Fragments of NIK President’s statement at the plenary session of the Sejm on the budget execution in 2021, held on 21 July 2022
The state budget and the EU funds budget were executed in line with the Budget Act for 2021. Though, the Act did not cover many significant financial operations related to the performance of the state tasks and having impact on an increase in the State Treasury debt. In that way, it was yet another year when the significance of the state budget was minimised. NIK underlines that the state budget is the key financial plan of the state and the fundamental tool to manage public finance.
The Council of Ministers’ report on the state budget execution for 2021 was developed in line with effective legal provisions based on the data included in the reports of individual budget users. This report presents, in all important aspects, a reliable picture of revenues, expenditures, receivables and liabilities as well as the state budget deficit. Nevertheless, that report, as well as the Act, fail to cover all operations which have impact on the state finance.
In the state budget execution audit in 2021, NIK made 278 unit evaluations, that is 53 more than a year before. In 70% of its unit audits NIK made a positive evaluation. But the number of those evaluations in the structure of all evaluations as compared with the previous year went down by nearly nine percentage points.
The state budget deficit totalled PLN 26.4 billion. It needs to be stressed that this result was caused by non-standard measures taken by the government as a result of which the budget bottom line was underestimated. Then, the total of the state budget deficit was distorted and did not fully reflect the financial imbalance of the state.
The fake reduction of the state budget deficit in 2021 was impacted among others by commissioning public authorities’ tasks to entities outside the public finance sector. That was also the case in 2020.
Those entities obtained funds for measures related to fighting the negative impacts of COVID-19 epidemic by issuing their own bonds worth PLN 42 billion, EUR 1 billion and USD 400 million.
Besides, the distortion of the state budget total in 2021 was also influenced by (as in previous years) unpaid transfers of the State Treasury bonds totalling over PLN 22 billion to entities outside the public finance sector.
In order to define the real value of the state budget deficit in 2021 it needs to be stated that not less than PLN 64.3 billion was found beyond the state budget deficit in 2021!
Besides, part of the state budget expenditures presented in the Report of the Council of Ministers as expenditures incurred in 2021, was not actually born in that period.
One of such operations was the transfer of nearly PLN 45 billion in the last months of 2021. The funds remained unused by the end of the year. That operation caused an increase in the state budget deficit in 2021, though. Using the mechanism of non-expiring expenditures of PLN 7.6 billion had the same effect. As a rule, this mechanism should enable financing tasks which were started in a given year and which should be completed in the first quarter of the following year. That solution is to be applied sporadically as it is an exception from the budget annuality principle. That has become a common practice in past two years, though.
Moreover, non-expiring expenditures are largely earmarked to finance tasks, the execution of which starts only the following year.
These tasks are often entered in the plan at the end of the year. These are the cases that were questioned by NIK. The Supreme Audit Office of Poland also had reservations about the considerably extended period of the expenditures’ incurrence falling on the end of November 2022. As a consequence, two budgets are being executed for the bigger part of this year.
It also needs to be noted that the same mechanism was applied in the budget for 2020 where expenditures of nearly PLN 50 billion were planned for tasks to be executed in 2021.
Incurring expenditures in a year other than planned not only distorts the picture of expenditures and the state budget deficit but also significantly limits comparability of data in subsequent years. It also makes the analysis of public spending efficiency much more difficult. Besides, it prevents NIK from making a statement about the adequacy of spending, representing nearly 30% of the state budget deficit.
Planning high expenditures beyond the state budget was a symptom of minimising the significance of the budget, being the key financial plan of the state.
Since 2020, public tasks related to COVID-19 prevention and fighting were financed from the COVID-19 Prevention Fund and the Polish Development Fund [Polski Fundusz Rozwoju S.A.]
Without questioning the purpose of that support, NIK points out that it was provided beyond the Budget Act, although it had a great impact on the deficit of the central and local government sector and on the debt increase in that sector.
NIK therefore sustains its last year’s opinion that the position of the state budget should be restored, considering its special nature and the central place it takes in the public finance system.
According to NIK operations performed in the government sector resulting in changes in the State Treasury debt should be, as a rule, recognised in the revenues and expenditures of the state budget. That would give control to the Parliament and ensure implementation of the Polish Constitution under which the state budget is a public financial plan covering the revenues and expenditures of the state and being the basis to run its financial economy.
