Polish Defence Spending Under Brussels' Financial Scrutiny [COMMENTARY]

Polish Finance Minister Andrzej Domański, quoted by Euractiv, stated that the European Commission confirmed Poland’s defence spending would not be excluded from the excessive deficit procedure. He added that Poland may consider issuing bonds for defence purposes under these circumstances.

In December 2023, Poland’s Ministry of Finance had signaled that EU finance ministers had reached an agreement to “treat defence spending,” specifically investment (procurement), in a special way within the excessive deficit procedure. This procedure imposes spending restrictions on countries not meeting specified deficit and public debt criteria. Poland is increasing its defence budget more than any other EU country, so this was of particular importance to Warsaw.

The excessive deficit procedure (apart from the public debt criterion, which the Commission is currently not addressing) is typically initiated when the budget deficit significantly exceeds the 3% of GDP threshold, especially if there’s no short-term prospect of returning below this level. Certain criteria may be relaxed, for example, through defence investment spending or other factors deemed “relevant”. Factors underlying the Commission’s recommendations for specific countries are detailed in published documents.

In 2023, the Czech Republic had a deficit of 3.7% of GDP, but the Commission anticipated a significant drop to 2.3% of GDP in 2024, deeming no action necessary. Increased defence investment, on a smaller scale than in Poland, was only one of several favorable factors. Similarly, in Finland, the 2023 deficit was below 3% of GDP, projected to rise slightly in 2024, and defence spending had increased, so no procedure was initiated.

In Poland’s case, however, the deficit criterion was significantly exceeded, necessitating more extensive special measures for defence spending. According to EU methodology, Poland’s budget deficit was forecasted by the Commission to reach 5.4% of GDP in 2024 (Poland declared 5.1%), with the 2023 deficit at 5.1% of GDP.

Poland’s defence budget for the current year is planned at over 4% of GDP in total (3.5% in 2023, including the Armed Forces Support Fund). According to EU methodology, Polish defence spending is set at 2.8% of GDP in 2024, 2.1% in 2023, rising to 3.2% in 2025, 3.7% in 2026, and 4.3% in 2027.

The EU calculates defence spending using a different methodology than Poland, especially regarding investment expenses, which are critical in assessing the deficit. The European Commission considers investment spending only at the time of contracted equipment delivery, not at the advance payments stage. Finance Minister Andrzej Domański highlighted this issue, noting that the 2023 deficit (from the previous administration) triggered the procedure. However, the 2024 outlook was also factored into the Council’s decision to initiate the procedure.

Poland sought exclusion from EU deficit rules, which it did not achieve to the extent requested. In the July decision to initiate this procedure for Poland, defene spending was listed as one of the “relevant factors” that could influence Poland’s deficit assessment. However, the assessment paints a “mixed” picture. “Taking these relevant factors into account does not change the conclusion that the Treaty on the Functioning of the European Union’s deficit criterion is not met,” the statement said.

Alongside defence spending, other factors contributing to Poland’s 2024 financial imbalance included a 20% wage increase for public administration, a 30% raise for teachers, and higher welfare expenditures. Notably, the government is currently working on a 2024 budget amendment that will further increase the deficit, partly due to flood relief measures.

What impact could the excessive deficit procedure have on Polish defence spending? Formally, the procedure can lead to penalties (for euro zone countries) or the suspension of structural funds. Even without such penalties, the procedure may complicate market financing and raise debt servicing costs.

It is difficult to predict the outcome of further discussions with the European Commission and their impact on Poland’s defence budget. Possible solutions include extending the “adjustment path” (the timeframe for achieving the target deficit) from 4 to 7 years, the Commission suggesting other spending areas for reduction or revenue-raising measures (e.g., welfare spending cuts, tax increases), or the EU procedure significantly slowing Poland’s military modernization. From this perspective, and considering the lack of political consensus on cuts in non-security spending areas, the actions initiated by the Commission are concerning. Although the impact may not be immediately felt, it could become more evident over several years. Additionally, most European countries have insufficient combat capabilities relative to NATO’s new force model requirements, particularly in the land domain and the air defence, areas where Polish modernization is most intense. This situation could increase the risk of inadequate deterrence against Russia, which Poland’s substantial defence spending aims to prevent.

Defence24.pl has reached out to the European Commission for further details on its stance regarding Polish defence spending.