Poland's fiscal deficit will exceed the EU's 3% GDP threshold due to defense spending.

A senior official from the International Monetary Fund stated that Poland should set a "very high bar" for further loosening fiscal policy,did tr foreign exchange collapsed given the increased costs due to infrastructure, climate risks, and security expenses from the war in Ukraine.

To rebuild voters' trust after eight years of nationalist Law and Justice Party (PiS) governance, Poland's pro-EU government under Prime Minister Donald Tusk has significantly raised public sector wages, social benefits, and the minimum wage this year.

The European Commission predicts Poland's budget deficit will rise to 5.4% of GDP this year, ranking among the highest in the EU, with the deficit expected to exceed the EU's 3% GDP threshold next year.

Geoff Gottlieb, the IMF's senior representative for Central and Southeastern Europe, told Reuters: "Poland's current fiscal deficit is quite large and needs to be reduced over time to ultimately curb the rise in public debt and comply with the new EU fiscal rules."

"Economic growth and above-target inflation are two factors prompting an early tightening of fiscal policy."

Last year, Poland spent nearly 4% of its GDP on defense, double NATO's 2% guideline. Last month, Poland announced a 10 billion zloty ($2.49 billion) plan to strengthen its eastern border due to perceived growing threats from Russia and Belarus.

Economists at ING noted in a report: "Due to very loose fiscal policy and record redemptions, we expect borrowing needs to increase significantly this year, reaching a historical high."

"With a slight increase in issuance needs and weakened demand for Polish government bonds, we expect further issuance of a considerable amount of euro bonds, even exceeding our previous forecast of just under $16 billion."

Warsaw is attempting to negotiate an exemption from the EU's deficit procedure. High spending needs have hindered Tusk's most expensive election promise—raising the income tax exemption, which is estimated to cost 1.3% of GDP.

Tusk's Civic Platform narrowly defeated the nationalist Law and Justice Party in Sunday's European Parliament elections, but the presidential election at the end of 2025 will be the third critical election within two years.

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