A 7% deficit is the new normal. No belt tightening?

This article is a part of Poland Unpacked. Weekly intelligence for decision-makers

The government has approved the draft 2027 budget law. Both its revenue and expenditure structures are very similar to those of this year’s budget.

From the perspective of the economy as a whole, the key figure is the general-government deficit planned by the government. This is the combined difference between the revenues and expenditures of all public authorities, at both central and local-government level. That distinction matters because the central government budget accounts for only around half of all public-sector spending. The remainder is handled by local governments, the Social Insurance Institution (ZUS), the National Health Fund (NFZ) and funds operated by the state development bank BGK.

In 2027, the deficit is expected to amount to 7.1% of GDP. According to the government, this will be the same level at which the deficit ultimately comes in for 2026, although it was originally projected at 6.8% of GDP.

By historical standards, the deficit is very high. It was only slightly higher during the financial crisis in 2010 and again in 2023. It was lower even during the pandemic. This will also be the third consecutive year in which Poland runs a deficit of more than 7% of GDP.

The chart also shows that what is unusual is the persistence of the deficit after such a sharp increase. The last comparable episode came in 1995-98, when the deficit exceeded 4% of GDP. In most other cases, a rapid increase in the deficit was followed by efforts to bring it down.

Prime Minister Donald Tusk said a few days ago that Poland has Scandinavian spending and Irish taxes. That is not entirely accurate. Ireland does not so much have low taxes as an inflated GDP figure. It serves as the European headquarters of many American companies, which book profits there and then immediately transfer them abroad. Those profits nevertheless account for about a quarter of Irish GDP. In reality, Ireland’s tax-to-GDP ratio, once GDP is adjusted for these distortions, is broadly in line with the EU average.

In Poland, total public-sector revenues are expected to amount to around 45% of GDP in 2026, compared with an EU average of more than 46%. Expenditure, meanwhile, will reach almost 52% of GDP, against an EU average of about 50%.

Political reasons...

Polish economic policymaking has undergone a profound shift in its approach to fiscal balance in recent years. For a long time, the prevailing view was that the deficit should be kept within reasonable bounds, which many economists saw as around 3% of GDP. Larger deficits were accepted only in times of crisis.

That has now changed completely. The current government is taking no steps toward fiscal consolidation, meaning a reduction in the size of the deficit. Why? There are several reasons.

The first is politics. Over the past dozen or so years, most election campaigns have been built around promises of additional transfers to selected social groups or tax cuts for them. This has fostered a growing belief that elections cannot be won – or power retained – without such measures, particularly in a highly polarized political environment.

For the current government, there may also be an additional motivation rooted in a particular calculation of the “opportunity costs.” There is reportedly a view within the governing coalition that high public spending, especially on social programs, is justified because a return to power by the right would entail even greater costs – both financial and in terms of the rule of law. It is a controversial argument, but successive economic-policy decisions suggest that this line of thinking may indeed be influencing policymakers.

...and economic ones

The second reason for maintaining a high deficit is, of course, defense spending. Relative to the size of its economy, Poland spends more on defense than any other NATO member. It also ranks among the world’s 10-15 biggest military spenders. For 2027, the government has budgeted 4.51% of GDP for this purpose.

Few question the need for this spending, but it is not the only reason for the large deficit. In 2021, before the war in Ukraine, Poland spent 2.2% of GDP on defense. The increase has therefore amounted to 2.3 percentage points of GDP. That accounts for only around one-third of the current deficit and about 40% of the increase in the deficit compared with 2021.

The third reason for maintaining a high deficit is that public debt remains relatively low. At the end of the first quarter of 2026, it stood at 61.6% of GDP. Across the EU, the figure is 82.9% of GDP, while in countries such as Italy, France, Belgium and Spain it exceeds 100%. Poland sits roughly in the middle of the pack.

There is also a fourth reason: a shift in economists’ attitudes toward deficits worldwide. This has happened largely because countries pursuing very restrictive fiscal policies, such as Germany, have performed much worse economically than countries running looser policies, such as the United States.

The deficit: heading in a risky direction

Poland’s highly expansionary fiscal policy has its advantages. It has undoubtedly played a significant role in the strong performance of the Polish economy in recent years, particularly its robust economic growth.

The question, however, is how long a deficit of this size can be sustained when there is no crisis. Poland is still a long way from a fiscal crisis. The reason is simple: the country has a balanced current account, meaning that, as an economy, it is not borrowing from abroad.

The vast majority of public debt is held by domestic banks and investors. Foreign investors account for less than 30%. As a result, even if capital outflows were to materialize, their impact would be limited.

Over the longer term, however, there is the question of what Poland would do in the event of a serious downturn in the global economy. With the budget already stretched this far, there is very little room for maneuver. There is also the question of whether much of the spending is economically justified. And, ultimately, the European Commission will require Poland to reduce its deficit. The current government is leaving these dilemmas for its successor to resolve.

Poland’s general-government deficit is projected at 7.1% of GDP in 2027, the same level the government expects for 2026. That would mark the third consecutive year with a deficit above 7% of GDP and one of the highest readings of the past 30 years.
The large deficit cannot be explained by higher defense spending alone. Defense expenditure is set to reach 4.51% of GDP in 2027, up from 2.2% in 2021 – an increase of 2.3 percentage points of GDP. That accounts for only around one-third of the current deficit.
Poland still has room to finance a large deficit thanks to its relatively low public debt, which stood at 61.6% of GDP at the end of the first quarter of 2026. The problem is the absence of fiscal consolidation: with public-sector spending approaching 52% of GDP and revenues at just over 46%, the room for maneuver in the event of another crisis will continue to shrink.