The government has adopted the Long-Term State Financial Plan for 2023-2026 (WPFP), the Ministry of Finance announced in a statement. The latest macro-fiscal scenario bases the deficit forecasts on the so-called expected execution of expenditure, which, according to the Ministry of Finance, is standard practice used by international institutions, including the European Commission.
The main element of the WPFP is the Convergence Programme. Update 2023 (APK), which will be submitted to the European Commission (EC) and the EU Council by April 30. As indicated by the Ministry of Finance, this is probably the last convergence programme. In the European Union, there is an ongoing discussion on the reform of economic governance, which may lead to a change in the rules of EU budgetary supervision as early as 2024.
“The adopted scenario assumes that in 2023 the rate of economic growth in Poland will slow down, and the real one GDP will increase by 0.9 percent. In the years 2024-26, the economy will recover – the GDP growth rate will be respectively: 2.8 percent, 3.2 percent and 3.2 percent. and 3.0 percent,” the press release said.
“In 2023, the increase in investments will amount to 1.1 percent, mainly as a result of a slight decrease in private investments, resulting, among others, from the poor economic situation or uncertainty related to the geopolitical situation. However, it will be compensated by an increase in public investments (military investments, launching projects from the National Reconstruction Plan). Thanks to this, the investment growth rate will accelerate in the coming years.
Single-digit inflation at the end of 2023
The MF estimates that unemployment rate according to BAEL, in 2023 it will only slightly increase to 3.2 percent. in 2023 due to the economic downturn. In the following years, unemployment will remain at a low level (approx. 3.0%).
In the following months, according to the forecasts of the Ministry of Finance, inflation will gradually decrease to a single-digit level by the end of 2023, a on average, it will amount to 12.0 percent. In the following years, inflation will continue to fall, but the rate of decline will be slightly slower.
In accordance with the macro-fiscal scenario, taking into account differences in the implementation of the sector’s expenditures (projected – according to financial plans – expenditures have been adjusted by 1.1% of GDP), in order to make the economic scenario more realistic, in 2023 the sector’s deficit will increase to 4.7 percent GDP, e.g. as a result of statutory regulations on tariffs for selected energy carriers, combined with compensation payments to their sellers and distributors, or significant indexation of annuities and pensions in March 2023 in the amount of 14.8 percent.
“Since 2016, the general government expenditure projected in the Convergence Program in relation to GDP in individual years systematically exceeded their actual implementation. Due to the fact that expenditure limits were used, the average difference between the forecast and the implementation in the period 2016-22 was 1.4 per cent of GDP, excluding the crisis years, i.e. in the period 2016-19, this difference amounted to 1.1 per cent of GDP.
“A more conservative assumption was adopted”
“The current Program adopts a more conservative assumption, i.e. the impact of crisis years on the scale of savings has been eliminated. Basing deficit forecasts on the so-called expected spending performance is standard practice by international institutions, including the European Commission. Adoption of such an approach in APK should contribute to reducing the forecast error and increasing the comparability of this forecast with the EC forecast.
Considering more than 3% of GDP nominal deficit projected for 2023, the fiscal scenario for the following years was developed by the Ministry of Finance assuming an improvement in the structural result by 0.5 percentage points on average. percent GDP per year in the period 2024-26, i.e. in accordance with the EU budgetary rules, which will be in force again in the EU after the expiry of the so-called general exit clause.
The nominal deficit in 2024, assuming the termination of protective measures related to the energy crisis and taking into account the historical level of non-performance of the sector’s expenditure in the presented scenario, it is assumed that the deficit will be reduced to a level close to the reference value of 3%. GDP (3.4 percent of GDP). In subsequent years, assuming further actions in the amount of 0.5 p. percent would fall below the 3 percent threshold. GDP. Exceeding the 3% deficit threshold GDP in 2024 would only result from increased defense spending.
The macro-fiscal scenario assumes that in 2023 general government expenditure will amount to 46.6% of GDP. GDP, and in the following years the sector’s expenditure will decrease to reach 43.8% in 2026. GDP.
In 2023, according to the Ministry of Finance, the gradual recovery of investments in the general government sector is to be continued. Their level will increase to approx. 4.2 percent. GDP and will remain on average at the level of 4.2-4.3 percent. GDP in 2024–26.
In the years 2023-26, the revenue of the general government sector will fall by about 1 percentage point, i.e. from 41.8 percent. up to 40.8 percent GDP, mainly due to the occurrence of electricity and gas write-offs only in 2023.
According to preliminary estimates of the Ministry of Finance, in 2022 the VAT gap amounted to approx. 4.9 percent. potential revenues and increased by 1.8 pp. percent compared to the recalculated VAT gap for 2021 (3.1%).
The macro-fiscal scenario assumes that in the years 2023-26 the debt of the sector will increase from 50.5% to GDP to 55.4 percent. GDP. The projected increase in debt, despite the decrease in the deficit, will mainly result from the pre-financing of military equipment purchases, which Poland significantly increased in the face of Russian aggression against Ukraine.
In the opinion of the Ministry of Finance, due to the good starting position in terms of the level of debt in percent, GDP, there is a low probability of an increase in the risk to the stability of public finances in the perspective of the Program in accordance with the indicators used by the European Commission.
Long-term State Financial Plan and the stabilizing expenditure rule
The latest Program does not take into account the requirements resulting from the stabilizing expenditure rule (SRW).
“SRW is an implementation of EU rules, but in its current form it implies a much deeper, abrupt consolidation than the one required by EU rules, which would result in a threat to macroeconomic stability. For this reason, and bearing in mind the discussion on new rules in the EU, it will be necessary to adjust the SRW from 2024.
“For years, Poland has been calling for special treatment of defense spending in EU rules. War in Ukraine confirmed the validity of this postulate and made it even more important. The development of the defense potential requires, especially in the case of Poland as a country near the frontline, spending on defense purposes.
According to the Ministry of Finance, at the EU level it is emphasized that strengthening the defense potential is a common goal and is one of the priorities both at the level of Member States and the entire EU.
“The EU recognizes that the need to rebuild the defense capabilities of the Member States will require maintaining a high level of investment in the coming years (…). In the current EU rules, spending by EU countries that strengthens international solidarity and helps achieve the Union’s political goals is treated as a mitigating factor assessment of public finances and taken into account by the European Commission and the Ecofin Council when opening the excessive deficit procedure.
Main photo source: PAP/Leszek Szymanski