Jan Cienski in Warsaw -

Donald Tusk, Poland's prime minister, is promising to make it possible for his country to join the euro by 2012, and the main way he plans to do that is by getting millions of inactive Poles back into the labour force.

Poland has the lowest level of labour activity in the EU, with only 54.5% of working-age Poles employed. "Those numbers are a scandal," says Jeremi Mordasewicz, an economist with Lewiatan, the Polish employers' federation. "The number of inactive people is acting like a brake on the economy." The finance ministry's convergence plan, due to be presented soon to the European Commission, calls for the number of working Poles to increase to 59% by 2010.

The problem began in the waning days of communism, when there wasn't much real work to do and the discredited Communist Party government tried to curry favour with the proletariat by allowing for early retirement, and for women to leave work even earlier than men. That tradition continued after Poland regained its independence in 1989 and returned to a market economy. Successive governments of both the left and the right have thought it more politic to allow early retirement benefits to be given to workers in companies being shut down or privatised or to coal miners no longer needed in loss-producing collieries.

What made sense at a time when a fifth of workers were officially unemployed and there simply were no jobs for many people is much less justified at a time when official unemployment is at 11.7% and the real unemployment rate is probably below 8%. Employers from builders to restaurants and security companies are screaming for more workers, while people with private sector jobs enjoy double-digit salary increases. Some companies are beginning to shift production to other countries because of difficulties in hiring new workers. "We're having real problems finding workers, and I'm even thinking of moving some of our production to Germany," says Solange Olszewska, co-owner of Solaris, a bus maker located near the central Polish city of Poznan.

PM Tusk's government says it is determined to do something about the labour issue, because it feels that employment holds the key to fixing the public finances, which would allow Poland to adopt the single currency.

Old-age workers

Currently, Poland spends about PLN20bn (€5.7bn) a year on the 1m people who have the right to retire early. In Poland, only 28% of people aged 50-65 work, while in the rest of the EU about half do. "Such a difference is unacceptable," Stanislaw Gomulka, the deputy finance minister, told the Gazeta Wyborcza newspaper. "It means that we have to impose high taxes on businesses and on workers in order to maintain some people outside the labour market."

Starting next year, the government plans to radically reduce the number of people who can retire early, and to push women's retirement age to be the same as men, rising from 55 to 60. It will also begin a programme to encourage employers to hire people over 50. The goal will be to save about PLN3bn by next year, with an eventual target of saving about PLN10bn a year and pulling in an extra PLN25bn in taxes from older workers. "Thanks to that, we will be able finance the reform of personal and corporate income taxes," says Gomulka.

Next year, the government is committed to reducing the current three levels of income tax - which top out at 4% - to two tax rates with a peak rate of 32%. Gomulka talks of bringing in a flat tax by the end of the decade set at about 18%. Despite those tax cuts, the finance ministry is counting on reducing the public sector deficit to 1% of GDP from 2.9% this year. As part of its assumptions, it is counting on growth this year to come in at 5.5% and for the economy to continue expanding at 5% for the subsequent two years. "It is a very optimistic programme from the macroeconomic point of view," writes Janusz Jankowiak, chief economist of the Polish business roundtable, pointing out that the turbulence caused by the credit crisis and the resulting slowdown in the US and Western Europe could drive Polish growth closer to 4%. "The convergence scenario is unusually ambitious, and at the same time unusually risky."

The current government's main problem is that its predecessors in the Law and Justice party, who ruled from 2005-2007, squandered the best years of economic growth by pushing through no economic reforms. It is also being forced to act by the European Commission, which since 2004 has put Poland on watch over running an excessive budget deficit.

Finally, there is the pressure from business and from Tusk to get Poland ready to join the euro by 2012, a break with the views of his Law and Justice predecessors who were much less enthusiastic about seeing Poland abandon the zloty. "The budget for next year is a test of the government's determination and its ability to explain to society that we have a new situation," Gomulka told reporters. "Spending over the last two years rose by 20 per cent, and we have to stop that growth."

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