Economic Analysis - Strong Macro Backdrop To Prevent Fiscal Slippage - JUNE 2017


BMI View: Poland ' s strong macroeconomic backdrop will help prevent significant fiscal s lippage amid st the governmen t ' s pro-cyclical spending hikes. Although expansionary fiscal policy poses minimal risk to the sovereign profile in the near term, weaker fiscal buffers and demographic problems raise longer-term risks to the public finances

Poland's populist Law and Justice (PiS) government will continue its expansionary fiscal policy in 2017 and 2018, despite strong economic growth. Pro-cyclical spending hikes will provide further tailwinds to the economy, and we forecast above-consensus real GDP growth of 3.3% in 2017 and 3.4% in 2018, from 2.8% in 2016. Poland's strong macroeconomic backdrop will boost tax receipts and help prevent the budget deficit from rising above the EU's Growth & Stability Pact threshold of 3.0% of GDP in 2017. We have revised down our budget deficit forecast from 3.2% of GDP to 3.0% of GDP for 2017, and maintain our view that the deficit will amount to 2.8% of GDP in 2018. We note that our deficit forecast is higher than the government's forecast of 2.8% of GDP in 2017, which is driven by an overly-optimistic real GDP growth assumption of 3.6%.

We forecast government expenditure growth to pick to 7.5% in 2017 and 6.0% in 2018, from an estimated 6.2% in 2016. On the current expenditure side, the government's child benefits programme will be rolled out for a full year for the first time in 2017, putting considerable strains on the budget. The programme will transfer PLN500 per month for every second and subsequent child per family, which will cost an estimated 1.2% of GDP in 2017. The government's reduction of the retirement age for men to 65 and women to 60 comes into effect in October 2017, and is estimated to cost the government an additional PLN10bn, or approximately 0.5% of GDP, by 2018 and 0.8% of GDP by 2021. Additional expenditure in 2017 and 2018 will also come from an uptick in public investment spending on the back of recovering EU structural fund inflows into Poland, which typically co-finance government construction and infrastructure projects. In the current 2014-2020 EU budgetary period, Poland has spent just 4.1% of its allocated EUR104.9bn budget, the total of which is equivalent to around 3.1% of annual GDP over the funding period.

PiS Spending Hikes To Reverse Budget Consolidation
Poland - Budget Deficit, % of GDP, 4qma
Source: Eurostat, BMI

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