This article is a part of Poland Unpacked. Weekly intelligence for decision-makers
Interactive chart Attentive readers of XYZ will not be surprised by the projected deficit and debt levels for 2026 – we wrote about them just a week ago. By way of reminder, the deficit is expected to reach 6.8% of GDP (0.5 percentage points lower than in 2025), while public debt is projected at 65.1% of GDP.
Whether this materializes remains to be seen. The Ministry of Finance’s recent track record on deficit forecasts leaves something to be desired. The chart accompanying this article illustrates the point. Compared with initial projections, the actual deficit turned out higher by 1.3 percentage points in 2024 and by 1.8 percentage points in 2025. In the latter case, some justification lies in Poland’s use of the EU’s escape clause to accommodate higher defense spending. This increased fiscal flexibility, but even so, the deficit was underestimated by 0.7 percentage points.
Macro outlook ignores the impact of a U.S. attack on Iran
According to the assumptions, Poland’s real GDP growth is expected to reach 3.6%, with inflation at 2.5%. The GDP projection has been revised up by 0.1 percentage points compared with the budget act. This likely reflects strong performance in the second half of 2025, which lifts growth through a carry-over effect.
The key issue, however, is that the macroeconomic (and fiscal) scenario does not factor in the shock linked to the geopolitical situation in the Middle East. The assumed Brent crude oil price is USD 65 per barrel. This clearly poses a significant risk to the forecast.
Escape clause - (not) for defense spending
There is little sign that the escape clause from EU fiscal rules, activated in the first quarter of 2025 due to defense spending, is being used to increase such outlays relative to the plans set in 2024 (i.e. before its introduction). Admittedly, military spending in 2025 is projected to be higher by 0.2 percentage points, but in 2026 it is expected to be lower by 0.3 percentage points. This suggests that, with high probability, the additional fiscal space created under EU rules is being used to fund other expenditures.
Interactive chart The outlook for 2027…
Little is known about fiscal policy in the following two years. Increasing military spending by 0.6 percentage points in 2027 (as planned in July 2024) would require either cutting other expenditure or raising taxes by at least the same amount. As early as 2025, Poland is set to exceed the EU benchmark for defense spending (3.1% of GDP).
In 2027, a costly increase in the survivor’s pension will also take effect, raising it from 15% to 25% of the second benefit. In addition, a reduction in the corporate income tax on banks – from 30% to 26% - is envisaged. Healthcare spending, meanwhile, is legally mandated to rise to 7% of GDP in 2027, up from 6.8% two years earlier. In practice, the situation is more complex, as actual spending has exceeded the statutory minimum for several years.
Against this backdrop, it appears that – much like in 2026 – the government will seek to reduce the deficit in line with EU rules, but only to the minimum extent required.
…and beyond: consolidation amid low growth
Paradoxically, more is known about the period after 2027. Postponing fiscal consolidation (through the use of the escape clause) implies the need for sharper adjustments later on. The starting point for both deficit and debt will be higher than envisaged in the original plan.
The European Commission has outlined a stylized (i.e. based on simplifying assumptions) scale of the required fiscal adjustment – understood as a reduction in the structural deficit – for countries that made use of the escape clause in the subsequent budgetary framework (assumed from 2029). Among the 16 EU member states concerned, Poland would face the second-largest required adjustment, as illustrated in the chart below.
Interactive chart This would entail the need for unpopular spending cuts or tax increases - and sizable ones at that.
“The estimated adjustment after the end of the escape clause period could approach or exceed 1% of GDP annually, far above what is generally considered achievable for a given country,” the European Fiscal Board recently noted (without naming Poland explicitly).
It is also possible that, by then, military spending in EU methodology will converge with cash-based spending. At present, it is around 1–1.5 percentage points lower. Closing that gap would require additional spending cuts or tax increases of a similar magnitude.
A further complication is that this would take place against a backdrop of slowing real GDP growth. The Ministry of Finance projects growth at 2.6% in 2029 and 2.2% in 2030.
Scenarios
One way to ease the adjustment path would be to extend the next fiscal plan to seven years. This would require agreement with the European Commission on structural reforms and their implementation. The process would be broadly similar to Poland’s National Recovery Plan. If the opposition were to win the 2027 election, this could become a flashpoint in relations between Warsaw and Brussels – as seen in the reaction to SAFE. At the same time, even the current governing coalition, if returned to power, would not necessarily have an easy path. That could be the case, for example, if the European Commission were to require – on economic grounds – an increase in the retirement age for women as part of the reform package.