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Source: Flickr, Kancelaria Premiera, CC

Implementing Law and Justice’s 2017 budget could be easier said than done

By Krzysztof Głowacki, Economist, CASE

With inflated social spending and the tax gap that seems impossible to close, the Polish government will face a daunting task in implementing the 2017 budget.

The provisory macroeconomic data released by the Central Statistical Office and the preliminary budget report published by the Ministry of Finance on January 31 give a perspective on Poland’s potential fiscal standing after 2016. Revenues last year were PLN 314.6 billion, while expenditures amounted to PLN 360.9 billion, resulting in a budget deficit that was the highest in Poland’s modern history, at PLN 46.3 billion (roughly 2.8–2.9% of GDP). The expenditure side was inflated by the many social programs introduced by the conservative Law and Justice Government, including universal cash grants for children, subsidization of medicines, and the reduction of the retirement age.

At the same time, the revenue side struggled to keep up. VAT collections, the most important source of tax revenue, have increased from PLN 123.1 billion to PLN 126.6 billion, or by 2.8% in nominal terms. However, given the growth of consumption by 3.6% (3% in nominal terms), the VAT collection rate effectively dropped by around 0.2%. The effect is not large in magnitude, but runs counter to the government’s plan of narrowing Poland’s huge VAT gap in search of additional revenues. The income from the newly-instituted tax on financial institutions yielded less than planned, and the tax on trade yielded naught, as it failed to be enacted among legal squabbles with the European Union.

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Source: Polish Ministry of Finance

The outlook for 2017 presents a challenging task. The extravagant social programs introduced halfway through 2016 will now have to be financed year-round. One-time money injections such as the Central Bank’s profit payout of around PLN 8 billion, which greatly helped the budget in 2016, are unlikely to be repeated in 2017. To address the challenge, the government again plans to rely on narrowing the VAT gap, but the 13.3% growth in VAT revenues that it anticipates seems unfeasible given the apparent lack of successes so far and a dearth of ideas on how to improve collections. As a result, the budget deficit, now estimated at around 2.8–2.9% of GDP, might soon breach the 3.0% threshold and trigger the EU’s excessive deficit procedure.

Fiscal policy must also be seen as part of the broader economic environment. Poland’s economic growth in 2016, at 2.8%, is below expectations (including the 3.8% assumed in the Budget Act) and far from the pace needed to continue its economic convergence with the West. While most macroeconomic conditions are reasonably sound, with growth led by consumption, the drop in investment of 5.5% will have deleterious effects for future growth. It is also a clear signal that businesses are holding back due to the political uncertainty prevailing in the country. Seemingly Poland has a lot of housekeeping to do in order to maintain its position as a favored destination for foreign investment. As of right now, the government’s spending spree is having the opposite effect.

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