NIK is also concerned that the financing of more and more public tasks is transferred to funds beyond the state budget in Bank Gospodarstwa Krajowego. From this year, also tasks related to the modernisation of armed forces, will be financed in the same way, using the Armed Forces Support Fund.
In 2021, the levels of the public debt and the debt of the central and local government sector went up. Those debt levels to the gross domestic product ratios were lower than forecasted and decreased against the corresponding values at the end of 2020.
In 2021, the financial standing of Poland was far from balanced. The debt of the central and local government sector to the gross domestic product ratio in Poland totalled 53.8% in 2021.
At the end of 2021, there was a record difference between the debt of the central and local government sector calculated in line with the EU methodology and the public debt established in line with domestic rules. It reached 10% of the GDP! Besides, the year 2021 was another year in turn when that difference exceeded PLN 200 billion.
That difference mainly resulted from recognising liabilities contracted to finance expenditures of the COVID-19 Prevention Fund and liabilities of Polski Fundusz Rozwoju S.A. in the debt of the central and local government sector and not including them in the public debt.
Finally, the debt of the central and local government sector was nearly PLN 262 billion higher than the public debt!
It is also worth noting that the debt of Bank Gospodarstwa Krajowego and Polski Fundusz Rozwoju S.A. is guaranteed by the State Treasury, although those guarantees were not covered with limits set out in the Budget Act.
The above means that nearly PLN 215 billion of the State Treasury’s potential liabilities was beyond the Parliament’s control! It should be added that the redemption of the said bonds will start only in 2024. It is possible then that their issuers will have to be financed from the State Treasury funds at that time.
It needs to be emphasised that based on the public debt to the gross domestic product ratio, the prudence thresholds of 55% and 60% as well as sanctions for non-compliance have been defined in the Public Finance Act and the Constitution of the Republic of Poland.
Other irregularities identified by NIK referring to the budget execution in 2021 are mainly related to errors which repeat every year, including the ones from the following areas: accounting, reporting or budget debt recovery. The big scale of irregularities was also related to non-observance of the Public Procurement Law.
In 2021, the structure of the Council of Ministers and offices supporting individual ministers was reorganised. Since 2015, ministers in charge of specific sections were changed 83 times, whereas offices supporting them were changed 61 times. As a rule, the changes were implemented without the required vacatio legis, and often with retrospective effect. Structural changes were rarely followed by changes in the area of financial and accounting support which were often effected with significant delay. Serious problems were also related to stock-taking and property acquisition.
In 2021, inflation soared to reach levels not recorded for two decades. In December 2021, it exceeded 8%, which was the highest level since November 2000. The yearly average rate of consumer price growth in 2021 was 5.1%.
The price increase was influenced both by external factors and the monetary policy of the National Bank of Poland. It focused on maintaining economic growth at the cost of price stability.
The Monetary Policy Council in its announcements ignored the impact of inflation threats. Consequences included improper expectations as to the inflation shaping and future measures of the National Bank of Poland.
The Monetary Policy Council changed its approach to inflation threats only in October 2021. Then it started a series of interest rate increases. It admitted at the same time that higher inflation may be a more long-term phenomenon than it had expected before.
Besides, the National Bank of Poland did not help reduce overliquidity of the banking sector which would help decrease inflation in a longer term. As a result of high overliquidity of the banking sector banks were not interested in increasing deposit interest rates. As a consequence, the real value of savings of households and companies was going down.
The Council of NIK, having investigated the Analysis of execution of the state budget and monetary policy assumptions in 2021, passed a resolution on 8 June 2022 where it approved granting discharge to the Council of Ministers for 2021.
Like a year before, NIK highlighted the necessity to take measures to improve transparency of public finance. Besides, the Council of NIK underscored the need to consider the state budget as the central financial plan. As a consequence, it will be the fundamental tool presenting the state of imbalance of public finance. Besides, the Council of NIK found it essential to stop issuing and publishing ordinances which impose new tasks and obligations on the government administration bodies and supporting offices, with retrospective effect, and introduce changes to the state budget, without proper notice.
