Consolidation Of Public Finances Expected To Boost Budget Deficit Next Year

The focus in morning research notes circulated by local sell-side desks falls on 2024 budget draft approved by the Cabinet yesterday. Most are not revising their forecasts yet, awaiting more details on the new spending plan. Several desks flagged the impact of the expected consolidation of public finances (i.e. reduction of the role of off-budget funds in financing government spending), which could initially boost budget deficit, but will also lower borrowing costs.

• According to mBank, the budget accentuates upside risks to the inflation outlook. In their view, fiscal loosening (which includes wage hikes for public sector workers) combined with a hefty minimum wage hike next year and strong wage growth in the private sector increases the likelihood of inflation staying elevated.
• Millennium Bank suggest that the realisation of the 2024 budget may deviate from the original plan after the upcoming elections. They highlight that the projected deficit exceeds the EU's 3%-of-GDP limit, but its enforcement remains suspended for now. They see a risk of an overestimation of revenue on optimistic GDP and inflation forecasts.
• Pekao note that the revenue target is "ambitious" but they think that the spending target may have been overestimated. As a result, they see a chance of budget deficit being lower than projected (possibly below 4% of GDP but close to that level).
• PKO point out that the realisation of public spending was lower by 1.1% of GDP on average in the period between 2016-19. Furthermore, a higher budget deficit may stem from the expected consolidation of public finances, so does not have to be bad news for the wider public finance sector.
  
• Santander call the plan "ambitious" but "not unrealistic," especially if some temporary tax exemptions are cancelled. They assess the budget draft as "slightly negative" for the zloty and the local debt market, due to high borrowing needs and a risk of tensions with the EU related to the reinstatement of the bloc's old fiscal rules (budget deficit lower than 3% of GDP) in 2024.