In a notable move last week, the Polish government revised its budget for 2024, raising the projected deficit from 184 billion złoty (€39 billion) to €51 billion. This adjustment comes despite the budget’s original spending targets remaining the same. Instead, the government has reduced its tax revenue forecast by €12 billion due to lower-than-expected income from tax sources.

To cover the newly anticipated shortfall, the government plans to draw on funds it has already borrowed from the market, which are currently held in reserve accounts at the National Bank of Poland (NBP). This reserve, amounting to over €27.5 billion, has been maintained as a financial buffer for unexpected shortfalls, though it will now be significantly reduced to make up for the revised deficit.

The timing and nature of this revision have raised questions among economists and financial analysts. Up until recently, the government had stated that any revenue shortfalls could be managed through underspending – a common occurrence since not all allocated funds are always fully spent within the fiscal year. However, the recent shift suggests that the government may now intend to advance certain expenditures originally planned for 2025, which could make meeting next year’s budget targets more manageable. Economists from major Polish banks suspect that this strategy is an effort to keep the 2025 budget in line with financial expectations, though these theories remain unconfirmed as the Finance Ministry has provided limited information on the rationale behind these changes.

As of the end of September, Poland’s budget deficit was recorded at €22.6 billion, leaving significant room below the previous cap of €39 billion. With the revised budget, the deficit is now set to expand by an additional €28 billion over the last three months of the fiscal year.

In an interesting detail, Finance Minister Andrzej Domański said that despite the increased central budget deficit, the total public sector deficit should remain stable at 5.7% of GDP. This implies that while the central government’s deficit is rising, deficits in other parts of the public sector – such as municipal and local governments – will likely be reduced to maintain the larger fiscal target.

Poland’s financial under pressure

During Poland’s recent budget revision, Domański reassured investors that the adjustment would not necessitate issuing large new series of government bonds. This assurance came in response to investor concerns in an already stressed financial market, where demand for Polish bonds has significantly weakened. In fact, the past two bond auctions did not reach their targets, a rare event in Poland’s financial landscape.

A week ago, the finance ministry aimed to raise €2.4 billion but received offers for only around €2.1 billion, with €1.9 billion secured. This week, the situation worsened as the ministry sought to borrow €1.9 billion but saw demand reach only €1.4 billion, raising a mere €1.2 billion. This was the lowest demand since April 2022, with similar issues last observed in early 2022, shortly after Russia’s invasion of Ukraine. As in 2022, this decline in interest is tied to high market uncertainty, particularly over the outcome of the U.S. presidential election.

The prospect of Donald Trump returning to office has added a layer of geopolitical risk and market unease. Known for his protectionist stance, Trump is associated with the imposition of tariffs and an expanded fiscal deficit, which could reignite inflationary pressures in the global economy. Bond prices have been falling as a result, pushing yields higher, particularly for U.S. bonds. These trends have affected bond yields worldwide, including Polish bonds. For Poland, a Trump victory also brings concerns about a potential reduction in U.S. support for Ukraine, heightening geopolitical risks in the region and further dampening interest in Polish bonds.

While Poland’s finances are not immediately threatened thanks to a financial cushion exceeding €21 billion, continued low demand for bonds could pose significant challenges if the trend persists.

Support grows in Poland for a four-day week

A recent report by ManpowerGroup reveals that the idea of a four-day working week has gained substantial support in Poland, with 65% of respondents in favor, including 36% who are strongly supportive. According to the survey, respondents believe that a shorter week would improve the balance between professional and personal life. However, concerns remain over potential pay reductions and increased workload within a four-day structure.

Are Polish power prices and taxes as high as perceived

Contrary to popular belief in Poland that electricity prices and taxes are among the highest in Europe, recent Eurostat data tells a different story. In the first half of 2023, the average cost of electricity for Polish households was just over €0.21 per kilowatt-hour, ranking Poland ninth in the EU for affordability. Nations such as Bulgaria, Romania, Croatia, Slovenia, Hungary, Slovakia, Malta, and Luxembourg enjoyed even cheaper power. Despite perceptions of high prices, Poland remains well below the EU average of €0.29 per kilowatt-hour, while Germany tops the charts with electricity costing €0.395 per kilowatt-hour, nearly 90% higher than in Poland.

