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Completing the slow arc of its focus from tough austerity to growth measures, the Polish government announced on July 16 that it will expand the budget deficit and suspend automatic stabilizers on to state debt.

Due to slower-than-forecast revenue to the tune of PLN24bn (€5.6bn), Prime Minister Donald Tusk told reporters that the government is set to widen the gap in the budget in a bid to avoid adding pressure on consumption and investments. In order to power that increased deficit, the 50% of GDP limit on state debt will be suspended for this year and next, he added.

"We have to decide how to cover this shortfall," Tusk said, according to Reuters. "We would be willing to increase the budget deficit by about PLN16bn and cuts (in expenditure) in the ministries would amount to PLN8.5bn-8.6bn."

Finance Minister Jacek Rostowski claimed the increase for the deficit would release money to the equivalent of 1% of GDP into the economy.

Tusk started out his second consecutive term in 2011 with promises of stiff fiscal consolidation for state debt already on the edge of its constitutional limits. However, that was far easier a line to follow at the time, with the Polish economy looking like repeating its 2008 trick of dodging the slowdown plaguing the rest of Europe. However, the crisis caught up with a vengeance last year, and by October - 12 months after he returned to office - the PM was stepping into line with the wider EU trends to talk of measuring austerity alongside stimulus.

The expansion of the deficit, and especially the suspension of the lower debt ceiling, is a significant step in that arc. However, with state debt already over the 50% threshold which would freeze the budget, Warsaw has little choice. It has been been searching for a way to circumvent the limit for some time - messing about with accounting practices for instance - as it complained of missing out on making the most of the emerging market bond rally.

While the backstops on state debt at 55% and 60% of GDP will remain in place, the government also wants to suspend other stabilizers tying budget spending to inflation, according to Dow Jones. Economic growth in Poland slowed to 0.5% annually in the first quarter of 2013, from 3.5% across the first three months of last year. The government's forecast of finishing 2013 with 1.5% growth is seen as optimistic.

Market calm, but political heat risks rise

The move to relax the budget "adds around 1% to the deficit," according to Tim Ash at Standard Bank. "I guess this means that the budget deficit will now increase to 4.5% of GDP, from the 3.5% contained in the government's European Commission Convergence Programme from April. This is also likely to stall plans for Poland to exit the EC's EDP in 2014 as had been planned."

The analyst also notes that the move could stir up political problems for the PM. "This also comes as the government have been pushing through reforms in OFE, the second pillar private pension system, to engineer a cut in the public sector debt/GDP ratio, and give them more fiscal space to loosen in the run up to elections in 2015," he writes. "The backdrop here is that the ruling Civic Platform government is struggling a bit in the polls ... Signs of fiscal easing will be grist to the mill of those on the right of the party ... this same wing has been mounting a leadership challenge."

"The plus is that the government is being pragmatic in terms of the use of fiscal stabilizers - much as it had through 2008-2010 - which should be good for growth," Ash adds. "A criticism of the administration has been that fiscal policy has been too tight, and the zloty too strong this time around, which has accentuated the growth slowdown and the disinflation process more generally."

At the same time, he points out, Poland has been aggressively taking advantage of the emerging market bond rally over the last few quarters, and is well ahead of the borrowing targets, "and should not have significant difficulty covering an enlarged budget deficit," Ash adds. "That said, given the relaxation on the fiscal front, particularly the lifting of fiscal anchors, Polish credit is beginning to appear somewhat expensive now on its regional peers."

However, according to debt traders quoted by PAP, the markets were untroubled by the move. Polish treasuries hardly moved on the announcement, one PKO trader told the newswire, according to cbonds. "The market failed to react to the news," Marek Kaczor said, adding that turnover was low. The lack of reaction may stem from the fact that the scale of the deficit increase is "not significant enough" to visibly alter Poland's supply plans, he added, while also noting the figure is in line with analyst expectations.

"According to the Prime Minister, the proposed amendments to budget are a strong stimulus," notes VTB Capital. "On the one hand, we tend to agree as the increase in the deficit is solid, but on the other hand actual spending is to be PLN8.5bn lower than the original plan ... Downward pressure on the economy and inflation from fiscal factors are set to persist. Thus, we continue to believe that Poland might continue its monetary policy easing cycle this autumn if the economy and inflation data allow it to do so."