OREANDA-NEWS. Poland's revised 2016 budget is consistent with our view that the new Law and Justice (PIS) government will partly relax the fiscal stance, Fitch Ratings says. The government has not yet incorporated all of its electoral promises into its fiscal plans, suggesting that there are still downside fiscal risks. The implementation of unorthodox or unpredictable economic policies presents a risk to the investment climate.

The budget revisions approved on Monday saw the PIS government implement some of its campaign pledges following its victory in October's elections. Spending increases worth 0.9% of GDP, mostly on higher child benefit, will be funded by higher taxes (including a new bank and insurance and retail tax) and delayed income from the auction of mobile frequencies.

This represents a slight loosening of the fiscal stance that we think will result in a budget deficit of 3% of GDP in 2016 versus our previous forecast of 2.8%. The government's own deficit forecast of 2.8% of GDP reflects stronger macro forecasts of 3.8% for GDP growth and 1.7% for inflation versus Fitch's estimates of 3.5% and 1.2% respectively.

However, from 2017, the PIS government will likely be under political pressure to deliver the rest of its various campaign promises (e.g. raising the income tax threshold, VAT reform and higher healthcare spending), increasing the risk of a higher deficit. This could be facilitated by the recent change in the stable expenditure rule, allowing more flexibility to increase spending, as illustrated by the upward spending revision for 2016.

Relying on higher taxes to fund greater spending raises execution risks. For example, VAT collection underperformed in 2015 by PLN13bn, or 0.7% of GDP, relative to the initial budget forecast. This does not augur well for the government's strategy to finance part of the increased spending through higher VAT compliance.

One important fiscal constraint is the need to comply with the EU Stability and Growth Pact's 3% deficit rule. Poland exited the Excessive Deficit Procedure in June 2015 and the authorities will probably want to avoid renewed sanction from the EU.

A significant relaxation in the fiscal stance could put pressure on Poland's 'A-'/Stable rating, particularly if it were accompanied by slowing economic growth. GDP grew 3.5% yoy in Q315, one of the fastest rates in the EU and Fitch expects growth will remain at 3.5% in 2016 and 2017.

However, the implementation of unorthodox or unpredictable economic policies that could damage Poland's business climate is a downside risk to growth and an additional risk to fiscal consolidation. Measures such as new sectoral taxes may deter foreign investment. Pre-election announcements by PIS officials and subsequent post-election actions mean that further unorthodox economic policies would not be a surprise.

The recent confrontation between the government and the constitutional tribunal that led to street protests, suggest that the risks of a more aggressively populist policy stance are rising. This adds to the negative signals on governance and increased political polarisation that may weigh on investor confidence.