Poland Proposes $2.4 Billion Tax Cuts

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Poland will temporarily reduce taxes on family energy bills to assist the central bank in containing rising inflation, which has become a key concern among the electorate of the nationalist ruling party.

From January to March, the government will implement a 10-billion-zloty ($2.4 billion) plan to reduce the value-added tax on energy and gas for three months. It will also lower fuel excise for five months and offer a one-time payment to around five million households to compensate them for higher food prices.

“We’re responding to market challenges, to energy prices, which went wild on global markets,” Deputy Prime Minister Jacek Sasin told reporters on Thursday.

The interim measures would allow the government, led by the Law & Justice party, to respond to allegations that it is not doing enough to combat rising costs from the opposition.

Inflation rose to 6.8% in October, the highest level in two decades, as consumers were increasingly concerned about rising food, gas, and power prices.

The central bank has been sluggish to respond, having only begun tightening the policy in October and just recently raised the main interest rate to 1.25 percent.

The reforms were greeted positively by certain central bank decision-makers. Jerzy Zyzynski, a member of the Monetary Policy Council, believes the benchmark interest rate may not need to move over 1.5 percent.

Can tax cuts help inflation?

Grazyna Ancyparowicz, another MPC member, believes the idea will help inflation return to the central bank's objective faster than expected.

It’s “a crucial factor that the government is joining the central bank in the fight against inflation,” Ancyparowicz said by phone.

Economists, on the other hand, are less optimistic. According to Citigroup Inc., the tax cuts will only affect the peak of headline inflation, not underlying pricing pressures.

“Government transfers to households should support private consumption,” Cezary Chrapek, an economist in Warsaw, said in a note.

“We, therefore, assume the MPC will increase rates further, with a likely 50 basis-point rate hike in December.”