Poland Faces Rising General Deficit Amid Rampant Defence Spending

Poland’s government forecasts a rise in the general deficit to 5.5% of GDP by 2025, driven by increased defense spending and the abandonment of financial practices of previous administrations. The budget predicts economic growth of 3.9% and inflation rising to 5%. Public sector debt is close to its constitutional limit.

Poland's general deficit is projected to rise to 5.5% of GDP in 2025, Prime Minister Donald Tusk announced Wednesday, as the nation increases defense spending and discontinues some financial practices of the former administration that critics argue kept costs off the books. The draft budget for next year also expects the economy to grow by 3.9%, surpassing a June forecast of 3.7%, with public sector debt nearing the 60% constitutional limit.

Finance Minister Andrzej Domanski anticipates inflation to average 5% in the upcoming year, up from below 4% in 2024. Despite aiming for a 5.1% deficit in 2024, these figures pose a challenge for Poland, which is under EU budget discipline measures. Domanski clarified that the deficit figures for this year and next aren't directly comparable, highlighting that the previous government used state-secured bonds for COVID-19 relief and other expenses, which critics argue distorted public finances.

Efforts to reduce the deficit include repaying liabilities amounting to 34.7 billion zlotys and a COVID-19 fund repayment of 28.5 billion zlotys. Domanski hopes that increased economic growth will boost tax revenues, projecting significant rises in VAT, excise tax, and corporate tax revenues. The new budget also escalates defense spending to 186.6 billion zlotys, reinforcing Poland's military in response to Russia's aggression in Ukraine. Healthcare spending will exceed 221.7 billion zlotys, and the budget bill reflects the government's recalibrated fiscal ambitions ahead of the 2025 presidential election.

(With inputs from agencies.)