The Supreme Audit Office of Poland (NIK) has made a descriptive assessment of execution of the Budget Act for 2023. According to NIK the state budget, the budget of European funds and the financial plans of off-budget entities of the public finance sector were implemented in accordance with the Budget Act for 2023. Also the report of the Council of Ministers was developed in line with applicable laws based on data included in the reports of individual budget holders.
The total revenue of the state budget and the budget of European funds reached PLN 650 billion in 2023 and was 12.5% higher than in 2022. A much higher increase was recorded for the combined expenditure of these two budgets. They amounted to almost PLN 735 billion and were over 24% higher than the expenditure made a year earlier. This means that the total deficit of the state budget and the European funds budget in 2023 totalled PLN 84.7 billion and was nearly PLN 71 billion higher than a year ago.
It should be underlined that in 2023 there was a clear increase in the VAT gap, which, according to preliminary estimates by the Ministry of Finance, amounted to nearly 16% and was six times higher than the lowest value obtained in 2021 and twice as high as in 2022.
Also the value of expenditure on the State Treasury debt service was alarmingly high in 2023. Expenditures for this purpose reached nearly PLN 62 billion, which means that they almost doubled compared to 2022.
Another issue worth noting is an upsurge in net borrowing needs of the state budget in 2023. In 2020, the needs reached PLN 50 billion and in 2021-2022 they did not occur at all, whereas in 2023 they were nearly PLN 138 billion.
As mentioned above, neither the Budget Act nor the report on state budget execution covered all operations affecting the condition of the state finance. It means that – as in the past three years – a substantial part of the state financial economy was carried out outside the state budget and without the rigours relevant for this budget, and even outside the public finance sector.
The Supreme Audit Office of Poland negatively evaluates the trend - present since 2020 – of using activities which violate underlying budget principles, in particular the principle of unity, transparency and openness of the budget. These activities minimise the significance of the state budget as the most important financial plan set out in the Constitution of the Republic of Poland.
Firstly, part of public tasks were still financed with funds operated by Bank Gospodarstwa Krajowego.
In 2023, the funds financed tasks for over PLN 130 billion, which accounted for 20% of the state budget expenditure and nearly 4% of the gross domestic product.
The debt of Bank Gospodarstwa Krajowego funds at the end of 2023 reached PLN 277 billion, which stands for an almost 21% increase against the previous year. It is worth noting that these funds are financed without any parliamentary control.
Secondly, Treasury securities were still transferred free of charge to various entities. The amount of such financing in 2023 was PLN 21.6 billion. In total, PLN 88 billion was transferred in this way in 2020-2023.
Thirdly, in 2023, the Polish Development Fund financed investments implemented under the National Recovery and Resilience Plan. The value of expenditure on "pre-financing" investments from this source, in 2022-2023, amounted to PLN 5.1 billion.
The said operations resulted, among other things, in a significant reduction in parliamentary and social control over collection and spending of part of funds for public tasks. Besides, the process of transferring public funds was not transparent. As a consequence, the budget did not reflect the real level of the state imbalance.
In 2023, operations were carried out outside the Budget Act, resulting in a 37% deficit of the government subsector, which reached PLN 135.6 billion.
At this point, it should be recalled that depriving the Budget Act of its political importance by boiling it down to the role of a machine paying benefits under separate statutory obligations is the destruction of democracy.
The public debt calculated in line with the domestic definition, i.e. the national public debt, exceeded one trillion 300 billion zlotys in 2023 and was nearly 10% higher than at the end of 2022. In relation to the gross domestic product, it amounted to 38.9%. The debt of the general government sector, calculated in line with the EU definition, reached almost one trillion 700 billion zlotys and was higher than in 2022 by almost 12%. In relation to the gross domestic product, it was 49.6%.
Thus, the gap between the public debt and the general government debt increased for another year in a row. At the end of 2023, it reached a level slightly exceeding PLN 363 billion and was about 20% higher than in the previous year.
The reason for the difference was the failure to include some debt types in the debt calculated in line with the domestic definition: e.g. the debt of funds placed in Bank Gospodarstwa Krajowego and the debt due to the financial shield of the Polish Development Fund. Liabilities from the sale of bonds by Bank Gospodarstwa Krajowego and the Polish Development Fund, as well as loans taken out by Bank Gospodarstwa Krajowego to implement public tasks at the end of 2023, totalled PLN 348 billion.
As estimated by NIK, the total costs of servicing bonds issued by Bank Gospodarstwa Krajowego for the COVID-19 Prevention Fund, the Aid Fund and the Armed Forces Support Fund, and by the Polish Development Fund S.A. for the implementation of state tasks throughout their maturity period, until 2042, will be almost PLN 14 billion higher than the costs that the state budget would incur to finance these tasks with Treasury securities.
For many years NIK has underscored the need to standardise the method of calculating the national public debt and the general government debt so that the value of the national public debt expresses the actual state debt.
Most of the state budget execution audits ended with a positive assessment. An alarming fact is, though, that in 2020-2023 the share of these assessments dropped significantly against the number of all the assessments made. In 2020, the share of positive assessments was almost 80%, and in 2023 it was just over 60%. At the same time, the share of negative assessments went up by four percentage points over these four years.
