The Polish government’s commitment to reducing its large budget deficit could be weakened by concerns over losing voter support, particularly in the context of the country’s deep political divisions, an S&P expert on Central and Eastern Europe said on Tuesday.
Despite these challenges, S&P maintains a stable outlook for Poland with an 'A-' rating, citing strong economic growth potential, a robust external financial position, and credible monetary policy, according to Karen Vartapetov, S&P’s lead analyst for Central and Eastern Europe and the CIS, speaking at a capital markets conference.
However, he highlighted the high deficit as a key area of concern.
“Risks to the Polish ratings are in balance ... but fiscal challenge is there, and in the medium term, they can put pressure on the ratings.
“So far, we are not in a rush to adjust the ratings for Poland, but would like to see a direction of travel and potentially, an announcement of a new fiscal consolidation package, which the government seems to be committed to in the medium term.”
S&P forecasts that Poland's general government deficit will decrease to 6.1% of GDP in 2025, down from last year’s 6.6%, which was the second-highest in the European Union.
Poland has committed to reducing its deficit to the EU’s 3% of GDP limit by 2028, relying on economic growth to achieve this target, Reuters reports.
However, the intense political polarisation in Poland, highlighted by the upcoming presidential run-off between liberal Rafal Trzaskowski and nationalist Karol Nawrocki, makes efforts to cut deficits politically sensitive and challenging.
“Loose fiscal policy is the cost which the government or the Polish economy has to pay for this extremely, extremely polarised society,” Vartapetov said.
“So the government is not able to contain fiscal expenditures or rule out some of the fiscal measures from the past. It is because you risk losing your, you know, elections immediately,” he added.
In addition to weaker nominal economic growth compared to pre-pandemic levels, which has reduced budget revenues, he highlighted concerns on the spending side, particularly Poland’s rising debt servicing costs and military expenditures, which are the highest in NATO relative to the size of its economy.
“This is not only defence expenditures, but also the legacy of the pandemic. So very generous social transfers to households, the businesses, and they are still there, especially if we talk about wages and pensions," Vartapetov said.
“Once the super electoral cycle is over, there will be a window of opportunity, even if it's narrow, maybe one year, two years before the next electoral cycle kicks in, for the government to come up with some medium-term fiscal adjustment. And this is our assumption behind the existing ratings for Poland.”
Poland's current pro-Brussels ruling coalition came into power in late 2023, bringing an end to eight years of conservative leadership. Since then, Poles have also participated in local elections and the 2024 European Parliament election, with the next parliamentary vote anticipated in 2027.