This year’s state budget deficit will reach a record high of 109 billion zloty (€25 billion), the government has announced.

On Thursday, the cabinet accepted a new budget proposal for 2020, adjusting its income forecasts down by 36.7 billion zloty, to 398.7 billion zloty, and expenditure up by 72.7 billion zloty, to 508 billion zloty.

While the news does not come as a surprise amid the economic fallout from the pandemic and government measures to mitigate it, the revised budget marks a sharp departure from earlier plans for Poland to record no deficit in 2020 for the first time in its post-1989 history.

Source: Ministry of Finance (*forecast)

“The government is adjusting the state budget for 2020 to the situation related to the outbreak of the COVID-19 pandemic,” explained the finance ministry, reports Business Insider.

“The spread of the coronavirus has contributed to the greatest economic crisis in recent years, which contributed to a sharp slowdown in economic activity in Poland and other countries affected by the pandemic,” it continued.

In late December, Prime Minister Mateusz Morawiecki’s cabinet had approved plans for a balanced state budget for 2020, with income and spending both planned to amount to 435.3 billion zloty.

He noted at the time that, amid economic “turbulence” elsewhere, Poland’s “balanced budget gives us comfort and a security buffer for 2020”, with public finances never having been in better shape.

Government approves Poland’s first balanced budget in post-1989 history

Since then, however, forecasts have been adjusted to account for large government spending to shelter businesses and workers from the economic fallout of the coronavirus, as well as to bulk up financial institutions and health services.

In reality, public spending to fight the pandemic will be even greater than the adjusted budget suggests, as much of the cost is being shouldered by other public bodies, including the National Development Bank (BGK) and Polish Development Fund (PFR).

The methodology used by the European Union to estimate the public sector’s deficit will, however, also take into account the additional spending by the BGK and PFR, reports Business Insider.

In its new budget forecast, Poland’s economy is expected to shrink by 4.6% this year (in line with IMF and European Commission predictions), which had been revised from the previous assumption of a 3.7% drop in GDP.

The new budget proposal assumes that employment will drop by 2.4%, following a 1.5% rise in 2019. This would mean that unemployment would reach 8% by the end of 2020, up from 5.2% in 2019.

Poland unveils multi-billion support package to counter coronavirus economic fallout

According to official figures released earlier this week, government revenue between January and July reached 235.8 billion zloty – with higher than expected VAT and business tax (CIT) income. Spending had been at 252.1 billion zloty. The state deficit had thus only reached 16.3 billion zloty by July.

The revised forecast for a higher budget deficit could therefore indicate increased government spending in coming months.

“Since we currently have a deficit of 16 billion zloty in the budget, and at the end of the year it is to be 109 [billion zloty], we must now run a deficit of 18.6 billion zloty every month,” tweeted ING bank.

In June, the World Bank’s senior economist for Poland, Cristina Savescu, noted that Poland was “more resistant” to the effects of the coronavirus pandemic than other countries in the region thanks to “a better fiscal situation, diversification and competitiveness”.

“Poland’s amount of debt in relation to GDP is one of the lowest in the European Union, and therefore the government has budgetary space to respond to the crisis,” she explained.

Savescu also argued that, in the medium term, the crisis presented opportunities for Poland to “benefit from reshuffles within global supply chains” as trade disruption leads firms “to transfer operations to other, competitively priced places”.

World Bank: Polish economy more resistant to virus than others in region and could even benefit

Main image credit: Ministerstwo Finansów/Twitter

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