Republic of Poland: Technical Assistance Report-Aligning the Stabilizing Expenditure Rule to the European Union Fiscal Framework

TECHNICALASSISTANCEREPORT REPUBLICOFPOLAND AligningtheStabilizingExpenditureRuletotheEuropeanUnionFiscalFramework JUNE2024 PreparedBy W.RaphaelLam,HassanAdan,KareemIsmail,GöstaLjungman,FazeerSheikRahim,andTjeerdTim ©2024InternationalMonetaryFund ThecontentsofthisdocumentconstitutetechnicaladviceprovidedbythestaffoftheInternationalMonetaryFundtotheauthoritiesoftheRepublicofPoland(the"TArecipient")inresponsetotheirrequestfortechnicalassistance.UnlesstheCDrecipientspecificallyobjectstosuchdisclosure,thisdocument(inwholeorinpart)orsummariesthereofmaybedisclosedbytheIMFtotheIMFExecutiveDirectorforPoland,tootherIMFExecutiveDirectorsandmembersoftheirstaff,aswellastootheragenciesorinstrumentalitiesoftheCDrecipient,andupontheirrequest,toWorldBankstaff,andothertechnicalassistanceprovidersanddonorswithlegitimateinterest(seeStaffOperationalGuidanceontheDisseminationofCapacityDevelopmentInformation).PublicationorDisclosureofthisreport(inwholeorinpart)topartiesoutsidetheIMFotherthanagenciesorinstrumentalitiesoftheCDrecipient,WorldBankstaff,othertechnicalassistanceprovidersanddonorswithlegitimateinterestshallrequiretheexplicitconsentoftheCDrecipientandtheIMF’sFiscalAffairsDepartment. Contents AbbreviationsandAcronyms5Preface6ExecutiveSummary7 I.Introduction 10 II.AssessmentoftheCurrentSER 11 A.CriteriainAssessingtheSER 14 B.DesignFeaturesoftheCurrentSER:StrengthsandWeaknesses 14 C.SimulationsoftheSER 18 D.ImplementationoftheSER 20 III.RevisingtheStabilizingExpenditureRule 23 A.ConsiderationofSERParameters 23 B.BroadeningtheCoverageoftheSER 25 C.StrengtheningCompliance 25 D.TransitioningtoaMulti-yearExpenditureRuleovertheMediumTerm 26 E.PeriodicReviewoftheFiscalRulesFramework 29 F.Recommendations 30 IV.ProvisionsofEscapeClauseandCorrectionMechanism 31 A.EscapeClause 31 B.CorrectionMechanism 34 C.Recommendations 36 V.AligningSERtoEUEconomicGovernanceFramework 38 A.TheEUEconomicGovernanceFramework 38 B.SimulationResultsforthePotentialNetExpenditurePath 40 C.FiscalAdjustmentPathsImpliedbySER 42 D.Recommendations 45 References 46 Boxes1.MainFeaturesofSERandChangessinceItsImplementationin2015 11 2.EuropeanCommissionAssessmentoftheQualityofMedium-TermBudgetaryFrameworks 28 3.NewReformsofEuropeanUnionEconomicGovernanceFramework 40 Figures1.RecentFiscalDevelopmentsinPoland(PercentofGDP) 11 2.EscapeClauseProvisioninPoland(since2020) 13 3.Poland:CorrectionMechanismoftheSERsinceBudgetYear2024 13 4.EconomicGrowth:ActualandMovingAverages 16 5.Multi-YearExpenditureAreLessProcyclical 16 6.GovernmentDebt—GapWideningbetweenDefinitions 17 7.SovereignSpreadsinPoland 17 8.GeneralGovernmentExpendituresandDebtBasedonCounterfactualApplication19 9.CountercyclicalityundertheSER19 10.GeneralGovernmentExpenditureinResponsetoAdverseGrowthShock19 11.SimulationResultsontheSERunderAdverseShocks20 12.FiscalDevelopmentsundertheSER21 13.PotentialGrowthinPoland23 14.SERFormulaandGrowth23 15.FiscalSlippagesfromDifferencesinForecast:AcomparisonofOfficialandConsensusForecast,2000-1924 16.GDPDeflatorandCPIInflation24 17.ProposedRefinementsontheProvisionofEscapeClause34 18.ProposedRefinementsontheCorrectionMechanismundertheSER36 19.MultipleMovingPartsinDeterminingtheFiscalAdjustmentPathsundertheNewEUFiscalFrameworkEuro39 20.FiscalAdjustmentsundertheEUFiscalFramework4121:ImpliedFiscalAdjustmentsundertheCurrentSER(WithoutCorrectionMechanism)andNetExpenditurePathintheEUFiscalFramework4322:ImpliedFiscalAdjustmentsunderaForward-LookingSER(withCorrectionMechanism)andNet ExpenditurePathintheEUFiscalFramework 44 A.1.1.TypesofFiscalRules 47 A.1.2.ChangesinFiscalRules 47 A.1.3.DeficitsandDebtLevelsExceedingtheRuleLimits 47 Tables1.InternationalExperienceofExpenditureRules 17 2.IndexationofGovernmentExpendituresandRevenues 24 4.EscapeClauseProvisionsforSelectedEuropeanCountries 32 4.SelectedCross-CountryExperiencewithCorrectionMechanismsinFiscalRules 35 5.ComparisonofPoland’sSERandEUNetExpenditureIndicators 38 AnnexesI.FiscalRulesacrossCountriesandSelectedExamplesofExpenditureRules 47 II.RecentAmendmentstotheFiscalRules,2015-23 49 III.ScenarioAnalysisonthePerformanceofSER 51 IV.FiscalAdjustmentPathundertheSERandEUFiscalFramework 53 AbbreviationsandAcronyms CG CentralGovernment BGK BankGospodarstwaKrajowego(BGK)(BankofDomesticEconomy) DRM Discretionaryrevenuemeasures DSM DebtSustainabilityMonitor EGF Economicgovernanceframework ESA EuropeanSystemofAccounts EU EuropeanUnion FAD FiscalAffairsDepartment FRL FiscalResponsibilityLaw FY FiscalYear GFC GlobalFinancialCrisis GFSM GovernmentFinanceStatisticsManual MFU MacroFiscalUnit MoF MinistryofFinance MOF-EM MinistryofFinanceEconomicModel(NEMPFinPolish) MTFF Medium-TermFiscalFramework MTOs Medium-TermBudgetaryObjectives MYFSP Multi-yearStateFinancialPlans NBP NationalBankofPoland NFPS NonfinancialPublicSector PFM PublicFinancialManagement SALM SovereignAssetandLiabilityManagement Sejm ParliamentoftheRepublicofPoland(SejmRzeczypospolitejPolskiej) VAR Vectorautoregression WEO WorldEconomicOutlook Preface Inresponsetoa