Rising prices in Poland: a “shield” against inflation

Status: 01/13/2022 8:10 a.m.

Poland is currently experiencing the highest inflation in more than 20 years. The government is trying to counter this by temporarily lowering VAT on many products. But is that enough?

By David Zajonz, ARD Studio Warsaw

People in Poland feel it every day: in the supermarket, at the petrol station, with the bills for electricity and heating. In December, inflation was 8.6 percent compared to the same month last year, which is significantly higher than in Germany. Actually everything has become more expensive, says a citizen on Polish television. Another woman grumbles: “This is an escalation disaster! Robbery in broad daylight!”

VAT on food is suspended

The Polish Finance Minister Tadeusz Koscinski says that this year even inflation of more than ten percent cannot be ruled out. The government is trying to counter this, “anti-inflation shield” is their new word. There are subsidies from the state for low-income households. In addition, taxes on products particularly affected by inflation are to be reduced. Prime Minister Mateusz Morawiecki even wants to temporarily abolish VAT on food, gas and fertilizers at the beginning of next month.

Tank tourism from Germany is likely to increase

The value added tax on fuel is to be reduced from 23 to eight percent. “The Poles will see even lower fuel prices at the petrol stations, I hope in three or four weeks,” said Prime Minister Morawiecki. The head of government wants to reduce the price of fuel to around five zlotys, or around 1.10 euros per liter. This means that petrol and diesel would be around a third cheaper than in Germany. Tank tourism in the German-Polish border region is then likely to increase further.

Tax cuts cost up to 4.4 billion euros

The economist Witold Orlowski from the Warsaw University of Technology sees the tax cuts with skepticism: “Of course they will have an effect on inflation, but the price for them is a huge hole in the state budget.” The Polish government itself assumes that its VAT cuts will cost a total of up to 4.4 billion euros. The first round of measures against inflation had already taken place in December. The government is now talking about an “anti-inflation shield 2.0”.

Economist calls for “sword” instead of “shield”

Economist Orlowski finds the word “protective shield” treacherous, after all it is a metaphor from the world of knights: “You don’t win a fight with a protective shield, but with a sword.” The shield alone can protect yourself for a while, but it does not replace the sword. “You have to fight against inflation,” says Orlowski.

By this, the economist means austerity measures by the government, but also drastic interest rate hikes. The Polish Central Bank has raised the key interest rate several times in the past few months, but in Orlowski’s opinion it is acting too hesitantly.

Tax cuts expire at the end of July

The economist fears that there could be a wage-price spiral in Poland. This is understood to mean a situation in which rising prices lead to higher wages and then, in turn, rising wages lead to higher prices. Central banks can break this dynamic by raising interest rates.

Another danger of inflation in Poland is that the tax cuts are limited in time. At the end of July, they should disappear, prices could then shoot up again. Unless the government extends the tax cuts. That in turn would, however, again come at the expense of the Polish state budget.

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