The Stabilizing Expenditure Rule in Poland—Simulations for 2014–2040

Abstract

The stabilizing expenditure rule (SER) imposed on the general government (GG) sector in Poland has been in force and binding since 2014. According to this rule, approximately 90 percent of GG expenditure is allowed to grow, at the most, in line with the real medium-term GDP, and the maximum expenditure growth rate is lowered if there is excessive debt or deficit, or the GG balance does not meet the medium-term objective. A series of stochastic simulations has been constructed that allows for the assessment of how the SER will affect the most important public finance indicators in the period between 2014 and 2040. In addition, this article analyzes the consequences of the lowering of debt thresholds in the SER’s correction mechanism due to the pension system reform implemented in Poland in 2014, and the amendment to the formula in 2015, and predicts how the fiscal reaction function may change after the introduction of the SER in Poland.

Keywords:

• debt thresholds
• fiscal policy cyclicality
• stabilizing expenditure rule
• stochastic simulations

JEL Classification:

• C53
• E62

ACKNOWLEDGMENTS

The views expressed in this article are those of the author and do not necessarily reflect those of the institutions he is affiliated with. The author would like to thank Karolina Konopczak, Joanna Bęza-Bojanowska, Sławomir Dudek, Jakub Growiec, Andrzej Torój, and Barbara Pączek for their valuable comments.

Notes

1. The medium-term budgetary objective (MTO) constitutes the cornerstone of the revised Stability and Growth Pact (European Union 2011a). This is the level of the general government structural balance targeted by all EU member-states. The SER was designed to be consistent both with all of the pact’s requirements and with Poland’s constitutional requirement limiting the national public debt level to below 60 percent of GDP.

2. In a similar vein, the introduction of the Bank Guarantee Fund into the SER—whose expenditure is commonly treated as a one-off measure—was unjustified from the theoretical point of view, because of the risk that it may foster procyclicality. Hence, the amendment (Dz. U. 2015a) also contributed to the higher level of expenditure. As Wierts (2008) noted: “the approach to fiscal rules … has given rise to criticism… . expenditure rules in the EU are usually enforced by the same authority that decides on expenditure decisions, i.e. the Ministry of Finance. A question then arises why policymakers would stick to such self-enforced rules instead of following their own biased incentives.”

3. In this regard, the two-year lag of reporting the fiscal variables was due to the fact that the correction mechanism was based on real data instead of forecasts.