Last Friday, Polish authorities announced that the 2023 budget act will be amended and the state budget deficit limit on a cash basis will be increased by PLN24bn from PLN68bn to PLN92bn (0.7% of GDP). The main reason behind such a move is the intention to boost one-off expenditure in 2023 (by PLN20.8bn), which ING links to upcoming general elections in Poland in the autumn of this year. With the direct consequence of making inflation more persistent.

The majority of the spending will be on one-off higher subsidies to local governments (PLN14bn) and one-off bonuses for teachers (excluding academics). Total state budget revenues are expected to be PLN3.2bn lower than previously projected, with tax collections PLN8.5bn lower than assumed in the budget act. VAT receipts are PLN13.4bn short of initial assumptions.

As a reminder, a few weeks ago the government released a plan to increase permanent spending from 2024 onwards on child benefits (from PLN500 per child to PLN800) and provide free pharmaceuticals for youngsters and the elderly (totalling 0.7% of GDP next year).

ING analysts hold their 2023 general government deficit estimate unchanged at 5.2% of GDP in 2023 and around 4% of GDP in 2024, as they already assumed loose fiscal policy in the election year.

Consumer price inflation in Poland eased to 13.0% year-on-year in May, but the mid-term prospects are still uncertain amid the expected economic rebound, fiscal expansion and robust growth of wages due to the tight labour market and a sizable increase in the minimum wage.

In this context, a possible rate cut at the end of 2023 is more likely to be a one-off move, while the regular monetary easing cycle is likely to start in the third quarter. ING analysts note that Poland’s core inflation picture is the least favourable in the CEE region. Fed’s decision to leave interest rates unchanged and the 25bp hike by the ECB suggest that central banks in developed countries want to maintain expectations of hikes because they see upside risks to inflation.

To bring inflation down to the target requires a decline in the wage growth rate below 5% YoY and a paradigm shift in economic policy, i.e. less consumption and more investment. The recent fiscal loosening raises concerns about whether the favourable GDP composition seen in the first quarter will continue in the following quarters.