Poland's High Deficit Increases Risks in the Bond Market
Although Poland’s budget deficit of about 7% of gross domestic product (GDP) is unlikely to trigger a sovereign debt crisis in the short term, it does increase risks for the bond market and limits the country’s fiscal flexibility. This is the conclusion reached by the research firm Capital Economics in an assessment published on July 21.
According to the analysts, the deterioration in public finances currently represents the greatest structural weakness of the Polish economy. Since the economy is already operating near full capacity and simultaneously has a high structural deficit, the government has only limited options for responding to an economic downturn or other economic shocks.
At the same time, the relatively moderate level of public debt—which is predominantly denominated in złoty—and a broad domestic investor base limit short-term refinancing risks. In addition, Poland can finance part of its defense spending through the European Union’s SAFE credit facility on more favorable terms.
Deficit Likely to Remain High in the Long Term
Capital Economics expects the budget deficit to decline only to around 5% of GDP by 2030. However, this will not be sufficient to permanently halt the rise in public debt.
According to analysts, high defense spending and the parliamentary elections scheduled for October 2027 at the latest leave little room for comprehensive fiscal consolidation.
In 2025, Poland’s budget deficit stood at 7.3% of GDP, while public debt reached 59.7% of GDP. The European Commission expects the deficit to decline to 6.5% in 2026 and 6.3% in 2027. At the same time, however, the debt-to-GDP ratio is projected to rise to 64.5% and 68.3%, respectively.
High Holdings of Government Bonds by Banks
According to Capital Economics, strong demand from banks for government bonds is leading to fewer loans being granted to businesses. This is contributing to the investment rate in Poland remaining below 20% of GDP.
According to data from the Austrian National Bank, Polish banks held nearly 40% of outstanding government bonds at the end of 2025. Claims on the government accounted for about 23% of their total assets. Despite the banking sector’s high capital adequacy and profitability, however, analysts currently see no immediate risks to financial stability.
Debt-to-GDP Ratio Continues to Rise
BNP Paribas estimates that the budget deficit would need to fall below 3.5% of GDP to stabilize public debt in the long term.
Poland’s total financing needs, including maturing liabilities, are projected to amount to 688.5 billion złoty (approximately 162 billion euros), or 16.6% of GDP, in 2026.
Poland’s largest bank, PKO BP, is also warning of rising fiscal risks.
“Fiscal risks are steadily increasing, and the additional burdens resulting from the oil price shock have further exacerbated the situation. By 2027 at the latest, Poland is likely to reach its fiscal limits when public debt exceeds the statutory monitoring threshold. This could necessitate significant budgetary adjustments starting in 2029,” PKO BP stated in late June.
Statutory debt brakes could kick in
Under Polish budget law, automatic corrective measures take effect as soon as public debt, according to national calculations, exceeds the threshold of 55% of GDP and the adjusted debt-to-GDP ratio also reaches this level.
In this case, the government would have to draft the following year’s budget without an additional deficit or take measures to reduce the debt-to-GDP ratio. Measures envisaged include freezing public sector salaries, capping pension adjustments to the inflation rate, and submitting a binding consolidation program.
If the statutory threshold is exceeded by the end of 2027, the corresponding restrictions would likely apply to the 2029 national budget.
Furthermore, the Polish Constitution stipulates that public debt may not exceed 60% of GDP. If this limit is reached or exceeded, even stricter fiscal requirements will come into effect.