A budget of wasted opportunities. IBS’ opinion on the draft Polish budget for 2016

Jakub Sawulski

The draft Polish budget for 2016 was prepared in unusual conditions. It was originally adopted in September 2015 by the coalition government of the Civic Platform (PO) and the Polish People’s Party (PSL). When Law and Justice (PiS) seized power, a new draft budget was prepared, yet in many respects it was similar to the draft made by the previous coalition government. The introduced modifications solely concern the implementation of some of the welfare promises made by Law and Justice during the election campaign and additional sources of their financing.

We have analysed the draft budget approved by the Council of Ministers on 21 December 2015. Based on previous years’ experience, it is assumed that the final budget (when adopted by the Parliament) will not differ significantly from the draft. Amendments introduced by the lower house (Sejm) usually affect no more than 0.1% of budgetary expenditure – their influence on the budgetary act is thus negligible. We examine the feasibility of budgetary assumptions adopted and the probability of generating the planned budgetary revenue. We also highlight the key areas in which budgetary spending has increased or decreased with respect to previous years. We also scrutinise the deficit and primary balance figures, and provide an estimate of the sovereign debt figures in the coming years.

In 2016, Polish public finances will be affected by a series of factors that hypothetically could decrease imbalances in the state budget. The most important ones include: good macroeconomic outlook, non-standard sources of revenue (revenue generated by the LTE spectrum auction and payment from the National Bank of Poland’s profit), reform of the pension system carried out in the previous years, savings generated by cutting spending on modernisation of Polish agriculture, as well as lower costs of sovereign debt servicing in comparison to previous years. Unfortunately, the state budget for 2016 squanders this potential. The draft presented by the Council of Ministers provides for a record-high public deficit, including a very high negative primary balance. The primary budget deficit suggests that the public finances are no longer in the safe zone.

A detailed analysis of the draft state budget for 2016 has yielded the following conclusions:

• Key obstacles to generating the planned budgetary revenue include the optimistic forecast regarding VAT revenue (increase by 6% in comparison to 2015), based on, among others, an inflation projection that has likely been overstated, and the assumption that in 2016 the administration will be more effective at collecting this tax than in the previous years. Budgetary revenue may be positively affected by a higher than expected payment from NBP’s profit.
• Non-standard revenue, such as: revenue from the LTE spectrum auction (PLN 9.2 billion) and payment from NBP’s profit (PLN 3.2 billion) are of key importance for the draft budget. Together with revenue from taxes on sectors (PLN 7.5 billion), this will allow to finance the “Family 500+” programme in 2016; however, it will be necessary to find new sources of financing this expenditure in the coming years.
• Despite the good macroeconomic situation and forecasted low inflation, a major increase in budget expenditure has been scheduled for 2016: by 9% (PLN 31.8 billion) with respect to forecast figures for 2015 and by 18% (PLN 56 billion) with respect to 2014. Keeping the election promises made by Law and Justice will increase the budgetary expenditure by PLN 17 billion.
• The Social Security Fund (FUS) remains unable to finance itself, as all attempts to permanently mitigate this problem have so far proved unsuccessful. 2016 will be another year in which FUS will receive higher subsidies (PLN 44.8 billion in subsidies and PLN 4.9 billion in loans), despite completed reforms of the pension system and other measures targeted at lowering the subsidy amount. The need to subsidise the retirement and disability pension system from the state budget (also in the form of subsidising the Farmers’ Social Security Fund (KRUS) and social security benefits for the uniformed services, judges and prosecutors) is one of the main reasons behind the budget’s imbalance.
• In comparison to 2013 and 2014, outlays on agriculture have been significantly decreased (lower expenditure on co-financing of EU projects targeted at modernisation of Polish rural areas), such as the cost of sovereign debt servicing (as a result of redemption of bonds held by open pension funds (OFE) and decreasing yield of Polish bonds). The resulting savings are estimated at PLN 16 billion. However, rather than cover the budgetary deficit, these funds have been allocated to increase spending in almost all sectors of the state budget.
• The budget for 2016 is characterised by a high deficit (PLN -54.7 billion) and negative primary balance. Between 2011 and 2014, the latter was relatively balanced, while in 2015 and 2016 a sudden increase in the primary deficit occurred, amounting to, respectively, PLN -20.2 billion and PLN -22.9 billion. One of the consequences of the high deficit is the rapid increase of sovereign debt. Polish public finances managed to “fritter away” PLN 130 billion of assets seized from OFE in just two years. According to forecasts, the official sovereign debt of Poland is to exceed PLN 1 trillion already in 2018.

Full article (in Polish):
Sawulski J., (2016), Budżet zmarnowanej szansy. Opinia IBS o projekcie budżetu państwa na 2016 rok, IBS Policy Paper 01/2016.