Although Poland is a moderately indebted country by European standards (public debt below 50% of GDP in 2022 vs. EU average of 83.5% of GDP), authorities have been running expansionary policies in the last pandemic and pre-election years as generous spending was accompanied by tax cuts. Some were temporary (VAT rate cuts for energy), but others are here to stay (lower personal income tax rate, higher tax-free allowance). Large fiscal gaps and borrowing needs in an environment of high interest rates should lead to a substantial rise in interest payments as the increased amount of total public debt is rolled over at higher costs. That may force adjustments in other spending in the future.
Some members of the new ruling majority were outraged when the Ministry of Finance disclosed that the state budget deficit (that covers only part of the central budget and is reported on a cash basis), rose to PLN33.5bn cumulatively year-to-date through September compared to PLN16.6bn through August. Given the annual target is set at PLN92bn, in our view in itself it is not a cause for alarm. What is concerning is that spending was substantial in September alone while some tax revenues were surprisingly weak (close to zero from CIT). As the deficit threshold cannot be exceeded, the administration theoretically needs to seek some savings on the expenditure side if revenues indeed fall short of the plan through the end of this year. But we think revenues should improve in the coming months, given that consumption is recovering, offsetting lower dynamics of nominal GDP due to low inflation.
According to the Eurostat data, which gives the full picture of public finances, the general government gap is indeed already sizable. In 2Q23, the general government deficit amounted to PLN36.6bn compared to PLN5.4bn in 2Q22. On a 4-quarter rolling basis, it increased to 4.7% of GDP from 3.9% of GDP after 1Q23. The Autumn fiscal notification points to above 5% of GDP fiscal gap in 2024, which is roughly 1% of GDP more than envisaged in the spring notification.
On the other hand, since the EU general exit clause regarding fiscal governance expires in 2023, the EC may impose an excessive deficit procedure on Poland already in 2024. Still, with the rules guiding the Stability and Growth Pact execution in 2024 subject to reform (leading to new approach based on debt sustainability rather than arbitrary 3% and 60% of GDP thresholds), Poland may not necessarily be obliged to comply quickly.
