EU to consider Poland’s defense spending in deficit limit, Polish finance minister says

By Thomson Reuters Apr 18, 2024 | 8:39 AM

By Karin Strohecker and Karol Badohal

WASHINGTON (Reuters) – The European Union will consider Poland’s defense spending, the highest in NATO in terms of economic output, as the bloc pushes for member states to clamp down on excessive deficit levels, the country’s Finance Minister Andrzej Domanski told Reuters.

The European Commission plans to revive its 3% deficit limit, suspended between 2020 and 2023 due to the COVID-19 pandemic and the war in Ukraine. Member states that exceed it are required to follow a plan to return below the mark.

“The increase in defense spending will be a mitigating factor in the excessive deficit procedure. 4.1% of GDP is the share we spend on defense this year and next year it will be more,” Domanski said in an interview on the sidelines of the International Monetary Fund and World Bank spring meetings.

Warsaw has been spending about double the NATO requirement of 2% of gross domestic product (GDP) since 2022 to ramp up its deterrence capabilities, amid growing worries that conflict could spread beyond neighbouring Ukraine.

Poland’s 2023 general governance deficit came in at 5.1% of GDP, a preliminary reading showed earlier this month. Economists see it rising to 5.4% in 2024, according to a Reuters poll.

“If we carve out the defense spending, spending on helping Ukrainian refugees and mitigating the crisis on the energy sector… we will get substantially below 3% for sure,” he said.

Domanski added that countries with relatively lower debt levels would be given more time to tamp down higher deficits under a new EU economic governance framework that will come into force within weeks.

“Those countries, like Poland, who have debt-to-GDP levels below 60% will have more time to adjust to this 3% level. It will be extended from 18 months to four years,” he said, adding he would speak with EU Commissioner for Economy Paolo Gentiloni on Thursday.

Asked whether an announcement on Wednesday that the Polish government would lift the maximum power price for households for the second half of 2024 would add to price pressures, Domanski said this had already been factored in to earlier inflation forecasts of 4% to 5% by end-2024.

“Currently I do not see CPI going higher than 5% at the end of this year,” he said.

(Reporting by Karin Strohecker in Washington and Karol Badohal in Warsaw; Editing by Jamie Freed)