Poland on the brink? Public debt forecasts to exceed 60% of GDP

An alarming report prepared by the Institute of Responsible Finance, the Friendly Country Foundation and the Institute of Public Finance. On the threats of excessive public debt and the paradox of "Swedish spending" with "Irish taxes".

Poland faces serious challenges in the area of ​​public finances. The latest report " Threats of excessive public debt. Edition 2025 ", prepared by the Institute of Responsible Finance, the Friendly Country Foundation and the Institute of Public Finance, sheds light on the growing problems that may lead to a debt crisis. The authors - Sławomir Dudek, Piotr Kalisz and Ludwik Kotecki - present a diagnosis of the situation, analyze the factors of debt growth and its costs, and indicate the urgent need for change.

The main, lasting structural problem in Polish public finances is the attempt to combine "Swedish spending" with a tendency for further growth, with "Irish taxes" that political parties declare they will reduce. The authors of the report clearly warn that this model is unsustainable .

• In 2024, Poland overtook the EU average in terms of public spending in relation to GDP for the first time in history, taking 8th place in the entire EU. We overtook countries such as Denmark, the Netherlands, Spain and Luxembourg, reaching a level similar to Sweden, Germany and Italy (around 50% of GDP).
• Forecasts for 2025 indicate a further increase in total public finance sector expenditure to 50.3% of GDP , which exceeds last year's level of expenditure in Sweden and Germany. The European Commission predicts that within two years Poland may be in the top five EU countries with the highest budget expenditure in relation to GDP.

Despite such high spending, the quality of public services in Poland leaves much to be desired . The authors of the report emphasize that although we spend almost half of GDP on public finances, spending on health care is among the lowest in the entire EU .

Moreover, the key factor in the growth of expenditure are social transfers in cash , such as 800+, 300+, grandmother's transfers, pensions (including 13th and 14th additional benefits) and widows' pensions.

• In 2024, these transfers amounted to 17.1% of GDP , which is the 7th highest in the EU and exceeds the levels recorded in Sweden (11.5% of GDP) and Germany (16.3% of GDP).
• The Ministry of Finance forecasts a further increase in this expenditure category to 17.6% of GDP in 2025.

The report clearly indicates that it is not defense spending that determines the deterioration of public finances . Decomposition of the growth in the nominal deficit of the public finance sector shows that excessive spending is the main cause of the problem, and the key categories of growth are:

• Social transfers : up 2.6 percentage points of GDP, more than twice as much as defence spending.
• Public sector wages : increase by 1.8 percentage points of GDP.
• Debt servicing costs : increase by 0.7 percentage points of GDP. In total, current budget expenditure, social transfers and interest account for 5.5 percentage points of the increase in total public expenditure.

Public debt (EDP) rose to 55.3% of GDP by the end of 2024. The forecasts are alarming:

• In 2025, the debt is expected to reach about 58% of GDP .
• In 2026, it will most likely exceed 60% of GDP and may remain above this level even until the end of the next decade.

Poland has already been subject to the EU's excessive deficit procedure. An additional problem is the existence of a "parallel budget" located in funds at BGK and PFR, which operates outside parliamentary control . The authors of the report call for its liquidation to ensure transparency and compliance with the constitutional principle of unity of public finance management.

The report by the Institute of Responsible Finance, the Przyjazny Kraj Foundation and the Institute of Public Finance not only diagnoses the problems, but also provides specific recommendations for the government:

• Setting a target for the level of public debt in the longer term, e.g. returning to below 60% of GDP.
• Reducing the budget's borrowing needs and presenting a credible path for fiscal consolidation.
• Finding constitutional solutions for arms financing that do not circumvent the budget law and fiscal rules.
• Phasing out the functioning of the "parallel budget" in the funds at BGK and PFR and including them in the state budget, ensuring full transparency and parliamentary control.
• Adoption of the EU definition of public debt (ESA) in national fiscal rules.
• Changing the structure of the banking tax so that it does not reinforce the effect of crowding out credit from the economy.

In the face of growing threats and the prospect of public debt remaining above a safe level, taking urgent and decisive action to repair public finances becomes imperative. Without this, the risk of a debt crisis will be a real prospect for Poland.

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