In late October, the Polish government announced a revision of the state budget for 2024 and an updated budget proposal for 2025. The key change for 2024 is an increase in the deficit by PLN 56 billion, from PLN 184 billion to PLN 240.3 billion. This adjustment is largely due to the need to reassess tax revenue forecasts, including a reduction of VAT revenue by PLN 23 billion, CIT by PLN 11 billion caused by weaker performance among export-oriented enterprises, and a PLN 6 billion drop in the National Bank of Poland’s profit transfer. Additionally, revenue from CO₂ emission permit sales is expected to be lower by PLN 9 billion. One significant expenditure adjustment is allocating PLN 10 billion to local governments to cover budget shortfalls caused by the Polish Deal.
In 2025, the state budget deficit is projected to rise to PLN 288.77 billion. A detailed budget plan for 2025 has not yet been released, but the cost of servicing state debt (excluding local governments and off-budget funds) is expected to reach PLN 75.5 billion. Just a few years ago, this cost was below PLN 30 billion. This expense is determined by financial markets. The continued rise in debt servicing costs through 2026-2028 poses a significant threat to macroeconomic stability, potentially greater than the discipline imposed by the European Commission, which could lead to an open financial crisis. The deficit for the entire public finance sector, including off-budget funds, is projected to reach 5.5% of GDP in 2025. Total public spending is expected to increase by around 7% of GDP between 2024 and 2027. Social transfers are set to rise from 17.7% of GDP in 2023 to 19-20% in 2027. Defense spending is also expected to grow, from about 2% of GDP in 2023 to 4.7% in 2025 and beyond.
The national debt, when calculated according to EU rules, is forecast to exceed the constitutional limit of 60% of GDP as early as 2026. Financial markets take the EU methodology seriously rather than the so-called national methodology. Therefore, presenting data according to the EU methodology, as Minister Domański does, is economically accurate. However, the government should abandon the use of the national methodology altogether, as it misleads the public into thinking the debt is much lower than it actually is. Another necessary amendment to the Public Finance Act involves eliminating off-budget expenditures, which remain outside parliamentary control. The volume of these expenditures is growing rapidly, enabling a risky “the budget can afford everything” policy.
Risks to Poland’s Economic Growth
Two significant reasons contribute to the finance minister and the government, including the opposition, underestimating the risk of a slowdown in GDP growth in the coming years. The first reason is persistently low investment, which stands at around 17% of GDP compared to the EU average of 22.5%. The reasons are long-standing: very low household savings, significant negative public savings, modest foreign investments, and a narrowing technological gap between Poland and technologically advanced countries like the USA, Germany, and the UK. Over the past 100-200 years, these countries have seen per capita GDP growth rates of around 1.5% annually. In developing countries, growth rates have varied from 0% to 10%, heavily influenced by investment levels, market institutions, and education quality. In Poland, the average growth rate over the past 32 years has been about 3.5% per year. Given the current high productivity levels and low investment, a gradual decline to 1.5% annually is inevitable, a view shared by the European Commission. However, the Polish government has yet to acknowledge this assessment.
Positive Developments in 2024
Several positive developments occurred in 2024. One was the resolution of the legal dispute with the European Commission and international law institutions, allowing Poland to receive funds from the National Recovery Plan and the EU budget. Another positive change is the program to grant a significant number of Ukrainians rights equivalent to Polish citizens, alleviating demographic crisis costs.
The third positive development is the announcement of a new policy focused on improving river quality, protecting forests, and preventing large-scale natural disasters. The fourth improvement concerns the energy sector: the closure of coal power plants and mines, approval for wind and nuclear power plants, reducing the carbon footprint in industrial production, and the rapid overhaul of the electricity grid.
Investments Needed in Key Sectors
Poland also needs a substantial increase in spending on science, education, and housing construction.
Author: Stanisław Gomułka, Chief Economist at BCC
Source: CEO.com.pl
