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2013 budget assumptions could prove hard to meet as GDP growth decelerates


2012-11-10



The updated draft budget for 2013 envisioning a higher deficit represents an attempt to strike a new balance between necessary fiscal consolidation and growth. A somewhat slower general government deficit-reduction path for next year (to below 3.5% of GDP) coupled with a credible deficit-cutting plan for the subsequent years should be sufficient for the European Commission to lift the excessive deficit procedure against Poland in 2013. But does the government have a “plan B” to implement in case economic conditions become markedly worse and the budget gap widens?

This year’s budget deficit under control thanks to central bank’s profit

With the economy losing momentum, VAT receipts have been significantly lower so far this year than suggested by data on domestic demand. Nevertheless, the resulting revenue gap was easily compensated for by a profit payment from the National Bank of Poland (NBP) for fiscal 2011.

Poland’s fiscal situation has improved substantially over the past two years, primarily thanks to spending cuts, but also as a result of cyclical factors (an acceleration of economic growth that pushed tax revenues higher). The year 2012 has proved more difficult than initially thought, however, with state finances coming under growing pressure from a slowing economy. The first few months of the year saw a significant increase in the central budget deficit, due both to high expenditures (mainly transfers to the EU general budget and costs of foreign debt servicing) and disappointing revenues from indirect taxes. VAT receipts, which usually constitute the biggest source of budget revenues, are particularly weak as compared with previous years. After the first eight months of 2012 actual VAT receipts represented 61% of the annual plan, compared with an average realisation rate for this time of year of 68% during 2010-2011. It is worth noting that the rate of increase in VAT revenues was smaller than would be expected on the basis of the rate of growth in domestic demand.

A lower realisation rate was also recorded in the case of excise revenues (63.4%, as against an average of 66% in 2010-2011). On the other hand, actual receipts from the personal income tax and especially from the corporate income tax were higher than projected. The higher-than-expected revenues from the corporate income tax may be a result of continued relative strength of business finances.

The gap in revenues created by lower tax receipts was compensated for by the transfer to the budget of the 2011 profit of the central bank. Last year the National Bank of Poland (NBP) generated a profit of approximately PLN 8.6bn (€2.1bn), of which PLN 8.2bn (€2bn) was transferred to the budget in June 2012. Since central bank profits were not included in this year’s budget bill, they largely made up for the loss of tax revenue. Indeed, thanks to this and to spending discipline, budget realisation has so far been better than foreseen by the official timetable document. At the end of September the central budget deficit amounted to PLN 21.1bn (€5bn), i.e. 60.4% of the annual plan.

Central budget execution in Poland at the end of September (PLN bn), 2004-2012

The budget deficit is set to increase in the fourth quarter. On the revenue side, weaker economic growth will continue to put pressure on tax receipts. On the other hand, expenditure savings (public spending tends to be lower in the final part of the year) should keep the deficit below the official target of PLN 35bn (€8.3bn). In my view, the estimate included in the draft 2013 budget of this year’s deficit coming in at a maximum of PLN 31.7bn or €7.5bn (about 91% of the annual plan) appears realistic.

Due to the economic slowdown the government is pursuing a somewhat slower fiscal consolidation path. The Ministry of Finance forecasts that in 2012 the general government deficit will fall to just under 3.5% of GDP from about 5% in 2011 and compared with 2.9% foreseen by the updated Convergence Programme published in April. Nevertheless, it is still possible that the European Commission will lift the excessive procedure against Poland, which remains one of the ministry’s priorities. A slower consolidation path is hardly a surprise given the economic situation in the rest of the EU, and particularly in the eurozone. Under these circumstances, the adoption by the government of a higher deficit target has not drawn any negative reactions from credit rating agencies (which are standing by their current ratings of Poland’s debt and maintaining the outlook at positive or stable) nor from foreign investors, whose exposure to the country’s debt is reaching levels never seen before.

Updated draft budget for 2013

The government decided to adjust the macroeconomic projections underlying the draft budget bill for 2013 to reflect changes in the economic environment. Nonetheless, judging from current trends in the global and domestic economies, there remains a high risk that next year’s GDP growth will be slower than forecast.

The government has tentatively adopted an amended draft budget bill for 2013 based on a new set of macroeconomic projections that are more realistic and better attuned to the current economic circumstances and outlook, both at home and globally. According to the forecasts of the Ministry of Finance, in 2013 GDP growth in Poland will decelerate slightly, to 2.2% from a projected 2.5% in 2012, while average inflation will drop to 2.7% from about 4%. Although the revised projection of next year’s GDP growth is substantially lower than the one published in mid-2012 (2.9%), it remains somewhat above my own forecast of 1.9%. A weaker pace of economic expansion would contribute to a further deterioration of labour market conditions (a decline in employment, a marked slowing of wage growth). This could push the unemployment rate above the level foreseen by the government.

