Why a debt scenario of 107% of GDP is unlikely

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

Under the baseline scenario presented by the European Commission in its Debt Sustainability Monitor 2025, Poland’s debt rises to almost 107% of GDP by 2036. The chart below illustrates the pace of this increase. The Commission assesses debt sustainability risks as high in the medium term and moderate over the long term.

Paradoxes of the baseline scenario

It is worth emphasizing that the baseline scenario is purely technical and based on a “no-policy-change” assumption. The European Commission itself notes in the report that it “should not be regarded as the most likely scenario.” The term “baseline scenario” can therefore be misleading.

In practice, this assumption implies that Poland would maintain a structural deficit of 3.6% of GDP throughout the entire projection horizon, as forecast in 2026. In addition, it incorporates the costs of an aging population, drawn from another Commission publication, the Ageing Report 2024.

How unrealistic are these assumptions? Consider that Poland already has mechanisms that naturally limit the deficit even without new policy decisions. These include, for example, the freezing of tax brackets – something I have discussed repeatedly – or the lack of automatic indexation for benefits (e.g. 800+ child allowance). Yet in the Commission’s scenario, these brackets are effectively assumed to be automatically adjusted. This means that the “no-policy-change” assumption implicitly entails a change in policy relative to current law.

Deficits approaching 10% of GDP?

The consequence of such assumptions is extremely high deficits in the Commission’s baseline scenario. They rise from 6.6% of GDP in 2027 to 9.9% of GDP in 2036, with an average deficit of 8.3% of GDP over this period.

According to the Commission, the main driver of this increase is the rapidly rising cost of debt servicing – from 2.8% of GDP to 6% of GDP. To a lesser extent, the costs of aging (pensions, healthcare, long-term care, and education) contribute, with a cumulative increase of 2.1% of GDP between 2027 and 2036.

The result is unprecedentedly high projected deficits for 2026–2036 – a scenario that should be considered highly unrealistic. Poland’s debt rising to 107% of GDP should not be presented as a certainty without clarifying the underlying deficits and assumptions. Moreover, this projection does not account for the fiscal consolidation to which Poland has committed in 2027–2028.

A glance at the EU

The next chart shows the ratio of public debt to GDP in 2025 and in 2036 under the Commission’s baseline scenario for all European Union countries. Because structural deficits are assumed frozen at 2026 levels, this comparison should be regarded primarily as illustrative. In large part, it reflects the current fiscal situation of each country, mechanically projected a decade into the future.

Nonetheless, it highlights important trends in some countries. There is a noticeable shift in Germany’s fiscal policy, which translates into a projected rise in public debt to around 90% of GDP by 2036. Significant debt increases are also visible in other Central and Eastern European countries, such as Romania, Hungary, and Slovakia. These countries, however, are not currently undertaking a comparable effort to increase defense capabilities as Poland is.

Improvements in deficit levels in recent years are reflected in relatively modest debt increases – and, in some cases, even declines – among Southern European countries. France, meanwhile, moves up to second place in terms of public debt, driven by its challenging current budgetary situation.

A softer path for now…

It is worth recalling that, following the announcement of the 2025–2028 budgetary and structural plan, Poland made use of the so-called defense spending escape clause. This provision allows the government to deviate from the previously set expenditure path by 1.5% of GDP. Within this limit, any excess defense spending compared with 2021 levels – i.e., before Russia’s aggression against Ukraine – is not counted as increased expenditure. In practice, this implies a softer fiscal consolidation compared with the original plan, meaning smaller spending cuts or less pressure to raise taxes.

…But a sharper adjustment in the future

In one of the report’s most interesting sections, the European Commission presents a stylized scale of required fiscal adjustment – understood as a reduction in the structural deficit – for countries that used the escape clause in their next budget plan (assumed from 2029 onward). Among 16 EU countries, Poland would face the second-highest required adjustment, as illustrated in the chart below.

Political consequences

What does this mean in practice? A challenging fiscal situation after the next elections. Fiscal adjustment has been postponed due to the activation of the defense escape clause. From the perspective of rapidly increasing military capacity – here and now, rather than in the future – this made sense from the European Union’s point of view. In Poland’s case, as we have noted repeatedly, the higher deficit in 2024–2025 also supported continued GDP growth.

This decision, however, has a downside. Postponing consolidation means stronger adjustments will be required in the future under EU fiscal rules. The starting point for both deficit and debt will be higher than originally planned. The calculations above are stylized – each country is assumed to follow a linear path using the 1.5% of GDP limit, which for Poland is relatively lenient, since a large portion of the limit was already used at the outset. On the other hand, it is possible that the deficit in 2025–2027 will turn out lower than projected, or that macroeconomic conditions will be more favorable. There is also the option to extend the consolidation period to seven years, but this would require structural reforms and approval from the European Commission.

One fact remains certain: regardless of who holds power after 2027, fiscal consolidation will be necessary – either through spending cuts, higher revenues, or a combination of both. Whether policymakers will realistically take these constraints into account will become clear during next year’s election campaign.

Use of the defense escape clause was justified geopolitically and macroeconomically, but it raised the starting point for future fiscal rules. According to stylized Commission calculations, Poland could face one of the largest required deficit reductions in the EU under its next budget plan. This means that after the 2027 elections, real fiscal consolidation will be unavoidable – through spending cuts, revenue increases, or a combination of both.
In the European Commission’s projection, Poland’s debt rises to nearly 107% of GDP by 2036. This results from a “no-policy-change” assumption, which in practice means freezing a high structural deficit. However, this approach ignores existing mechanisms in Poland that limit the deficit – such as the lack of indexation for tax brackets or certain benefits – as well as obligations stemming from EU fiscal rules.
For public debt to reach around 107% of GDP, deficits would need to reach unprecedented levels. In the Commission’s projection, they increase from 6.6% of GDP in 2027 to 9.9% in 2036, with an average of about 8.3% over the period. The main driver is the sharp rise in debt servicing costs – from 2.8% of GDP to 6%. Maintaining such high and persistent deficits without any consolidation is the condition for this path to materialize, making it highly unrealistic.