Donald Trump and Liz Truss. Lessons for Poland in financial management [OPINIA]
The situation of public finances is unbelievable. Part of the budget problems with a high deficit Donald Tusk's government inherited from its predecessors. However, the current team decided to add to the PiS preheated by PiS. Already 2023 we ended with a hole in state finances at 5.3 percent. GDP, and last year brought a drastic deterioration of this image with a deficit of as much as 6.6 percent. GDP. This is the worst result of history, not counting the crisis years after the fall of the investment bank Lehman Brothers, the threat of the euro area or pandemic.
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The deficit higher and higher
Last fall, the Ministry of Finance (MF) predicted that 2024 we would close a 5.7 percent deficit. GDP, and this year it will be able to beat up to 5.5 percent. GDP. Dry numbers may not say much to someone who does not observe Poland's fiscal situation on a daily basis. To understand the reference point, however, it is worth showing that the EU deficit limit is 3 percent. GDP, and we are over twice as high. Additionally Last year, our budget situation was one of the worst in the EU – only Romania had worse data on public finance.
Last year's forecasts of the Ministry of Finance can already be thrown into the trash. According to these latest predictions this year, the deficit will be 6.3 percent. GDP, i.e. by as much as 0.8 percentage points More than six months ago. This, in turn, means that the path of limiting excessive deficit, which was to end with Brussels, which was to end in 2028, also becomes an outdated probability.
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The government was based mainly on the fact that the economy will grow at a rapid pace, which means that even if the deficit increases nominally, it should fall in relation to GDP.
Only that in the situation of divergence of global financial markets by Donald Trump's commercial policy, which can soon translate into the real sphere of the economy, it can be difficult to dynamic development in the coming years.
In addition, in a situation of uncertainty, investors are inclined to more radical response to currencies or bonds of countries in which they begin to see a risky policy regarding, e.g. deficit or public debt.
Markets can scold politicians
The strength of the markets can be powerful if the economic policy of a given government assess how far from rational. A few years ago, British Prime Minister Liz Truss found out about it, whose office fell after she announced giant tax cuts. Even a moment ago, US President Donald Trump, whose commercial policy led to a few days and extremely powerful breakdown on global stock exchanges. Today we see a correction of the approach to customs duties through the White House and it is difficult not to combine this fact with the behavior of the markets, although the American head of state considers its strategy to be right and bringing fruit.
If the markets recognize that the deficit or debt has escaped the government from control, and the restriction plan does not guarantee success, also They can show their dissatisfaction, firing the costs of financing with bonds into space or getting rid of the zloty.
The government does not have many aces in its sleeve when it comes to managing public finances. We can count to some extent that Brussels will turn a blind eye. Departure from the path of burial hole in public finances may get dry in a situation where we still bear high -related defense costs. Fortunately, we do not have to be afraid of penalties from the European Commission, but we should slowly look and fear if investors do not want to scold us.
Certainly they will not cut us off from financing, but they can bring its cost to the levels of finance, and the finances, accepted by the Minister of Finance, levels. This year the situation is safe, because although gross loan needs are over PLN 550 billion, almost two -thirds of this amount has already been covered by the finance ministry. However, there are no prospects that in the coming years loan needs will be significantly different, on the contrary, their growth should be predicted. The market pressure on the government will also be increasing.
Without a third way
Of course, the growing economy will support the limitation of the deficit or inhibit debt growth. But There are de facto roads to straighten the situation in public finances. First, a tax increase. For political reasons, it is known that this is the last resort, but is it for sure. While it is difficult to imagine a PIT increase, the appearance of new sector taxes or regarding selected segments of the economy seems likely. In addition, greater restrictiveness of the National Tax Administration apparatus may occur.
The second strategy assumes cutting expenses. Here, the field to show off is greater, if you have the favor of the president, because about three quarters of budget expenditure is rigid, i.e. it results from laws. However, limiting expenses is also politically embarrassing, especially since we will only have a short, one annual break in the campaign and in 2027 the choice of a new cast of the Sejm and Senate.
In a crisis situation, subsequent turmoil on global markets, unpredictable movements of Donald Trump's administration, a total trade war of the USA with China, we can find an uninteresting situation with a high deficit and rapidly growing debt. The costs of their financing may be unbearable. The government should now show whether it chooses a tax increase or cutting out of expenses, because it seems that there is no third way. This is a radical setting, but since politicians are unable to even determine priorities in expenses and honestly communicate to society, they can be forced to have unpopular and made at the wall.
Author: Bartek Godusławski, journalist Business Insider Polska
