ZPP Newsletter
Warsaw, 30th June 2021
Position of the Union of Entrepreneurs and Employers on the assumptions for the draft state budget for 2022
- The forecast of the most important macroeconomic indicators included in the “Assumptions to the state budget for 2022” is definitely more conservative than the values presented in forecasts of other institutions. This allows for a more conservative forecast of budget revenues and expenditures for the next year, while slightly distorting the overall picture of the forecast of the economic situation in Poland.
- When interpreting the values of macroeconomic indicators included in the budget assumptions for 2022, one must be aware of the strong base effects resulting from the crisis-related anomalies of 2021. Part of the real GDP growth in 2022 is only the effect of the recovery from post-crisis declines in demand.
- Linking a significant part of budget expenditure to the level of GDP poses a challenge to the sustainability of the public finance sector.
- Bearing in mind that the Stabilising Expenditure Rule (SER) does not cover all revenues and expenditures of the public finance sector, it should be positively assessed that the budget assumptions allow for the return to the application of the SER in the original formula as early as 2022. There are, however, many risk factors that may adversely affect the level of budget revenues and expenditures.
Chart 1. List of selected macroeconomic indices included in the “Assumptions to the state budget for 2022” compared with forecasts of selected institutions
Forecasted growth dynamics in 2022 y-o-y
GDP CPI inflation BAEL unemployment rate (registered) Investments/GDP
The forecasts of the major macroeconomic indices presented in the “Assumptions to the state budget for 2022” are more conservative in relation to the values forecasted by other institutions: the European Commission, the OECD and the National Bank of Poland. This allows for a more conservative forecast of budget revenues and expenditures for the next year, while slightly distorting the overall picture of the forecasted economic situation in Poland. This is the result of both maintaining the assumptions regarding the external environment of the Polish economy, taken from the (now obsolete) forecast of the European Commission of February this year, and the failure to take into account the impact of the National Recovery and Resilience Plan (Krajowy Plan Odbudowy i Zwiększenia Odporności – KPOiZO) and the effects of the Polish New Deal on the economy in the forecast.
When interpreting the values of macroeconomic indices included in the budget assumptions for 2022, one must be aware of the strong base effects resulting from the crisis-related anomalies of 2021. Part of the real GDP growth in 2022 will only be the effect of the recovery from post-crisis declines in household consumption demand and public consumption. Therefore, GDP growth of 4.3% in 2022 is a largely conservative assumption. However, given the existence of many risk factors, such as the uncertainty regarding the further spread of the COVID-19 virus, we believe that this value – although it differs in minus from the forecasts of other centres – is a safe assumption.
The forecast of an increase in CPI inflation in 2021 by 3.1% and in 2022 by 2.8% also seems to be highly underestimated in relation to the inflation data published in the first half of this year and the forecasts of other institutions. We would like to point out that lowering the inflation rate generates an underestimation of not only budget revenues from VAT or excise duty, but also budget expenses that will be necessary to cover, among other things, the statutory minimum in terms of next year’s pension indexation. Therefore, the inflation rate forecast should be revised accordingly.
The assumptions predict a moderate improvement on the labour market and further decline in the unemployment rate down to 5.8% related to it. This is a safe assumption, especially considering the uncertainty accompanying fears of the autumn wave of disease associated with subsequent mutations of the virus reaching Europe. Although the unemployment rate in Poland in May 2021 amounted to 6.1%, the situation on the labour market is not so unequivocally positive – the comparison of the number of job vacancies with the number of the unemployed is a source of concern. As a result of the mismatch between the supply structure and the demand on the labour market, we are currently dealing with a strong wage pressure, especially when it comes to highly qualified specialists. Furthermore, high inflation also affects the growth rate of wages.
In the case of investments in 2022, the forecast of the Ministry of Finance is significantly underestimated due to the fact that it does not take into account the inflow of funds from the National Recovery and Resilience Plan. In 2022, the direct effect of this programme is to be an increase in investment outlays by PLN 22.9 billion, which will result in approx. 5.8% increase in investments, representing the excess 0.9% of GDP. On the other hand, preliminary estimates of Statistics Poland on growth components for Q1 2021 have positively surprised in terms of investment. Despite the fact that in Q1 2021 there was a decline in GDP (-0.9%) caused by a decrease in the dynamics of the trade balance, we were dealing with an increase in investments by 1.3%. Other factors that will positively affect the level of investment in 2022 include the increase in household income driven by high wage growth as well as the increase in imports of our products by countries of the eurozone. However, all of the above-mentioned factors can be effectively neutralised by regulatory uncertainty, which is one of the key barriers to investment in Poland.
The statutory algorithm of linking a significant part of budget expenditure to the level of GDP will pose a challenge to the sustainability of the public finance sector in 2022. The basis for calculating health expenditure in 2022 will be the level from 2020 when we dealt with a 2.8% decline in GDP. The real drop in health care expenditure, due to the high forecasted inflation, may be much higher. The combination of this decline with high inflation will also generate additional pressure on wage growth in this sector. With regard to national defence spending, the opposite will be the case. The “Act on restructuring and technical modernisation of the Armed Forces and their financing” sets the minimum expenditure on national defence in 2021-2023 at the level of 2.2% of the forecasted GDP for a given year, as included in the assumptions of the draft budget. The rapid recovery of the economy in relation to the crisis anomaly of the previous year will be challenging for the state budget in this context.
In 2020 and 2021, we used the so-called general exit clause from the fiscal rules introduced by the European Commission. The Commission kept in force the application of the exemption from these rules for 2021-2022 arguing that during this period all member states should remain able to pursue fiscal policies without restrictions on the pace of expenditure growth. Bearing in mind that the Stabilising Expenditure Rule (SER) in force in Poland does not cover all revenues and expenditures of the public finance sector, it should be positively assessed that the budget assumptions allow for the return to the application of the SER in its original formula as early as 2022. There are, however, many risk factors which may adversely affect the level of budget revenues and expenses.
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[1] Ministry of Finance, Assumptions to the state budget for 2022, Warsaw, June 2021, online: „Założenia projektu budżetu państwa na rok 2022” – Chancellery of the Prime Minister – Portal Gov.pl (www.gov.pl)
[2] Economic Forecast of the Union of Entrepreneurs and Employers 2021/2022, Warszawa, 10th June 2021: online: Prognoza Ekonomiczna ZPP 2021/2022 – ZPP
[3] European Commission, Spring 2021 Economic Forecasts for Poland, Luxembourg, May 2021, online: Economic forecast for Poland | European Commission (europa.eu)
[4] Organisation for Economic Co-operation and Development, Economic Forecast Summary, May 2021, online: Poland Economic Snapshot – OECD
[5] National Bank of Poland, Projection of inflation and economic growth of the National Bank of Poland based on the NECMOD model, Warsaw, 8th March 2021, online: Projekcja inflacji i wzrostu gospodarczego Narodowego Banku Polskiego na podstawie modelu NECMOD (nbp.pl)