The changing structure of assessments shows that the quality of the Budget Act execution has decreased.
Key systemic irregularities
As in the two previous years, the stabilising expenditure rule did not play a significant role in limiting the growth of public spending.
In 2023, another significant increase in funds planned in specific reserves was recorded, which altogether accounted for as much as 17.5% of the expenditure limit of the state budget and the budget of European funds.
A considerable part of the general reserve was spent contrary to its interventional purpose, i.e. on tasks that did not result from sudden, unforeseeable situations requiring immediate action. In addition, the process of distributing funds from the general reserve was non-transparent and not properly documented.
The imbalance of revenues and costs of special-purpose state funds has deepened. Part of these funds continued to finance tasks unrelated to the purposes for which they were originally created. An example can be the payment of the 14th pension from the Solidarity Fund.
Significant irregularities were also found in the National Defence section. They concerned, among others, leaving an informal reserve of PLN 8 billion at the level of the Ministry of National Defence, or spending PLN 2.2 billion in an unjustified, wasteful manner and in violation of generally applicable laws, which is particularly unacceptable given the ongoing armed conflict just across the Polish border.
On the other hand, the audit of the Ombudsman for Children and the Institute of National Remembrance revealed smaller irregularities (in terms of amounts), but no less glaring. The holders of these parts were accused of mismanagement, which can be considered as misappropriation of public funds, possibly bearing the hallmarks of a crime.
In 2023, the underfunding of the Police units persisted. This led to a situation where the formation units responsible for the security of citizens paid their liabilities on a large scale after the payment deadline, and therefore also incurred the interest costs.
Besides, there is a high risk that the funds of the National Recovery and Resilience Plan will not be used by 31 August 2026 due to their low level of commitment. By the end of 2023, less than 3% of funds planned in the NRRP were spent.
Numerous irregularities in the management of public funds, including the discretion of the holders of budget funds, which has become so common recently, were also found in other audits carried out in 2023.
As part of the audit of the National Freedom Institute – Centre for Civil Society Development, NIK found, among other things, that the process of review of funding applications, as well as their verification and settlement, was unreliable, and in some cases illegal, unjustified or wasteful.
The results of two other audits, in turn, show that financial independence of local government units decreased in 2019-2023 and they are now more dependent on funds granted on a discretionary basis by selected government bodies, based on unclear criteria.
These are only examples of irregularities identified by the Supreme Audit Office of Poland, exposing the way public funds were managed in 2023 and in previous years. As mentioned before, the scale of NIK's reservations about the management of state finances is alarming and requires immediate corrective measures.
For the third year in a row, the Supreme Audit Office of Poland has made a descriptive assessment of execution of the monetary policy assumptions in 2023.
As in previous years, the main objective of the monetary policy was to maintain the consumer price growth rate in the medium term at 2.5% with a 1% deviation range. In 2023, the average value of this indicator was 11.4%.
In September 2023, the Monetary Policy Council made the biggest reference rate reduction in over 14 years, by 0.75 percentage points, and in October 2023 by another 0.25 percentage points. As a result of these changes, the reference rate of the National Bank of Poland (NBP) was lowered to 5.75%.
The decisions to cut interest rates, in particular in September 2023, were not consistent with the previous communication of the National Bank of Poland, and the scale of the biggest interest rate cut in 14 years was not clearly justified, which raises doubts about the rationale of the Monetary Policy Council when making these decisions.
The core inflation index has remained higher than the consumer price index since September 2023. This could mean that an important role in the formation of consumer prices is played by demand-related factors, i.e. factors that the National Bank of Poland could influence through the instruments of domestic monetary policy.
On 6 June this year, the Council of NIK, having reviewed the Analysis of the implementation of the state budget and monetary policy assumptions in 2023, adopted a resolution in which it expressed its opinion on the discharge of the Council of Ministers for 2023.
The Council of the Supreme Audit Office, while negatively evaluating changes in the public finance system, once again pointed to the need to take effective measures to guarantee openness and transparency of public finances and to restore the role of the Budget Act as the basic act of the state finance management.
In the opinion of the NIK Council, the redistribution of funds to finance state tasks outside the Budget Act, including in the form of Treasury securities and from money of the funds operated by Bank Gospodarstwa Krajowego, should be discontinued.
The Council also stated that the Minister of the Interior and Administration and the Minister of Finance should make sure the Police expenditure plan includes funds necessary for this formation to operate.
Considering the type and scope of the irregularities identified in the planning and spending of public funds, the Council requests that the holders of these funds ensure compliance with the budget management principles.
To sum up, the Supreme Audit Office of Poland consistently and forcefully negatively evaluates actions that result in the following: minimising significance of the state budget, weakening proper operation of the stabilising expenditure rule, incurring higher costs of servicing bonds issued by entities from outside the public finance sector, as well as excluding increasing amounts of the state liabilities from the national public debt, as a result of which the size of this debt ceases to be relevant when assessing the actual scale of the state debt.
It needs to be re-emphasised, as stated in the discharge resolution of the NIK Council, that further reduction of the state budget significance may lead to inconsistency of the adopted solutions with the Constitution of the Republic of Poland, as well as to the abolition of political and legal responsibility for the management of public finances, and thus for the condition of the state and its sovereignty.
