Budget-Bulging Largess Hits Polish Bid to Squeak by EU’s Cap

  • Finance Ministry sees 2017 fiscal deficit at 2.9% of GDP
  • Breaching 3% cap would imperil EU development funds allocated

It may be a close call but it’s unlikely to go Poland’s way.

While the Polish Finance Ministry projects next year’s budget deficit will fall just short of the European Union’s limit, all but one economist surveyed by Bloomberg in late July saw it reaching or exceeding the 3 percent of gross domestic product ceiling. The shortfall will come in at 2.9 percent, the ministry said on Monday, as it cut economic growth forecasts. The deficit is seen at 2.6 percent this year, according to Puls Biznesu daily.

“With government spending rising and the GDP growth outlook facing downside risks, the chances of Poland overshooting the 3 percent-of-GDP target are quite high over the next several years,” said Sharon Fisher, senior principal economist at IHS Markit in Washington. “Although we may see last-minute policy changes aimed at keeping public finances under control, these could pose further risks to the GDP growth outlook.”

Only a year after winning reprieve from the EU’s monitoring procedure for budget offenders, the Law & Justice government’s higher spending on family benefits and plans to cut the retirement age next year may make that short lived. Breaching the limit would threaten the flow of 82.5 billion euros ($93 billion) in EU development funds earmarked for Poland through 2020.

For a story on Polish economic developments, click here

After its biggest weekly loss since May, the zloty gained 0.2 percent to 4.3011 versus the euro at 6:34 p.m. in Warsaw. The yield on Poland’s 10-year government bond fell two basis points to 2.66 percent.

Further complicating the task for the nine-month-old cabinet is a souring outlook for the economy. The Finance Ministry cut its growth forecast after measures aimed at spurring domestic demand failed to offset a drop in investment. The government is set to discuss the budget plan on Thursday.

The challenge is to reverse an economic slowdown after Law & Justice rattled businesses by imposing new taxes on banks and retailers. The downswing may already be extending into the third quarter, with retail sales and construction for July missing analysts’ forecasts and industrial output unexpectedly contracting for the first time in almost two years.

A preliminary reading for second-quarter GDP showed a gain of 3.1 percent, missing estimates for 3.3 percent growth and barely improving on the first three months, when output rose 3 percent.

Modified Forecasts

“Given the present data and the external factors, including possible scenarios for Britain’s exit from the European Union, we have modified the budget forecasts,” the Finance Ministry said in an e-mailed statement.

The ministry’s forecasts include economic growth of 3.6 percent next year and 3.4 percent in 2016, from 3.8 percent previously. Poland’s spending plan is set to grow by over 10 billion zloty ($2.6 billion) next year to 324.1 billion zloty, chiefly thanks to rising value-added and corporate-income taxes as part of Finance Minister Pawel Szalamacha’s campaign to improve revenue collection.

William Jackson, an analyst at Capital Economics Ltd. in London, says he’s “always slightly skeptical” when expectations of higher revenue hinge on better tax collection. “Small tweaks to spending” are possible to ensure that the threshold mandated by the EU is met, he said.

‘Too Optimistic’

“Even with the government’s latest forecast revisions, I think it may be a bit too optimistic on the growth outlook,” Jackson said by e-mail. “And that suggests revenues may be weaker than the government anticipates.”

A gradual pickup in inflation, set to average 1.3 percent next year, will create grounds for an even better uptake next year, the ministry forecasts. The revised GDP figures still assume the economy will pick up in the second half and in 2017. That may be too optimistic.

“There’s a growing risk in the context of economic results, as growth may turn out lower than expected,” Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, said by phone. “Meanwhile, additional revenue is supposed to come from better tax collection, which is another risky assumption.”

For S&P Global Ratings, which in January handed Poland its first-ever credit downgrade, the budget plan “doesn’t have an immediate ratings impact,” Felix Winnekens, a primary credit analyst, said by e-mail.

The company forecasts “a slightly higher deficit as a result of our lower growth forecast,” he said. “As we said before, we could lower our ratings if public finances deteriorated beyond our current baseline scenario.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE