(Ken Teegardin, CC BY-SA)
The ruling Law & Justice (PiS) party in mid-November fulfilled its promise and approved a bill to rescind an increase in the retirement age that had been approved by the previous administration in 2012. The legislation reverses the rise in retirement age to 67 from 65 for men and from 65 to 60 for women as of October 2017.
The government has – since coming to power in late 2015 – pushed measures that include a higher minimum wage and pensions, benefits for families with more than one child and free medicine for the elderly.
The lower retirement age will cost the budget about PLN10bn zlotys (EUR2.25bn) a year from 2018, with costs set to approach PLN20bn (EUR5bn) a year by 2021, according to government estimates.
The government said the public finance deficit will be below 2.6 per cent of GDP this year, while the European Commission has said it will rise to the EU’s 3 per cent ceiling in 2017 and exceed it a year later.
The European Commission lowered its 2017 growth forecast for Polish GDP on November 9th, from 3.6 per cent to 3.4 per cent. “Investment activity is expected to contract in 2016, but should gradually recover as utilization of EU funds picks up. Price pressures are set to remain subdued. The headline general government deficit is projected to decrease slightly in 2016, but to widen in 2017 and 2018,” it added.
Bonds yields indicative
Earlier reports had suggested that lower domestic demand for Polish treasury bonds is indicative of rising fears the government will overshoot its key debt to GDP ratio and incur EU penalties.
The yield on Poland’s benchmark 10-year local bond jumped to 3.57 per cent in mid-November, the highest since June 2014. The yield on the secondary market reached an average level of 3.11 per cent in June, an increase of 2.89 per cent since March and at a similar level to 2015 (average 3.19 per cent).
Excessive Deficit Procedure?
Poland was taken out of the excessive deficit procedure by the European Council earlier this year following a reduction in the deficit to below the 3 per cent of GDP threshold.
When foreign investors reduced their net holdings of Polish government bonds by 9 per cent in the first four months of 2016, local banks were on hand to step in, induced to do so by Treasury tax incentives for banks to hold more of its debt. Demand was up 28 per cent in the first five months to PLN219bn (EUR49.3bn), according to Finance Ministry figures at the end of August.
But that situation has seemingly changed and the government may now struggle to meet its maximum sales goal.
The government’s fourth-quarter debt issuance plans – the most ambitious to date – include selling new 10-year benchmark notes with a 3.098 per cent yield, 10 basis points above similar securities on the secondary market.
Investors remain attracted to Polish yields amid near-zero global rates, but with a projected rise in inflation, a possible lowering of stimulus in Europe and the Federal Reserve possibly moving closer to raising interest rates, the outlook for Polish bonds could be deteriorating.
Central bank chief Adam Glapinski said after policy makers left rates unchanged at 1.5 per cent for the 18th straight month in October, with the ECB’s rate tapering plans potentially having “significant consequences” – he said – for Poland.
Budget issues
The budget for 2017 is based on GDP growth at 3.6 per cent and CPI inflation at 1.3 per cent. The deficit is planned at a level of PLN59.3bn (EUR13.3bn). The government has forecast a 2.6 per cent deficit this year and 2.9 per cent in 2017, banking on an increased tax revenues to offset higher spending. But a projected slowdown in economic growth and weaker forecasts have cast some doubt on its ability to raise revenues.
The budget plan assumes the realization of tax revenues next year (8.6 per cent) far higher than the forecast performance in 2016. This means a continuation of the closing of the tax gap, especially in the case of VAT, where revenue will be over PLN14bn (EUR3.15bn, almost 1 per cent of GDP) and excise tax almost PLN5bn (EUR1.13bn), and is thus quite ambitious.
In the case of income from direct taxes – PIT and CIT – it is PLN4.1bn (EUR923.3m) and PLN2.5bn (EUR563m), respectively. For 2017, income from some financial institutions is planned (i.e. the bank tax) of PLN3.9bn (EUR878.2m) against the forecast performance in 2016, at a level of PLN3.4bn (EUR765.6m), while the retail sales tax was PLN1.6bn (EUR360.3m) to PLN0.5bn PLN (EUR112.6m; up to September 2016, when it was suspended).
The draft budget plans for revenues of PLN296.88bn (EUR70.1bn) and spending of PLN351.50bn (EUR82.9bn) next year, with a resultant budget deficit of just over PLN54.6bn (EUR12.9bn).
This is based on the assumption of 3.8 per cent real GDP growth in 2016 and inflation of 1.7 per cent.
Poland’s central budget deficit up to October was 45 per cent of the full-year plan of PLN54.7bn (EUR12.3bn), the finance ministry said in mid-November, adding that tax revenues were up 7.5 per cent year-on-year in the January-October period, while value added tax (VAT) revenue increased 7.6 per cent.
But with welfare spending also increasing, with PLN1bn (EUR0.24bn) allocated to higher family benefits and PLN1.4bn (EUR0.33bn) as the cost of a one-off increase in retirement payments and increasing public sector wages, which have been frozen since the start of 2010, these are both endangered.
Poland had earmarked 1.6bn zlotys from the tax on supermarket revenues introduced earlier this year, but was forced to abandon it after the EU launched an investigation into whether it breached state aid rules. At the same time, a crackdown on VAT avoidance has not so far brought in the expected cash.
Warsaw’s planned 8.9 per cent nominal increase in tax revenues to fill the gap is over-optimistic, according to Fitch, mainly because the government’s assumed economic growth is unlikely to take place.
„Fitch believes the EU Stability and Growth Pact’s (SGP) 3 per cent of GDP deficit limit remains a strong anchor for fiscal policy in Poland, and would expect some policy adjustments if revenue growth disappoints,” the rating agency’s analysts write. „Poland exited the Excessive Deficit Procedure (EDP) in 2015 and reopening it would damage fiscal policy credibility. It could potentially result in financial sanctions via reduced disbursements of EU funds, a key driver of Poland’s economic development since its accession to the EU in 2004.”
Standard & Poor’s cut Poland’s rating in January, citing political risk to the independence of institutions. In May, Moody’s cut Poland’s outlook from stable to negative over the fiscal risks posed by the government, but left its A2 investment grade unchanged. Fitch Ratings affirmed Poland at A- in July with a stable outlook.
