By Gergely Szakacs
BUDAPEST (Reuters) - Poland should set a "very high bar" for more fiscal loosening given rising expenditure needs related to infrastructure, climate risks and security costs driven by the war in Ukraine, a senior International Monetary Fund official said.
Prime Minister Donald Tusk's pro-European Union government hiked public sector pay, social benefits and the minimum wage sharply this year to build credibility with voters after eight years of rule under the nationalist Law and Justice party (PiS).
The European Commission forecasts Poland's budget deficit will rise to 5.4% of gross domestic product this year, among the highest in the European Union, with the shortfall on track to exceed the EU's 3% of GDP threshold next year.
"Poland's current fiscal deficit is large and will need to come down over time, both to eventually stop public debt from rising and to comply with new EU fiscal rules," Geoff Gottlieb, the IMF's Senior Regional Representative for Central, Eastern and South-Eastern Europe told Reuters.
"A strengthening economy and above-target inflation would be two factors that would argue for tightening sooner rather than later."
Poland, which spent nearly 4% of GDP on defence last year, twice NATO's 2% guideline, announced a 10 billion zloty ($2.49 billion) programme last month to bolster its eastern border given what it says is a rising threat from Russia and Belarus.
"For this year, we project a massive increase in borrowing needs to an all-time high, not only due to very loose fiscal policy but also record redemptions," economists at ING said in a note.
"With slightly higher issuance needs and waning demand for POLGBs (Polish government bonds), we see scope for a decent amount of further Eurobond issuance, even above our previous expectations of just under $16bn."
Warsaw is trying to negotiate an exemption from the EU's deficit procedure. High spending needs have already prevented the launch of Tusk's costliest election pledge, a higher income tax free allowance with an estimated 1.3% of GDP price tag.
Tusk's Civic Coalition narrowly defeated the nationalist Law and Justice party at Sunday's European Parliament election, but will face its third key election in just two years with a presidential ballot due by the end of 2025.
The IMF's Gottlieb said meeting Poland's growing expenditure responsibilities while reining in the deficit will require careful decisions.
"One clear conclusion is that there should be a very high bar for further discretionary loosening as it just increases the adjustment need from elsewhere," he said.
"Given the size of the challenge, it is encouraging that Poland is looking to re-design its fiscal rule as this would provide a better anchor for decisions about public finances going forward."
Poland's general government debt is forecast to rise to 60.6% of gross domestic product (GDP) in 2026 and to 63.2% in 2027, the finance ministry said in late-April, exceeding a constitutional limit of 60%.
Finance Minister Andrzej Domanski has said Warsaw would take steps to increase the transparency of public finances, including establishing a fiscal council to monitor government policy.