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Poland faces fiscal continued challenges regardless of election outcomes

In the lead-up to Poland's general election, slated for October 15, 2023, Fitch Ratings emphasizes that the outcome of this crucial political event will significantly influence policy clarity in the country. However, uncertainties persist regarding how the next government will tackle Poland's medium-term fiscal challenges, which have become more pronounced due to a trend of fiscal loosening seen in recent budgets.


The 2024 budget, recently finalized in September, maintains a deficit target of 4.5% of GDP for the following year, a more optimistic projection than Fitch's 2023 forecast of 5.3%. This is attributed to assumptions of economic growth recovery and a reduction in energy support measures.


However, the budget showcases mounting spending pressures, with a notable increase in defense spending, rising public-sector wages, and additional social transfers. Poland's shift toward fiscal loosening in recent years contrasts with its pre-pandemic fiscal prudence.


The forthcoming election has injected a dose of uncertainty, as various political parties promise expanded social spending and sustained high defense outlays. This potentially could challenge long-term public debt sustainability. The exact nature of offsetting measures post-election remains uncertain, further prolonging policy ambiguity, especially in the case of inconclusive coalition talks.


As Poland's fiscal trade-offs become more challenging, external relations, particularly with the EU, will play a pivotal role in shaping the country's economic outlook and fiscal health. Additionally, the interplay between fiscal and monetary policy post-election is crucial for maintaining institutional credibility, given recent pre-election interest rate cuts by the National Bank of Poland.


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