Fitch: Likely Poland EDP Exit Highlights Consolidation Success

The European Commission's recommendation that Poland should leave the Excessive Deficit Procedure (EDP) highlights the effectiveness of Poland's deficit reduction strategy and the positive fiscal impact of a strong economic performance, Fitch Ratings says. We expect the general government deficit to remain below the 3% of GDP threshold in the medium term.

Sustained fiscal consolidation has cut Poland's general government deficit from 4.0% in 2013 to 3.2% last year. We forecast a further fall to 2.8% this year. Fiscal tightening primarily reflects the impact of accelerating real GDP growth (3.4% in 2014 after 1.7% in 2013) on revenues, the impact of the reform of the pension system on social contributions, and lower interest payments. The introduction of an expenditure rule to limit the growth in government spending from one year to the next, also contributed to tighter spending control in 2014.

We think the general government deficit will remain 2.5%-3% in the medium term. This is consistent with our expectation that GDP will continue to grow above 3% per year, revenues will benefit from new measures to increase tax compliance and VAT receipts and expenditure will remain under control.

Our deficit forecasts are consistent with a stabilisation of government debt at slightly below 50% of GDP (in line with ratings peers). But a sustainable decline in government debt that would be positive for the rating would be more likely if deficits fell further, below the 2.5%-3.0% range.

Poland's electoral cycle may present risks to consolidation. Parliamentary elections are scheduled for October, and the strong showing by the opposition Law and Justice Party's candidate in May's presidential elections (a run-off vote will be held later in May after an inconclusive first poll) could put political pressure on the government to increase spending.

The Commission said this week that "the conditions are now fulfilled for an early closure of Poland's Excessive Deficit Procedure." The 2014 deficit was 3.2% of GDP, according to Eurostat, but this in part reflected costs associated with pension reforms enacted in 1999. Without these, the deficit would have been below the Stability and Growth Pact's 3% limit. The final decision will be taken by the Council of Ministers in June. Poland has been under the EDP since 2009.