Poland's fiscal policy tightening in 2025 would help disinflation - IMF

"The fiscal deficit is projected to remain elevated in 2025 at 5.6 percent of GDP with a broadly neutral fiscal stance," IMF analysts assessed.

They forecast Poland's general government deficit to fall to 4.9 percent of GDP in 2026 and to be at 4.1, 3.6 and 3.5 percent of GDP in 2027-2029, respectively.

The analysts added that the lower primary deficit in 2025 by 0.4 percentage points of GDP, in line with cyclical factors, will be partially offset by increased interest expenses (up by 0.2 percentage points of GDP).

"The lower cost of energy measures, gains from unchanged nominal PIT brackets, and a higher excise tax on tobacco are largely offset by higher defence expenditure and social benefits," IMF economists stressed.

They pointed out that the expected acceleration of economic growth in the short term creates an opportunity to rebuild fiscal buffers and support the completion of the disinflation process by tightening fiscal policy.

The IMF expects Poland's GDP to grow by 3.5 percent in 2025, 3.3 percent in 2026 and 3.1 percent, 2.8 percent and 2.7 percent in 2027-2029, respectively.

"Tightening (fiscal) policies in 2025 to rein in the high deficit would help disinflation and create monetary policy space to support private investment," the analysts assessed.

In 2025, the IMF recommends a 'modest' fiscal adjustment of around 0.5 percent of GDP, considering the economic slack while delivering a still-meaningful adjustment. According to the analysts, this can be still achievable within the 2025 budget by saving possible revenue overperformance and limiting non-priority spending (e.g. on goods and services).

In their view, such action within this year's budget "would help modestly lower debt and rebuild fiscal buffers to safeguard against future shocks; it would also remove some of the burden from tight monetary policies to rein in inflation, potentially freeing space for additional policy rate cuts while supporting faster convergence of

inflation towards the NBP target".

IMF economists added that in the medium term, additional fiscal tightening measures of around 1.5 percent of GDP should be implemented on top of those already in the government's plans to help stabilise debt around 60 percent of GDP while providing adequate space for public investment.

"Furthermore, raising the PIT tax-exempt threshold as under current consideration, would require further measures to offset the cost," they pointed out.

The analysts pointed to raising the progressivity of PIT in line with tax systems in other EU countries as a potential step that could support consolidation in such a case while increasing the social safety net.

"Medium-term fiscal pressures remain elevated. An elevated wage bill and higher spending on defence, social benefits, and interest will maintain pressures on public finances," they listed.

Nevertheless, IMF economists expect the budget deficit to narrow gradually to around 3.5 percent of GDP in 2029, due to higher revenues generated by fixed nominal PIT tax thresholds, higher VAT collection with the implementation of e-invoicing, higher tobacco excise taxes and lower spending on nominally indexed social benefits.

The Fund's economists assess that Poland has some fiscal space as low government bond spreads continue to provide favourable access to financing and low overall sovereign debt service risk.

"However, medium-term risks are notable, as debt is not expected to stabilise and is projected to increase

from 50 to 65 percent of GDP over 2023-29. However, several factors mitigate risks, including

conservative deficit projections and financing assumptions under the baseline," IMF pointed out.

According to IMF economists, Poland will face additional pressures on its public finances in the long term due to climate change, an ageing population and the need to increase investment.

jz/ ao/