As for taxes, Poland's total tax revenue, including social security contributions, equated to 36% of its GDP in 2022, lower than the EU average of 40%. In high-tax countries like France, taxes account for 46% of GDP, with Belgium, Denmark, and Austria close behind. At the other end of the spectrum is Ireland, where tax revenue represents only 23% of GDP, making it a fiscal haven within the EU. Poland's tax rate is lower than the EU average but relatively high within Central Europe. Only Slovenia and Croatia surpass Poland slightly, with tax revenues at 37% of GDP. Slovakia aligns with Poland at 36%, while Hungary and the Czech Republic report lower figures of 35% and 34%, respectively.

Warsaw tops EU employment rates

In a notable achievement, Warsaw and its surrounding areas led the EU in employment rates for adults aged 20 to 64 in 2023, boasting an impressive 86.5% employment rate. This indicates that if someone is seeking working-age adults who are unemployed, they are unlikely to find many in Poland’s capital region. By contrast, employment rates in southern Italy tell a different story. In regions like Calabria, Sicily, and Campania, only 48.4% of adults are employed, meaning more than half of the adult population is out of work.

But high employment rates mean that Polish businesses may soon face an even greater struggle to find workers, particularly seasonal employees, as the number of Ukrainian workers entering Poland is expected to decline this winter. A report by Gremi Personal, a recruitment agency specializing in Ukrainian labor, indicates that while overall labor migration from Ukraine may rise, fewer Ukrainians are likely to choose Poland, with many preferring destinations like Denmark, Norway, and Germany.

The report highlights several reasons behind this shift: increasingly stringent employment regulations for foreign workers, reduced support for Ukrainian refugees, and, most significantly, a perceived decline in social attitudes toward Ukrainians in Poland.

A drop in the number of Ukrainian workers could soon affect logistics and e-commerce sectors in Poland, which traditionally see a surge in activity ahead of the holiday season. Currently, around 60% of the workforce in these industries is foreign-born, primarily from Ukraine. Without Ukrainian workers, Polish businesses may need to turn to other migrant sources, or consumers might face longer wait times for deliveries as Christmas approaches.

Hungary in recession and facing tax hikes

Hungary has officially entered a recession, and its government is now proposing tax hikes to address the country’s growing budget deficit. Recent data revealed that Hungary's GDP contracted by 0.7% in the third quarter, following a 0.2% drop in the second quarter. Analysts had expected modest growth of 0.1%, making this downturn a surprise. Hungary has struggled with slow or negative growth for over a year, having entered a recession in 2022 and early 2023, experiencing a brief period of weak growth, and now seeing another GDP decline.

Typically, a recessionary economy would benefit from stimulative policies like lower interest rates or a higher budget deficit with increased government spending. However, Hungary faces constraints on both fronts. The central bank recently halted its rate-cutting cycle to stabilise the forint, which has been losing value. Meanwhile, raising the budget deficit is also problematic. Hungary ended 2022 with a deficit of 6.7% of GDP, which has placed it under the EU’s excessive deficit procedure. This deficit is partly due to lower tax revenues from an economy that has been stagnating. This situation creates a challenging cycle: efforts to reduce the deficit could further slow growth, making it harder to generate the necessary tax revenue.

In an attempt to improve fiscal health, Viktor Orbán’s government is introducing a bill to Parliament that would allow inflation-adjusted tax increases. The proposed legislation would tie excise taxes on tobacco, alcohol, and fuel to the inflation rate. Similarly, taxes on vehicles would also be linked to inflation. Hungary’s inflation currently stands at just above 4%, so this indexation could help the government close the budget gap without directly increasing tax rates.