Warning about the boom-bust cycle. The Fiscal Council attacks the government project

The government's draft changes to the Stabilizing Expenditure Rule (SRW) regarding the defense clause pose a risk of weakening the state budget framework – assessed the Fiscal Council.

“The draft changes to the SRW regarding the defense clause pose a risk of weakening the state budget framework. The proposed solutions increase unjustifiably short-term spending freedom at the expense of mid-term stability, deepen the opacity of the system and limit its ability to self-correct,” wrote the Fiscal Council in its position of April 15.

She added that it is necessary, in particular, to maintain the mechanism of ex-post corrections as a safeguard against forecast errors, as well as to precisely define, at the level of an act or executive act, defense expenditure in a way that excludes discretionary classification and ensures full disclosure and transparency of these expenditures.

Moreover, in the opinion of the Council members, it is necessary to avoid overlapping of the EU NEC clause and the national defense clause and to abandon mechanisms that destabilize the SRW by shifting the fiscal space over time and increasing the risk of a “boom-bust” cycle.

In the Council's opinion, it is necessary to conduct in-depth simulation analyzes of the operation of the defense clause in the medium and long term and to ensure that any changes to the defense clause are preceded by an assessment of their impact on public debt, the medium-term expenditure path and compliance with the stabilizing objective of the rules.

The Fiscal Council referred to the government's draft amendment to the Public Finance Act and certain other acts, submitted to the Sejm as form No. 2388.

“Article 1(4) proposes changes to the structure of the stabilizing expenditure rule (modification of Article 112aa of the Public Finance Act). This is a change of significant importance for the national budgetary framework because it concerns the so-called defense clause – a mechanism that in 2023-2025 increased the expenditure limit on a scale reaching up to 0.8% to 1.4% of GDP annually,” the Council pointed out.

The defense clause consists in adjusting the expenditure limit by the difference between the amount of advance payments for the purchase of military equipment in a given year and the value of deliveries expected in a given year.

“When the former is higher, the limit is increased, and in the opposite situation – reduced. The proposed change to the stabilizing expenditure rule (SRW) is of a systemic nature, i.e. it goes beyond a change of technical significance. The proposed solution therefore requires a thorough assessment of its impact on the transparency, credibility and effectiveness of the SRW as the basic +fiscal anchor+ and on the medium-term stability of public finances,” the Council said. (PAP Business)

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