General elections in Poland that took place on 15 October brought a shift in the political ground, with the new government expected to be formed by the opposition parties led by Civic Coalition (KO). In such a scenario, a new majority is to replace a government that has been on a collision course with the EU over recent years. Needing the game changer, the conflict between Warsaw and Brussels over the rule of law would hopefully be resolved, unlocking transfers from both the Recovery and Resilience Fund (RRF) and cohesion policy funds from the new 2021-27 EU budget.

ING sees a bunch of broad priorities for the future government.

First, a need for a paradigm shift in economic policy from support focused mainly on consumption to greater support for investment. This refers to domestic investments through predictable tax policy, as in the last eight years private outlays were discouraged. As a result, Poland’s investment-to-GDP ratio decreased to 17%, much lower than in other Central European economies where this ratio varies between 25-28%. The higher investment should mitigate price pressures and support further disinflation towards the 2.5% inflation target over the medium term.

The next priority is depoliticizing the energy transition, as Poland is the most exposed in the CEE region to expensive energy, through a highly carbon-intensive mix.

Another one is a new social contract to high spending promises on top of those already contained in the 2024 draft budget with record-high net borrowing needs.

The final priority is improving governance and institutions, from assuring an adequate system of checks and balances, transparency in public finances, and predictable tax law, to improved governance of state-owned companies. Transparency in public finance is key for better controlling public spending, which outpaced public revenues, in particular since the Covid-19 pandemic.

Although Poland is a moderately indebted country by European standards (public debt below 50% of GDP in 2022 vs. EU average of 83.5% of GDP), authorities have been running expansionary policies in the last pandemic and pre-election years as generous spending was accompanied by tax cuts. Some were temporary (VAT rate cuts for energy), but others are here to stay (lower personal income tax rate, higher tax-free allowance). Large fiscal gaps and borrowing needs in an environment of high interest rates should lead to a substantial rise in interest payments as the increased amount of total public debt is rolled over at higher costs. That may force adjustments in other spending in the future.

The incumbent government planned net borrowing needs at a record-high level of PLN225bn (6.1% of GDP) in 2024. ING forecasts the 2024 general government deficit at about 4.8% of GDP, estimating the common spending promises of election winners should add 1% of GDP extra spending in 2024, lifting borrowing needs to 7% of GDP and the general government deficit to 5.5-6% of GDP.

That is the maximum the European Commission may accept in 2024 given that the Growth and Stability Pact will be restored to work. The Pact is subject to reform leading to a new approach based on debt sustainability rather than arbitrary 3% and 60% of GDP thresholds for deficit and debt. But before the reform is agreed by member states, the EC should assess countries’ fiscal stances based on the old approach: Poland with 5.5-6% of GDP would have the highest deficit in the EU. Warsaw may potentially negotiate a waiver with the EC due to high military spending and its role as the Eastern NATO border.