“Generous social spending” and increased spending on arms are among the reasons for the high deficit in 2025. “In the short term, the draft budget increases inflation risk, which may delay interest rate cuts,” say the authors of the Allianz Trade report. According to experts, Polish economic growth will remain solid.
The authors of the report emphasized that Poland's budget proposal for 2025, in their opinion, “questions fiscal consolidation, which carries medium-term fiscal risk.” They added that fiscal policy next year is to be more expansionary than previously forecast.
High deficit in the 2025 budget
According to Allianz Trade, “generous social spending” supporting consumer spending and an increase in defense spending to 4.7 percent. GDP in 2025 are the main reasons for the increase in the deficit.
“The initiation of the excessive deficit procedure against Poland by the European Commission in June, even before the draft budget, means that the country will have to commit to a deficit reduction path. Allianz Trade's baseline scenario therefore assumes that Poland will start consolidating its budget from 2026. As a result, the public debt-to-GDP ratio will probably stabilize at around 56 percent after 2026,” the report said.
Inflation risks and distant prospect of rate cuts
According to Allianz Trade, in the short term The Polish budget bill poses an inflationary risk and will likely delay interest rate cuts“Taking into account additional inflationary pressures resulting from planned increases in child benefits, pensions and public sector wages, Allianz Trade has raised its average annual inflation forecasts to 3.8% in 2024 and 4.5% in 2025 (from 3.6% and 3.8% in June, respectively),” it was reported.
According to Allianz Trade, the company's analysts expect the Polish central bank, which has been keeping the main interest rate unchanged at 5.75% since October 2023, to postpone the next rate cut until the second quarter of 2025.
Interest rates (September 2024)PAP
Government spending has become a “key driver of growth” in recent quarters, rising nearly 11 percent year-on-year in the first half of the year, thanks in part to a rise in public sector wages, according to the firm's analysts. The rise in wages, along with a generally strong labor market and falling unemployment, has helped boost public spending, according to the firm's analysts. inflation increased consumer spending growth to an average of 4.7 percent in the first half of the year.
“Looking ahead, we expect domestic spending in Poland to continue to grow at a sustained pace in the coming quarters. In addition, investment growth should accelerate as the Polish government aims to spend all previously frozen EU funds over the next two years,” the report reads.
It added that exports should gradually improve from the end of 2024, thanks to a moderate recovery in eurozone“Overall, Allianz Trade has raised its full-year real GDP growth forecast for Poland to +3% in 2024 and +3.8% in 2025.”
The draft state budget for 2025 was adopted by the Council of Ministers at the end of August. State budget revenues are to amount to PLN 632.6 billion, the expenditure limit has been set at PLN 921.6 billion, and the budget deficit is not to exceed PLN 289 billion. Ministry of Finance claims that the state budget deficit for 2025 will amount to 7.3 percent of GDP, but in conditions comparable to the budget act for 2024, the deficit would amount to PLN 180.8 billion, or 4.6 percent of GDP. The project assumes, among other things, a 7 percent increase in wages, a 5 percent raise for the public sector, 3.9 percent economic growth and 5 percent inflation. The government wants to allocate 4.7 percent of the projected GDP to defense. According to the project, the public finance sector deficit in 2025 will amount to 5.5 percent of GDP, and public debt 59.8 percent
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