Eastern Bloc upstart to poster boy of the EU. It began in 1989 when Poland became the first country in Eastern Europe to renounce communism and create a market economy. Building on a long tradition of anti-communist opposition which had its roots in the foundation of Solidarity in 1980, Poland’s rejection of its Soviet-backed government, inspired other countries to sweep away the occupying power and embrace democracy and freedom.
In 2004, Poland joined the EU and became a beneficiary of EU structural funds. The Organisation for Economic Co-operation and Development (OECD) estimates that since 2004, the average Polish worker’s wages have increased by 47 per cent to about $33,600 per year. In the UK, wages have increased by just 11 per cent to $50,000 in the same period.
To put that in perspective, salaries in Poland are projected to have increased by 11.3 per cent in 2022 alone. The Financial Times has reported that if current trends continue, the average Polish household will have a higher standard of living than their British counterparts by 2030.
Rising living standards in Poland have precipitated a groundswell in emigrants returning to the country. Official statistics show the number of Poles living in the UK has tumbled from over a million in 2017 to 696,000 as of June 2021.
Although Brexit has contributed to lower levels of EU immigration to the UK, the number of immigrants to the UK from Bulgaria, Portugal and France was still rising as of 2019, while the numbers of Polish immigrants was already stagnating.
Poland’s journey to prosperity is a story worth telling, particularly at a time when British workers are experiencing the highest tax burden since the Second World War.
Not since 1951 have workers been so impoverished by the tax system. British families are facing the largest fall in living standards for six decades and disposable incomes are set to fall further than at any time since records began.
Unfortunately, the Prime Minister’s New Year speech did not contain any policies that could reduce the tax burden and offered no way out of Britain’s low-growth trap.
Rishi Sunak has so far presented himself as a competent pragmatist, and certainly a degree of calm was required to restore confidence in the markets and stability to public finances in the immediate aftermath of Truss’s tenure. Nonetheless, he seems to be ignoring the importance of the pro-growth policies championed by his predecessor.
The longer-term economic outlook is showing the first green shoots of recovery. Official data shows the economy expanded by 0.1 per cent in November 2022, easing concerns about a possible recession. Inflation is also set to half in 2023, with Governor of the Bank of England Andrew Bailey saying there could now be a “rapid” fall in inflation in Britain.
As a result of an improving economic picture and falling energy prices, The Telegraph has reported that the Treasury will be left with a £11bn windfall. This fiscal headroom raises the tantalising prospect of an opportunity for future tax cuts before a general election.
At Next Gen Tories, we are calling on the Government to follow Poland’s example and reform our penalising tax system to the benefit of workers. Changes to income tax, savings and child benefits should be urgently considered to boost the economy. Lowering the basic rate to 18 per cent this year would cost about £10bn and would give hard working people the break they deserve.
Tax cuts alone will not be enough to revamp Britain’s stagnating economy. As I have often argued, politicians will need to find the courage to carry out the necessary supply side reforms to boost productivity, which, to her credit, Liz Truss was prepared to deliver. These should include liberalising immigration, reform of the NHS, overhauling the planning system, redesigning the civil service and encouraging supply-chain resilience across the economy.
A critical feature of Poland’s economy is that its purchasing power is very much in the hands of its younger, working population. Since 2015, the Polish government has established numerous social transfer policies, its most notable being “500+,” which gives 500 zlotys (£94) per month to families with two or more children.
In 2019, Poland amended its policy on personal income tax, family benefits and health care benefits by introducing income tax relief for people under 26 years of age. This is perhaps why the Polish economy was performing strongly before the pandemic. In October 2019, it had been predicted to grow by 3.1 per cent in 2020, according to the IMF’s World Economic Outlook.
Poland’s consideration for its younger citizens contrasts starkly with the UK, where soaring inflation and house prices are hitting workers’ wallets. Millennials are destined to spend a large proportion of their income on rent and taxes, making the dream of home ownership even more unattainable and exacerbating intergenerational inequality. The opportunities for young people in Britain do not correspond to those of their Western peers, which makes us all poorer in the long-term.
Tax cuts need to happen now, not later, to avoid apathy and disillusionment. Unless the Government lets people keep more of what they earn, countries like Poland will continue to overtake Britain on the road to prosperity, while the UK languishes in the slow lane, squandering the opportunities of Brexit.
