On October 31, the report “The Real Budget of Poland for 2024: Necessary Amendments to Increase Transparency to the Budget Law for 2024. Basic Figures” was published. The authors of the report are economists with many years of experience working at the Ministry of Finance. The experts analyzed the draft of the budget law submitted to the parliament by the Polish government of Prime Minister Mateusz Morawiecki. Their findings suggest that the assumptions and plans prepared in the draft are overly optimistic.
Key issues
- The draft budget, adopted by the government of Mateusz Morawiecki [Prime Minister of Poland], envisages that state budget revenues will amount to PLN 684.5 billion and expenditures to PLN 849.3 billion. This implies a deficit of PLN 164.8 billion. Economists analyzing public finances for the „Real Budget” project calculate the deficit amount at PLN 277 billion. This is PLN 112 billion more than the government officially showed us.
- After taking into account so-called “natural savings” and the staggered delivery of military equipment, the deficit of the public finance sector according to the European methodology after these adjustments will be 6% of GDP in 2023, and 5.1-5.4% of GDP in 2024.
- After 8 years, Poland will go through the excessive deficit procedure (EDP) again.
- Taking the above into account, it should be firmly stated that there is no doubt that Poland will be placed under the EDP procedure (starting in 2024). This means that the country’s budget policy will be conducted under the strict rules of this procedure. Twice a year, the new government will have to report what measures it is taking to reduce the deficit and account for the effects of those measures. There is no room in this procedure for so-called „belt loosening” (expansive fiscal policy) after 2024. We can only dialogue and agree on a credible, realistic deficit reduction path acceptable by the EU procedures.
The Constitution of Poland requires the BUDGET ACT to be the basic financial plan of the state. Article 219 of the Constitution is precise in this regard and states: “The Parliament shall adopt the state budget for the fiscal year in the form of a budget law.” And Article 109 of the Law on Public Finance specifies: “The Budget Law is the basis for the financial economy of the state in a given fiscal year.” The statement “in the form of a budget law” dissolves any doubts. Sending supposedly complete budget data to Eurostat does not meet the “in the form of a budget law” provision. Presenting data in statistical bulletins on the websites of the Ministry of Finance or the Central Statistical Office does not meet the provision “in the form of a budget law.”
In the study “Necessary Amendments to Increase Transparency to the Budget Law for 2024. Basic Figures,” we symbolically restore the constitutional rank and scope of the Budget Law in accordance with Article 219 of the Constitution and Article 109 of the Public Finance Act.
Unfortunately, recent years have shown that there have been blatant violations of the rules, frameworks and boundaries that public bodies should take into account when planning and then adopting and implementing the budget. This was reflected in the opinions of the Supreme Audit Office (NIK) as early as 2022: “It is legitimate to restore the state budget to the proper rank associated with its special nature and central position in the system of public finances” and “Effective public control and the public’s right to know about the state coffers are disrupted when the government undermines the transparency of public finances. The NIK’s analysis of the execution of the state budget showed that last year the government used unprecedented mechanisms to push spending outside the budget.” In the analysis for 2022 NIK negatively assessed the directions of changes in the system of public finances, as a result of which the state’s financial economy is carried out largely outside the state budget. As a result, the Council of the NIK did not express a positive opinion on the discharge for the Council of Ministers for 2022. The last time such a situation occurred was in 1994!
In our study, we updated the macroeconomic forecast. The macroeconomic scenario, which seems to us much more likely than the one underlying the construction of next year’s state budget, specifically assumes lower economic growth this year (0%) and next year (2%). It is consistent with current forecasts by international institutions for Poland. However, lower economic activity than assumed by the Ministry of Finance may contribute to the realization of the inflation forecast assumed in the budget bill. However, several risks should be pointed out: fuel prices in the coming months, the anti-inflationary „shield” (reduced VAT on food) and, finally, the tariff prices of energy carriers. The main risks for the macroeconomic forecast are: greater slowdown in Poland’s close economic environment, escalation of hostilities in Ukraine, problems with financing the record high borrowing needs of the public finance sector, rapid and significant depreciation of the PLN, halting disinflation in Poland at a higher than expected level and a return to interest rate hikes. The balance of risks for the macroeconomic scenario, which is the basis of the budget bill for 2023, but also the basis of this study, is unfortunately unequivocally negative.
The forecast of the state budget revenue must be based on realistic and prudent macroeconomic assumptions and on realistic and prudent assumptions of tax elasticity to macroeconomic parameters. In addition, it must take into account the most likely scenario of systemic changes and the most current starting point, that is, revenue realization in 2023. The revenue forecast in the draft budget for 2024 adopted by the previous Council of Ministers does not meet the above requirements, so it must be actualized.
