Higher deficit, increase in social and defense spending, energy and environmental reforms

ECONOMYHigher deficit, increase in social and defense spending, energy and environmental reforms

The government announced at the end of October a revision of the national budget for 2024 and a proposed budget revision for 2025. The main change for 2024 is an increase in the deficit by PLN 56 billion, from PLN 184 billion to PLN 240.3 billion, primarily due to realistic tax revenue projections, including an increase from VAT of PLN 23 billion and corporation tax of PLN 11 billion due to a weaker performance of exporting businesses – a result of the weak economic situation in the Eurozone and smaller profit contributions to the National Bank of Poland (NBP) by PLN 6 billion. Revenues from the sale of CO2 emission rights are also expected to be lower by PLN 9 billion. One significant change in expenditures is the allocation of PLN 10 billion to local authorities to fill the gaps related to the Polish Deal.

In 2025, the national budget deficit is projected to rise to PLN 288.77 billion. A detailed project for the 2025 budget has not yet been published, but the cost of servicing the national debt (not counting local governments and extrabudgetary funds) is expected to be PLN 75.5 billion, whereas just a few years ago it was below PLN 30 billion. Financial markets dictate this cost. The continued increase in this cost from 2026-2028 remains the principal threat to the country’s macroeconomic stability, greater than governance from the European Commission, with the possibility of an open crisis. The deficit of the entire public finance sector, including extrabudgetary funds, is expected to be 5.5% of GDP in 2025. The total increase in public expenditure from 2024-2027 is estimated at around 7% of GDP. The level of social transfers is expected to increase from 17.7% of GDP in 2023 to 19-20% of GDP in 2027. Expenditures on national defense are expected to increase from around 2% of GDP in 2023 to 4.7% of GDP in 2025 and later.

In the government’s forecast, the debt of the sector, calculated correctly according to EU rules, will exceed the constitutional limit of 60% of GDP as early as 2026. Financial markets take EU methodology seriously, not the so-called national methodology, so the data provided by Minister Domański following this Union methodology is economically correct. However, the government should entirely abandon, which it has not done so far, the use of the so-called national method, as this methodology misleads the public into believing that the debt is lower, and now even much lower than it actually is. The second necessary change to the Public Finance Act is to eliminate so-called extrabudgetary expenditures, which remain outside parliamentary control. These expenditures are growing very rapidly, allowing for the continuation of the dangerous policy of “the budget can afford everything.”

We have two important reasons for the finance minister’s ignoring or underestimating, and generally the current government as well as the opposition, the significant risk of a slowdown in GDP growth rate in the coming years. The first reason is the likely still low investments, about 17% of GDP, compared to 22.5% on average in EU countries. The causes are long-term: very low household savings, strongly negative public savings, modest foreign investments, and a decreasing technological gap between Poland and technologically advanced countries, such as the USA, Germany, or the UK. The pace of GDP growth per capita in these countries has been roughly the same for the last 100-200 years, about 1.5% annually. This pace in catching-up countries was very diverse between zero and about 10%, strongly dependent on the share of investments in GDP, the quality of market institutions, and education quality. In Poland, the growth rate over the last about 32 years has averaged about 3.5% per year. In the coming years, due to the already high level of labor productivity and low investments, a slow decrease in this rate to 1.5% per year is, therefore, inevitable. The European Commission (EC) shares this assessment. The Polish government has not yet accepted it.

Ending the legal war with the EC and international law institutions was a significant positive change in 2024. Poland started receiving funds from the National Recovery Fund and the current EU budget. Another positive change is the program for admitting a large number of Ukrainians with the rights of Polish citizens. This change reduces the cost of the demographic crisis. The third positive change is the planned new policy for improving river quality, protecting forests, and eliminating large natural disasters. The fourth good change concerns the energy sector: closing coal power plants and coal mines, greenlighting wind and nuclear power plants, reducing the carbon footprint in industrial production, and the projected rapid restructuring of the electrical connection network. A significant increase in spending on science, education, and housing construction is also needed.

Written by Stanisław Gomułka, Chief economist of BCC

Source: https://ceo.com.pl/nowelizacja-budzetu-na-2024-i-2025-wyzszy-deficyt-wzrost-wydatkow-socjalnych-i-obronnych-reformy-energetyczne-i-srodowiskowe-24437

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