Europe News

Europe's brain drain is getting worse — so some countries are scrapping income tax for young people

Key Points
  • A so-called 'brain drain' is dimming the economic prospects of some CEE countries, with young people disproportionately making the most of the bloc's freedom of movement in search of better paid jobs.
  • It has prompted the government of Poland to completely scrap income taxes for approximately 2 million young workers.
  • Meanwhile, Croatia has also proposed to scrap income tax for people up to 25 years of age and cut it by half for people aged between 25 to 30.
From August 1, 2019, Polish citizens under the age of 26 who earn less than 85,528 zloty ($22,207) a year will no longer have to pay income tax.
Jaap Arriens | NurPhoto | Getty Images

Central and Eastern European (CEE) countries are proposing radical tax incentives for young people, as part of a drive to stem the flow of skilled workers to Western EU states.

A so-called 'brain drain' is dimming the economic prospects of some CEE countries, with young people disproportionately making the most of the bloc's freedom of movement in search of better paid jobs.

It has prompted Poland's government to completely scrap income taxes for approximately 2 million young workers.

The new law — which came into effect at the start of the month — is designed to help retain young Polish citizens.

When advocating for the law in parliament, Prime Minister Mateusz Morawiecki said 1.7 million people had left the country in the past 15 years.

It is "as if the entire city of Warsaw has left," he said, before describing the demographic decline as a "gigantic loss."

Strong doubts

To be sure, Polish citizens under the age of 26 who earn less than 85,528 zloty ($22,207) a year will now no longer have to pay income tax.

The average salary is around 60,000 zloty — meaning the threshold is comparatively high for young people in Poland.

Meanwhile, Croatia has also proposed to scrap income tax for people up to 25 years of age and cut it by half for people aged between 25 to 30.

The proposed changes are expected to be completed over the coming months, with new legislation set to take effect from January 1, 2020.

However, analysts told CNBC they had strong doubts about whether such tax relief measures would prevent the drain of young workers.

Shrinking workforce

The fundamental problem is that while these popular stopgap measures are well-meaning, they ultimately "fail to address the root cause" of the brain drain phenomenon, Prianthi Roy, analyst at the Economist Intelligence Unit (EIU), told CNBC via telephone.

Roy said tax breaks for young people in CEE countries had been proposed to "reverse the tide of a shrinking workforce" — a trend which is likely to be the most prominent long-term drag to economic growth in the region.

Tourists walk in silhouette across the river from the London Eye, one of the most famous landmarks, skylines and iconic buildings in the capital in London, England, United Kingdom.
Mike Kemp | In Pictures | Getty Images

Declining birth rates, an increasing trend of young people moving abroad and a government-led refusal to allow immigrants to join the labor market had "skewed the dependency ratio" in these countries, Roy said, before adding this problem was just "going to get worse and worse."

"Ultimately, it will start to weigh on fiscal balance and economic growth. So, parity with the West is not going to be possible. It is just never going to happen."

Brain drain 'is not just a wage differential'

In 2017, almost 17 million people based in the bloc moved to another EU country, of which 32% were aged between 15 and 34, according to an official EU report.

Germany and the U.K. were found to be the top two destinations for young European citizens, while the top countries of origin were Romania, Poland, Italy and Portugal.

Highly-educated European movers were more likely to favor urban settings and northern areas of the EU, the report said, citing Sweden, Ireland, Estonia, Denmark and the U.K.

They also usually enjoy very high employment rates, it added.

"It is not just a wage differential. It could be young people want to move abroad for a new cultural experience or it might be because they simply do not see a long-term future for themselves at home," Otilia Dhand, senior vice president at research firm Teneo Intelligence, told CNBC via telephone.

"The political solutions that are being proposed do not necessarily address the issue of labor migration," Dhand said.