As a result of adjusting the starting point of the forecast and taking into account lower economic growth and lower tax elasticities, it can be estimated in a prudent scenario that the total tax revenue of the state budget in 2024 is overestimated at about PLN 31.7 (Polish Zloty in billions):
- VAT: – PLN 26.7
- CIT: – PLN 2.0
- PIT: – PLN 3.0
In the draft of the state budget for 2024, state budget revenues were planned at PLN 684.5 billion. Thus, after the update, they will amount to PLN 652.9 billion, down by PLN 31.7 billion, or 0.9% of GDP.
In the draft of the state budget for 2024, expenditures from the state budget were planned at PLN 849.3 billion. Expenditures planned for 2024 are higher by as much as 22.5% compared to the volume of expenditures planned for 2023. To some extent, this is due to the inclusion (already at the stage of the budget plan) of expenditures that were previously “pushed” outside the budget or were not included at the planning stage, such as funds to finance the 13th and 14th pensions.
Compared to the budget bill for 2023, the draft budget for 2024 contains a small, directionally correct, qualitative change in the approach to the construction of the budget as a state financial plan, i.e. the absence of the explicitly mentioned additional solutions of financing various tasks through the transfer of treasury securities to certain entities in lieu of subsidies with which these tasks should be financed. At the same time, it should be noted that the limit on additional bond issuance (PLN 25 billion), which was used for this purpose, was maintained and provided for. Public media were financed in this form. The budget bill for 2024 did not provide for this expenditure. The use of this instrument distorted the picture of public finances and is pointed out in the audit opinions of the Supreme Audit Office and reports by many economists as an instrument that violates the principles of transparency of public finances. Therefore, this practice should be finally abandoned.
Unfortunately, except in this case, as in previous years, the financing of state tasks using instruments that are outside the finance sector within the meaning of the Law on public finance and the Constitution, and thus outside the control of Parliament, is maintained. This applies in particular to expenditures carried out by funds located in the Bank Gospodarstwa Krajowego (Polish Development Bank) and the Polski Fundusz Rozwoju (Polish Development Fund).
Unfortunately, the financial plans of these funds are not publicly known. Their plans have not been attached to the budget bill, nor are they published. For the purposes of this study, it was assumed that these funds would function like state special funds. It was assumed that the subsidy from the state budget to these funds is equal to the increase in debt in these funds calculated on the basis of the “Strategie zarządzania długiem sektora finansów publicznych w latach 2024-2027” (“Strategy for Debt Management of the Public Finance Sector in 2024-2027”).
Based on the data on the growth of debt in these funds, it can be estimated that the subsidy to these funds in 2024 should amount to about PLN 78.9 billion.
In the draft of the state budget for 2024, expenditures from the state budget were planned at PLN 849.3 billion. After making it more realistic (taking into account the estimated expenditures of funds housed in BGK), they would amount to PLN 929.7 billion.
Implementation of the necessary changes to make revenue estimates more realistic and to restore and increase transparency in the draft of the state budget would change the picture of basic budget figures (Polish Zloty in thousands):
- state budget revenues would amount to PLN 652,861,007
- state budget expenditures would amount to PLN 929,685,427
- the state budget deficit would be PLN 276,824,420
The state budget deficit, estimated for the purposes of this study, may seem very large, but it is not far from the debt increases assumed even by the government (9% of GDP). Respecting Article 219 of the Constitution and Article 109 of the Law on public finance, it would be necessary to show a state budget deficit of PLN 277 billion, (which is 7.5% of GDP) in the draft of the budget bill. This means that the real state budget deficit is understated by PLN 112 billion.
In the report, it was calculated that the borrowing needs of the real budget, including extra-budgetary funds, would amount to PLN 336 billion.
It was also estimated that after taking into account so-called “natural savings” and the staggered delivery of military equipment, the deficit of the public finance sector (according to the European methodology) after these adjustments will be 6% of GDP in 2023, and 5.1-5.4% of GDP in 2024, well above the 3% reference value. The fact that Poland exceeded the allowable deficit was already forecast by the European Commission. The scale of the overrun is so large that in this aspect there is no doubt.
The authors state “Thus, after 8 years, Poland will again find itself in the excessive deficit procedure (EDP).”
Taking the above into account, it should be firmly stated that there is no doubt that Poland will be included in the EDP procedure (starting in 2024). This means that the country’s budget policy will be conducted under the strict rules of this procedure. Twice a year, the new government will have to report what measures it is taking to reduce the deficit and account for the effects of those measures. There is no room in this procedure for so-called „belt loosening” (expansive fiscal policy) after 2024. We can only dialogue and agree on a credible, realistic deficit reduction path acceptable by the EU procedures.
Download the full report (in PL) here
