Today’s session of the Council of Ministers will see the passing of the Long-term Plan for State Finances for 2016-2019 and the newest amendments to the Convergence Program. This is one of the most important annual documents. It includes macroeconomic assumptions and planned government actions for the coming years, both of which will have a significant impact on the condition of Polish public finances. Although the document has not been published yet, its contents are already known.
Similarly to its predecessors, the current government has delayed the consolidation, assuming that in 2017, the public finance deficit will deepen to 2.9 percent of the GDP (compared to 2.6 percent in 2016), again closing in on the threshold value – a value beyond which the excessive deficit procedure would have to be re-applied to Poland. This projection is based predominantly on the current state of the law, meaning that the impact of realizing the governments earlier announcements, such as lower pension age and the increase of the income tax threshold to 8 000 PLN, has not been taken into account.
The expected worsening of the showings in the government and local government sector next year is a result of increased spending on the Rodzina 500+ program (in 2017 it will for the first time be in force for 12 months, rather than only 9, as the case will be this year), from 17 to 23 bln PLN and decreased extraordinary budget income compared to this year, mostly due to the LTE auction and the payment of profits from the NBP. This shows that in the immediate future, the fiscal space for the realization of the remaining plans is quite restricted, particularly is keeping the deficit under 3 percent of the GDP is still a target. Introducing all the key changes immediately would lead to increasing the financial gap to a relatively high level of 3.9 percent. Therefore, given the current condition of the budget, the government is leaning towards a solution which involves splitting the planned actions in phases. The efficiency of efforts to tighten the fiscal system which should, as estimated, bring in a maximum of 33.4 bln PLN in additional income per year until 2019, will be of great importance to the realization of those plans.
The government is now taking advantage of favourable conditions for Polish public finances. Relatively rapid economic growth and relatively low yield of treasury bonds provide an opportunity to lower the rate of public debt to the GDP even with a big deficit. However, this window of opportunity should not be wasted – if we balance on the brink of safety for too long, the impact of the later downturn will be more noticeable. Worse still, we may not have the tools to counter said downturn if we will not have created sufficient fiscal space by then.
Łukasz Kozłowski, economic expert of Employers of Poland