The Polish government has approved a budget deficit for next year that is close to the European Union’s limit of 3% of gross domestic product (GDP) and could breach that threshold if growth turns out to be weaker than planned.
The populist Law and Justice government – which is already in conflict with the European Commission over its obstruction of the country’s Constitutional Tribunal – could now find itself in trouble over its plans to boost government spending to fulfil its election promises. Poland only escaped from the EU’s excessive deficit procedure in late 2015.
This week the finance ministry proposed a 2017 deficit of 2.9% of GDP, or PLN59.3bn (€13.7bn), an increase of PLN5bn on 2016. This was approved by the cabinet on August 25.
At the same time the ministry has reduced its economic growth estimate for 2017 from 3.9% to 3.6%, while also cutting its growth forecast for this year to 3.4%, down from 3.6%.
However, some analysts fear that this could be too optimistic, raising the risk that the budget deficit could be larger than planned and would breach the EU’s guidelines.
According to a recent Bloomberg poll of analysts, GDP will expand 3.3% this year and next, from earlier predictions of 3.4% and 3.5%, and remain at the same level in 2018. They expect next year’s budget deficit to widen to 3.1% of GDP.
The International Monetary Fund (IMF) said in July that it expected the budget deficit to be 2.8% of GDP in 2016 and more than 3% of GDP in 2017, compared to the 2.6% in 2015, the last year of the centre-right Civic Platform government.
Growth figures so far this year have been disappointing. Preliminary figures for second-quarter GDP showed growth of 3.1% after 3% in the first quarter.
Things could get even worse if Poland loses its investment grade. Global ratings agency Moody's warned again on August 25 that the escalating constitutional crisis in Poland could hurt investment, and therefore growth, and may affect its credit rating, which would make government borrowing more expensive.
The constitutional "crisis already appears to have left its mark" Moody's said, noting that real investment contracted by 2.2% in the first quarter of 2016 compared to 2015.
Poland will lose its investment grade if one more of the three big ratings agencies downgrades it to ‘junk’, following Standard & Poor’s downgrade in January.
In May, Moody's cut Poland's outlook from stable to negative over the fiscal risks posed by the Law and Justice government, but left its ‘A2’ investment grade unchanged. Fitch Ratings affirmed Poland's ratings at 'A-' in July with a stable outlook.