Poland is facing significant challenges in its fiscal policy, as highlighted by a senior International Monetary Fund official. The European Commission has projected that Poland’s budget deficit will rise to 5.4% of gross domestic product this year, which is among the highest in the European Union. This is primarily due to the government’s increased expenditure on public sector pay, social benefits, and minimum wage hikes. These decisions were made in an effort to build credibility with voters after years of rule under the nationalist Law and Justice party.
The IMF official stressed the importance of setting a “very high bar” for further fiscal loosening in Poland. The country’s current fiscal deficit is significant and needs to be reduced over time to prevent a rise in public debt and comply with EU fiscal rules. Despite the strengthening economy and above-target inflation, the IMF recommends tightening fiscal policy sooner rather than later.
Poland’s increased expenditure on security, particularly in response to the conflict in Ukraine, poses additional challenges to its fiscal policy. The country has also announced a significant program to bolster its eastern border due to perceived threats from Russia and Belarus. These security concerns, along with infrastructure needs and climate risks, add to the pressure on Poland’s budget.
Poland’s general government debt is forecast to rise above the constitutional limit of 60% of GDP in the coming years. This presents a significant challenge for the country’s fiscal sustainability. Moreover, high spending needs have already hindered the implementation of key government pledges, such as a higher income tax-free allowance.
In order to address these challenges, Poland will need to make careful decisions regarding its fiscal policy. The IMF official emphasized the importance of re-designing the country’s fiscal rule to provide a better anchor for future decisions on public finances. Additionally, Poland may need to negotiate an exemption from the EU’s deficit procedure to manage its borrowing needs effectively.
Poland’s fiscal policy faces significant challenges in the coming years. The government will need to balance the need for increased expenditure on security and infrastructure with the imperative of reducing the budget deficit and public debt. By making careful and strategic decisions, Poland can navigate these challenges and ensure fiscal sustainability in the long term.