Hopefully, it will not end with a further debt increase, because with such high interest rates on Polish bonds, this is the collision course with an iceberg. Unfortunately for Poland, there is a risk of a crisis similar to the one that happened in Romania in 2009.
All public expenditures are financed either from taxes (levies) or from government issued debt (which means higher taxes in the future). Many people, when demanding the implementation of new programs by the state, do not see that it is associated with greater taxation of society (now or in the future).
As Margaret Thatcher noted: “If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more. There is no such thing as public money, there is only taxpayers’ money”.
That is why Civil Development Forum (FOR) has prepared for the eleventh time the “Bill from the state”, which shows the expenditures of the Polish state broken down into the most important categories calculated per capita.
Sources of Increase in Expenses
In 2021, public expenditure per capita for the first time exceeded the amount of PLN 30,000. It accounted for 44.2% of GDP – less than the year before when the pandemic hit, but still much more than in 2019. Since 2015, public spending in Poland has increased in real terms by over 35%. There are three sources of financing this increase in expenditure.
Firstly, thanks to the good economic situation in Western Europe and the influx of workers from Ukraine, the Polish economy grew very quickly. Secondly, the PiS government introduced many new taxes, often called fees or levies for concealment (“emission charge”, “solidarity levy”, and in addition, for example, bank tax and commerce tax). Thirdly, the debt of the public sector has increased.
The largest category of public expenses was, as every year, pensions and disability pensions. The average Polish resident spent PLN 8,938 on them, including the “thirteenth” and “fourteenth” pensions. This is much more than the two consecutive categories of expenses: health care (3851 PLN) and education and science (PLN 3731).
It should be highlighted that Poland spends much more on pensions than other countries of Central and Eastern Europe at a similar level of development, and at the same time its society is aging very quickly.
In 2015–2021, social spending in real terms in Poland increased by almost 43% – this was the fifth result in the EU (with an average of 22.3%). Social expenditure grew faster than the economy – in relation to GDP it increased by 1.7 pp. On the other hand, public investments decreased by 0.4 pp in relation to GDP.
The debt increased significantly, but the most disturbing thing is the sharp increase in the yield of Polish bonds. Until recently, yields on five-year bonds were below 1%, to break for a moment 8.5% in June this year.
The situation on the Polish debt market looks like a rollercoaster. You can see tremendous volatility and uncertainty. Within two days, the yields can change by 100 basis points. The huge instability of yield and the increased risk in our country, combined with very low economic credibility, suggest that even a scenario of a sudden breakthrough through the 10% yield level is possible.
Suffice to recall that the country’s insolvency insurance, i.e. CDS contracts, has become over 1.5 times more expensive for Poland. This is the second largest increase in the price of CDS in the world, only Russia is ahead of us. And this is a kind of fiscal credibility measure, now showing a huge loss of credibility for Polish debt.
PLN 1705 of Interest Per Pole Per Year
Due to the fact that interest rates were decreasing for a long time, it seemed that the state could go into debt with impunity. Now, however, interest is starting to rise rapidly.
According to the forecast from April this year presented by the government in the Long-term Financial Plan of the State for 2022–2025, the interest on public debt should amount to PLN 1,258 per capita this year and PLN 1,705 next year. For comparison, in 2021 the interest amounted to 772 PLN per capita.
Interest in the “Bill from the state” will increase by almost PLN 1,000. This is almost 1.5 times the expenditure for the police, fire departments and other services combined, and a little less than the expenditure for the army. In total, this year the cost of maintaining public debt will be higher than the cost of the “Family 500+” program.
What about other expenses: health, army and pensions? Official forecasts assume that yields will stay at the level of 5-6%. With yield above 8% or 10% the horror bill is awaiting us.
It will become necessary to cut other expenses or increase taxes immensely. Hopefully it will not end with a further increase in debt, because with such high interest rates on Polish bonds, this is the collision course with an iceberg. Unfortunately for Poland, there is a risk of a crisis similar to the one that happened in Romania in 2009.
In Romania, despite relatively low debt-to-GDP ratio (approx. 30% of GDP), a fiscal crisis occurred after the outbreak of the global financial crisis. At the same time, the country recorded a high current account deficit and a budget deficit (the so-called twin deficits).
One of the inflammatory factors in the Romanian crisis was the sharp rise in yield. It increased to 11-12%. and the country was forced to turn for help to the International Monetary Fund and the European Commission. Being unable to issue bonds on the domestic market, Romania also had to double its foreign debt.
We can see many parallels in Poland today. We have a saturated domestic bond market, a surge in yield and the issuance of foreign debt on a larger scale. The fact that the Romanian scenario may await us is also indicated by the fact that Mateusz Morawiecki is looking for a deputy minister who would travel around the world and sell Polish bonds in foreign currencies.
It is worth noting that the table in which the government shows the share of foreign debt has suddenly disappeared from the long-term financial plan of the state after several dozen years.
Unfortunately, we will get the horror bill after the elections. And when you take into account the downward spiral of populism fueled by politicians, it can be enormous.
Translated by: Bartłomiej Jabrzyk