Poland Presents Loose 2025 Budget Before Presidential Ballot

Agnieszka Barteczko
·3-min read

(Bloomberg) -- Polish Prime Minister Donald Tusk proposed a loose budget for 2025 as his government plans a massive build up in defense spending and seeks to maintain support ahead of next year’s presidential election.

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The fiscal plan, announced on Wednesday, envisages a third straight year with a public sector deficit of more than 5% of gross domestic product, along with faster economic growth and slightly higher inflation. The zloty weakened and yields on Polish government bonds jumped.

Tusk’s coalition took power late last year, vowing to bring Poland back toward the European mainstream after eight turbulent years of nationalist rule. But it has struggled to overcome opposition to its legislative agenda from President Andrzej Duda, an ally of the former government whose term ends in mid-2025. In the run-up to what is expected to be a tight election, the prime minister has ruled out spending cuts.

The 2025 budget draft envisages military spending of nearly 187 billion zloty ($48.4 billion), or 4.7% of GDP, as NATO member Poland boosts its defense amid Russia’s ongoing invasion of neighboring Ukraine. Outlays on healthcare are set to increase by 16% compared with this year.

The fiscal deficit is set at 5.5% of economic output next year and Finance Minister Andrzej Domanski revised this year’s expected gap to 5.7% from 5.1% to 5.7%. GDP is set to expand by 3.9% next year while average annual inflation will rise to 5% from below 4% in 2024, according to the plan.

The deficit for 2025 exceeds analyst expectations, which Domanski said was partly caused by the need to redeem Covid-era bonds issued by state-guaranteed institutions. The zloty weakened ahead of publication of the budget details while the yields on 10-year local-currency bonds increased 11 basis points to 5.49%, the highest since July.

“We don’t expect a large, negative market reaction,” said Rafal Benecki, chief economist at ING Bank Slaski SA. “Foreign investors haven’t significantly increased their zloty bond portfolio recently, and we have known for some time that borrowing needs will be high.”

The previous government’s accounting methods didn’t factor in some spending by public agencies, meaning that next year’s deficit would be closer to 200 billion zloty, instead of 286 billion zloty, if Domanski hadn’t changed this. The move also means that borrowing needs jumped by 45%, instead of 20%, according to Benecki.

“The ministry still has room to finance these high needs,” he added.

Excessive Deficit

A Bloomberg survey of 20 economists had a median prediction of a 4.5% shortfall, with the highest forecast at 4.9%. In June, the EU opened an excessive deficit procedure against Poland in a bid to force the member nation to return to its guidelines capping deficits at 3% of GDP.

Domanski has in the past downplayed the fiscal challenge, telling Bloomberg this month that accelerating economic growth will help keep the budget gap under control. He said that tax inflows this year have so far been below expectations, which has led to an upward revision of the 2024 fiscal shortfall.

Economists at MBank SA, including Marcin Mazurek, said the sheer size of the budget deficit is likely to reduce pressure on the central bank to lower interest rates soon. They said the developments were likely to add to Governor Adam Glapinski’s view that easing may only start in 2026.

The budget draft next goes to parliament, which can’t change the planned deficit level but can rearrange spending.

--With assistance from Barbara Sladkowska, Maciej Martewicz and Piotr Bujnicki.

(Updates with more details and comments from the second paragraph)

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