Macroeconomic assumptions of the draft 2013 budget in Poland, 2011-2015
* realisation
** planned realisation
*** forecast
Ministry of Finance, 2012
2011*2012**2013***2014***2015***
GDP at current prices (PLN bn) 1,524.7 1,612.7 1,688.3 1,769.5 1,875.7
GDP real change (%) 4.3 2.5 2.2 2.5 3.5
CPI inflation (%, average) 4.3 4.0 2.7 2.3 2.5
Average employment in the national economy (y-o-y change, %) 0.9 0.1 0.2 0.4 0.7
Average gross monthly wage in the national economy (y-o-y change, %) 5.4 4.4 4.6 4.6 5.2
Registered unemployment rate (%, end of period) 12.5 13.0 13.0 12.6 12.0
EUR/PLN exchange rate (average) 4.12 4.21 4.05 3.87 3.72
Reference rate (%, average) 4.22 4.66 4.36 4.25 4.25

The revised draft budget currently being worked by the Sejm envisions budget revenues of nearly PLN 299.4bn or €71.1bn in 2013 (an increase of 2.4% compared with the government’s estimate of actual revenues this year), and expenditures of about PLN 335bn or €79.6bn (up by 3.3%). The proposed central budget deficit, at PLN 35.6bn (€8.5bn), is PLN 3.6bn (€0.9bn) higher than the original projection written into the Multiyear State Financial Plan for 2012-2015, which put the figure at PLN 32bn (€7.6bn); and higher than this year’s estimated actual deficit of PLN 31.7bn (€7.5bn). The adoption of a slightly relaxed deficit target represents an attempt to strike a new balance between necessary fiscal consolidation and growth.

Economic slowdown is main risk factor for budget revenues in 2013

The year 2013 may prove more difficult for budget realisation. In response to macroeconomic challenges, the government is embarking on measures to support economic growth.

The Ministry of Finance has pencilled in a 5.1% rise in tax revenues in 2013, to be driven primarily by higher projected receipts from the corporate income tax (by about 11%), the personal income tax (by about 6%) and VAT (by 4%). However, given the steadily deteriorating financial results of the business sector and the anticipated deceleration of economic growth, actual receipts from the CIT, which tend to be highly cyclical, are at a high risk of falling short of the target. The projected rate of increase in VAT revenues, which has been set below the nominal rate of GDP growth, represents an attempt to adjust to the circumstances of the moment, but here too there is a risk of lower receipts if the GDP mix proves less favourable. In particular, such a scenario is likely as long as exports, which are exempt from VAT, remain the chief motor of economic growth.

Central budget revenues, expenditures, and balance in Poland according to the draft 2013 budget, 2011-2013
* realisation
** planned realisation
*** forecast
Ministry of Finance, 2012
2011*2012**2013***
PLN bnPLN bnY-o-y changePLN bnY-o-y change
Total budget revenues, including:277.56292.445.4%299.392.4%
Tax revenues 243.21 253.92 4.4% 266.98 5.1%
- VAT 120.83 121.50 0.6% 126.41 4.0%
- CIT 24.86 26.64 7.2% 29.64 11.3%
- PIT 38.07 40.43 6.2% 42.94 6.2%
Non-tax revenues 32.27 37.00 14.7% 30.81 -16.7%
Total budget expenditures, including:302.68324.107.1%334.953.3%
Grants and subsidies 148.46 156.49 5.4% 157.54 0.7%
Servicing of public debt 35.96 43.00 19.6% 43.42 1.0%
Budget balance-25.12-31.70--35.56-

Likewise, the personal income tax revenue target could prove hard to meet, considering the situation on the labour market and the possibility of a further slowdown of economic growth. Latest data from the enterprise sector indicate that job creation has stabilised at around zero, while wage growth is steadily weakening. In light of this, the foreseen 4.6% increase in the average monthly wage in the national economy in 2013 could in my opinion turn out to be overly optimistic.

If the pessimistic scenario materialises and tax receipts come in lower than projected, the Ministry of Finance will have to act to close the resulting revenue gap. This should not be difficult if the NBP reports a healthy profit for 2012 and transfers 95% of the sum to the central budget, as it did this year. But if the central bank makes no profit, or if its profit proves insufficient to plug the funding hole in a significant way, the Ministry of Finance will need to find other means to cope with the situation. The most immediate way to partly compensate for the revenue shortfall is to reduce spending. Other solutions are not as simple. They include:

  • selective tax increases, mainly in indirect taxes or social insurance contributions;
  • another reduction of transfers to open pension funds (OFE);
  • amending the budget bill during 2013 and increasing the budget deficit.

The government’s latest moves indicate that its approach is to allow the operation of automatic fiscal stabilisers. Taking into consideration the present economic conditions and cloudy outlook, it has decided to spread its fiscal consolidation effort over a somewhat longer period of time. The general government deficit is to fall to about 3.5% this year, and to drop slightly below this level in 2013. It should be noted that the government’s capacity for fiscal loosening and stimulus policies is currently very limited and much smaller than it was in 2008-2009, since the general government debt is already close to the second constitutional limit of 55% of GDP. Despite the many threats, the government has decided to act to stimulate growth, chiefly by supporting investments, but also through assistance to small and medium-sized enterprises. These objectives are to be implemented through several programmes outlined in Prime Minister Donald Tusk’s so-called second inaugural address, and particularly through the “Inwestycje Polskie” scheme or through Portfelowa Linia Gwarancyjna “De Minimis”, a loan guarantee programme for SMEs. The expectation is that these measures will not only facilitate business investment, but will also generate new jobs in the economy.

Agnieszka Decewicz

Senior Economist, Bank Zachodni WBK

agnieszka.decewicz@bzwbk.pl



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