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Poland’s Budget Deficit Looms Large: Electoral Promises and Foreign Debt Pose Risks

ECONOMYPoland's Budget Deficit Looms Large: Electoral Promises and Foreign Debt Pose Risks

This year, the budget deficit could reach high levels, possibly approaching 200 billion złoty. Generous electoral promises have been made, such as the continuation of the 500+ program, increasing it to 800 złoty, as well as salary increases in the budgetary sector, in education, the introduction of the so-called “grandmother’s allowance”, and the contemplated implementation of the so-called widow’s pension. Zero VAT on food has also been extended, which is a considerable cost to the budget. Therefore, Poland is most likely going to increase its debt – not only in the domestic market but also in foreign markets. Currently, about a quarter of our debt falls under foreign debt. The risk is that in the event of exchange rate increases, the cost of servicing this debt will rise. All these factors show that it will be hard to fulfill electoral promises while maintaining public finance stability.

– Public debt in Poland is quite manageable. If we look at the European methodology, Poland’s debt of governmental and local institutions reached just below 50% of GDP according to the latest data,” Grzegorz Sielewicz, the chief economist at COFACE in Central and Eastern Europe, told “This is lower than in many other European countries, such as Greece and Italy, but also lower than the EU average. For all EU countries, it exceeds 80% and for Eurozone countries, it exceeds 90%. This puts Poland in a rather good light – although let’s not forget that we still have a lot of so-called hidden debt. We may be approaching a dangerous level in the coming years – due to greater borrowing needs. I would like to remind you that the constitution encapsulates this level at below 60% of GDP. This is a stabilizing spending rule – we also have to take into account that we are assessed by foreign markets and investors. Certainly, the lower the debt, the better for our country’s image – and also for financing costs. The yield on domestic bonds exceeds 5% – it’s lower than in mid-October last year when the yield on our bonds exceeded 6%, although the Polish government still has to pay high financing costs. In addition, we have local elections ahead of us this year, and presidential next year. This will certainly be a factor that will make the current government want to fulfill their electoral promises – which will have an impact on the state budget and the level of public debt,” Sielewicz analyzes.

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