Morawiecki will have his budget success

2016 was the third year in a row that the deficit not only fell year-on-year but also went below the 3 per cent of GDP threshold.

The Ministry of Finance unofficially admits that the deficit of the government and local government could have fallen below 2.4 per cent of GDP in 2016. This is a key indicator for assessing the state of Polish finances prepared by the European Commission.

The ministry is still waiting for full details on the implementation of the budget in December as well as information from local authorities. If these estimates are confirmed, the deficit would not only be less than in the preceding year (2.6 per cent of GDP), it would be the second best result since Poland acceded to the EU (the record lies at 1.9 per cent of GDP in 2007).

The situation in the central budget is more than good. After 11 months, its deficit accounted for just over half of the annual plan. Grzegorz Maliszewski, chief economist at Bank Millennium, says that one can assume a budget deficit for the entire year is below the so-called 2016 implementation plan. He points out that the good performance is in large part thanks to so-called disposable income, namely payment of nearly 8 billion zł of profit by the National Bank of Poland and approx. 9,2 billion zl from LTE auctions.

“But we also have better collection of taxes, especially VAT. This is seen not only in the increased income from this tax but also in the more efficient tax bracket,” the economist says.

In total, revenues from VAT to the end of November were 8.4 billion zł higher than a year ago. The annual plan was already realized to 94.4 per cent. It is unlikely that a breakdown of VAT revenue took place in December as – for the first time since mid-2014 – we had a price increase on an annual scale. So the base for this tax was also higher. Another reason for the low deficit is the spending restraint. Implementation of the expenditure plan after 11 months was 87.4 per cent – which is relatively low.

“When you add to that the surplus in local government, which after three quarters amounted to 22 billion zł, if it also continues at the end of the year, the descent of the deficit of the whole government and local government sector below 2.4 per cent of GDP will be very real. But one must remember that on the other hand we have slower than expected economic growth, which in this case is a risk factor,” says Grzegorz Maliszewski.

From the 3 per cent of GDP threshold of public sector deficit, which could trigger the implementation of an excessive deficit procedure in the case that it is exceeded, there remains 0.6 per cent of GDP, which is approximately 12 billion zł.

But this only appears to be a very comfortable margin, because the catalogue of increased spending is quite large.

The reduction of the retirement age is due to cost over 2 billion zł in 2017 alone. Precisely to minimize these costs the government decided to introduce a solution only from October this year. Another cost is the full implementation of the 500 plus programme, expenditure for this purpose will be 6 billion zl higher than last year (the programme was initiated in April 2016). On top of this comes 2.5 billion zl for a new way for the indexation of pensions. These three expenses alone add up to 10.5 billion zł, thus using up the room for manoeuvre in the budget.  On the other hand, the GDP will continue to grow. Budget revenues will be higher and approx. 10 billion zl will come from National Bank of Poland profit. But the National Bank of Poland profit will not reduce the deficit of public finances according to EU methodology.

However, surely a good result of the public finance sector this year diminishes the prospect of possible sanctions from the European Commission due to failure to follow the deficit reduction plan of the public finance sector. Because it will be the third consecutive year in which the deficit is not only declining year on year, but is below the threshold of convergence (3 per cent of GDP, although in the case of Poland there is still so-called OPF relief).

Most of the money in the OPF will go to the third pillar

The pension review adopted by the government on Friday consists of two documents. One concerns the evaluation of the capital pillar and third pillar, while the second pertains to the entire Social Insurance Institution (ZUS) pension system. According to our information, the government will soon create teams whose task will be to prepare (based on the results of the review) proposed changes.

As we have written previously, the review did not in the end include detailed proposals for restricting the possibility of additional income by retirees. In the original version there was a proposal to impose such restrictions that apply to pensioners and early retirees on people who have attained the statutory retirement age. Namely a reduction in benefits if the retiree earns 70-130 per cent of the average salary, or the suspension of pension payment if they receive a salary above that limit. Finally – we wrote – this clause was dropped in the course of government proposals on the matter. What remained, however, were recommendations on the development of incentives for prospective retirees to work longer and fuller information that was to be presented by the Social Insurance Institution (ZUS) to potential pensioners regarding the amount of their benefits.

This information was due to include a forecast regarding the increase of these benefits if the person in question postponed retirement by, for example, a year or two years. Another outcome of the review is a green light for the proposals put forward by Mateusz Morawiecki to changes regarding pension funds. He is proposing that one-fourth of OPF assets worth 35 billion zł go to the Demographic Reserve Fund at the Social Insurance Institution (ZUS). Their value would be recorded on the sub-accounts of the insured. The remainder, that is 105 billion zł, would be transferred to the accounts of those insured in the third pillar. At the same time, an employee insurance pillar would be extended with the possibility of a default option.

Grzegorz Osiecki, Marek Chądzyński 

Source: Dziennika Gazeta Prawna

1.9 per cent of GDP – the deficit of the government and local government sector in 2007. This was the lowest value since Poland joined the EU.

27.6 billion zł – the central budget deficit after 11 months in 2016. Just 50.4 per cent of the annual plan

22.1 billion zł – the surplus of local government following the first three quarters of the year

2.4 per cent of GDP – the European Commission forecast for Poland’s government and local government deficit

2.9 per cent of GDP – the government forecast for deficit in 2017.

Source: Dziennik Gazeta Prawna