Economic challenges and inflationary pressures in the European Union may increase the number of people living in poverty, including in Poland, says a new World Bank report published today. To confront these challenges, Poland and other EU countries will need to pursue a carefully calibrated macroeconomic policy mix that continues to rein in inflation while avoiding additional financial market volatility and protecting the poorest people.
The World Bank's latest European Union Regular Economic Report (EU RER): "Energizing Europe - Part 1: Inclusive Growth - Inflation Chipping Away Income Gains," analyzes economic developments and prospects among EU Member States with a focus on inclusion. It highlights that growth in the EU is expected to sharply decelerate in 2023, as high inflation and the accumulating effects of tight monetary policy dampen economic activity. While inflation has been showing recent signs of easing across many EU countries, it nevertheless remains high, especially in some of the poorer EU economies amid particularly high food inflation. Despite ongoing fiscal support, the adverse impact of high inflation on real disposable income has disproportionately affected the region's poorest.
"The outlook for the EU economy remains challenging," said Gallina A. Vincelette, World Bank Regional Director for the EU countries. "While rising prices affect everyone, low-income households are impacted the most as they spend a cardinal share of their incomes on food and energy. Targeted policy interventions and social safety nets are important in shielding the poor and vulnerable from economic shocks such as the current cost-of-living crisis."
Governments have continued to step in to shield their economies and people from the cost-of-living crisis, but support measures have varied considerably, depending on exposure to spillovers from Russia's invasion of Ukraine and the availability of policy buffers. Most measures have been in the form of untargeted price support, such as price controls and subsidies, which are suboptimal as they distort price signals for consumers and producers. Social safety nets are vital in protecting households from various risks; yet these programs are still not sufficient to support the poorest and most vulnerable.
In Poland, while government measures such as the Anti-inflation Shield, 14th-month
Pension, and energy subsidies help soften household impacts, the population at risk of poverty is expected to remain elevated at 1 to 2 percentage points above 2021 levels. While Poland spends a higher percentage of GDP and social protection expenditures on family benefits than the EU average (3.8 and 16.2 percent vs. 2.5 and 8.3 percent, respectively), the country also spends less on social exclusion measures and housing support than the EU average. A re-balancing of support measures would help increase their impact on the poorest and most vulnerable.
Well-targeted fiscal support can also bolster efforts to realign spending with revenues, especially as policymakers embark on much-needed and delayed fiscal consolidation. The challenge, however, is to ensure that the economic slowdown is not exacerbated by fiscal consolidation efforts-as was the case following the global financial crisis. Countries can balance these priorities by reducing untargeted tax cuts, strengthening tax administration, broadening the tax base, and cutting subsidies on fossil fuels. These subsidies are costly and support demand for environmentally damaging and carbon-intensive energy sources, which erodes the incentive for energy conservation and creates tension with longer-term climate goals. EU countries will need to restore their macroeconomic policy buffers while protecting the vulnerable from future shocks.
