• Budget's economic forecasts are ``very ambitious,'' BNP says
  • Revision increases state spending 4.7% from previous plan

Poland’s new government increased state spending its 2016 budget revision, raising concern that its plan to keep the budget deficit below European Union limits may prove overly optimistic.

The fiscal gap will reach 2.8 percent of gross domestic product, unchanged from plans by the previous government and below the EU’s 3 percent ceiling, Finance Minister Pawel Szalamacha told reporters in Warsaw on Monday. Budget spending will increase 4.7 percent from the previous plan to 368 billion zloty ($94 billion), while revenue will grow 5.4 percent to 313 billion zloty as the government seeks to implement new levies on banks and retailers as well as shore up tax collection.

The government of Law & Justice, which won October’s election on a promise to boost the state’s role in the economy, is basing its budget draft on 3.8 percent economic expansion and 1.7 percent average inflation next year, targets deemed “very ambitious” by BNP Paribas SA economist Michal Dybula. Investors such as Aberdeen Asset Management Plc have turned negative on Polish bonds in the past weeks, saying the government was undermining public spending safeguards and helping send yields on benchmark 10-year bonds to a five-month high.

“The picture isn’t as rosy as the ministry would like to see it,” said Mateusz Sutowicz, an economist at Bank Millennium SA in Warsaw. “The risk of breaching the 3 percent limit is real as spending plans are going to generate costs for the budget, which won’t be easy to match with additional revenue straight away.”

Law & Justice won elections after its pledge to boost welfare spending and champion national interest lured voters left behind by Poland’s economic growth. It’s facing a difficult balancing act to keep those promises and stay within the EU’s budget rules, which if breached could lead to suspensions in aid inflows to Poland.

Flagship Program

The government’s main welfare proposal of giving Poles 500 zloty per child per month will be funded by a new tax on banks and insurers as well as proceeds from the sale of mobile phone frequencies, Szalamacha said. In the following years, the party wants to finance it mainly from improved tax collection.

The new cabinet has already revised this year’s budget, saying that revenue was below levels planned by the previous government and that the deficit could “temporarily” top 3 percent of GDP. Tax revenues are hit by Poland’s longest streak of deflation in living memory, with prices dropping for 17 straight months.

“This budget will accommodate our flagship project of helping families with children,” Szalamacha said. “At the same time, it’s stable from the point of view of public finances.”

Yield Increase

Yields on 10-year government notes increased 12 basis points to 3.23 percent at 4:12 p.m. in Warsaw, the highest level since July. The zloty is the worst performing emerging-market currency over the past three months after the South African rand and the Colombian peso, losing 3.5 percent of its value against the euro and 6.1 percent to the dollar.

The government’s economic growth target compares with the 3.5 percent median forecast in a Bloomberg survey of 33 analysts. Only six of the respondents predicted expansion at least as fast as the government envisages in its budget. Poland’s central bank projected 1.1 percent inflation next year, also lower than the budget assumption.

“Poland risks breaching the deficit threshold as inflation may be eventually tempered by low fuel prices,” BNP’s Dybula said.

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