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Polish government budget for 2024: GDP growth, but deficit and inflation remain high

ECONOMYPolish government budget for 2024: GDP growth, but deficit and inflation remain high

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The government anticipates a considerable increase in GDP of 3 percent. It’s a significant acceleration compared to the year 2023 and towards a level close to the trend in the transformation period from the year 1992.

Meanwhile, average annual inflation is expected to decrease from 12 percent in 2023 to 6.6 percent, according to the realistic forecast of the National Bank of Poland (NBP). As inflation is expected to substantially exceed interest rates on bank deposits and a high rate (around 10 percent) of nominal GDP growth, it may imply the continuation of a relatively high inflation tax level.

Inflation tax helps keep the budget deficit under control. However, this deficit is expected to be high, 184 billion PLN and 4.8 percent of GDP but still considerably less than what economists expected considering the announced increase in health, national defense, education spending, and doubling of the tax-free amount.

Safeguards

In 2024, public health expenditures are expected to reach 192 billion PLN, which is 5 percent of GDP, rather than the previously predicted 7 percent of GDP. The government may argue that private health expenses account for about 2 percent of GDP, so the 7 percent forecast might indeed refer to total spending. The second change relates to defense spending, expected to reach 104.6 billion PLN, or 2.8 percent of GDP. Previous projections considered these costs to be around 4 percent of GDP. This is an essential adjustment.

The budget for this year also assumes maintaining the cost of servicing public debt at 66.7 billion PLN, instead of the 80-100 billion PLN that many expected. The finance minister was undoubtedly aided by the resolution of the legal conflict with the EU, which resulted in strengthening the zloty exchange rate and lowering the interest on new public debt.

Risks

The government maintains in the budget the doubling of the income tax-free amount (PIT) from a level of 30 thousand PLN annually to 60 thousand PLN. This promise is politically essential. However, it should be noted that the cost is close to 40 billion PLN. According to the finance ministry’s estimates, it could be about 10 billion higher. This could result in a significant loss of revenue for local government units, thereby forcing the government to markedly increase subsidies for municipalities and counties. According to the approved budget, this subsidy is expected to increase by 18.4 percent and amounts to 117.9 billion PLN. This is a subsidy increase of nearly 20 billion PLN. There’s also uncertainty about the NBP’s profit size, which, based on a preliminary assessment, was estimated to be 20 billion PLN.

The budget proposal for 2024 adopted by the Parliament is somewhat risky, but less than what many analysts assumed – concludes Stanisława Gomułka, chief economist of BCC.

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