Poland's increased social, health, and defence spending needs continued fiscal adjustments to reduce the budget deficit and prevent excess demand, according to a report by the Organisation for Economic Co-operation and Development (OECD) published on Tuesday.

The OECD forecasts Poland's economy will grow by 3.4% in 2025 and 3% in 2026, driven by rising external demand, declining inflation, and a gradual reduction in interest rates.

The report advises that monetary policy should stay sufficiently restrictive to bring inflation back to target in the medium term, considering the pressures from a strong labour market and rapid wage growth.

“Fiscal support measures, combined with additional spending on social policies, health and defence, have opened up a substantial fiscal deficit,” the OECD report states.

The OECD expects Poland's fiscal deficit in 2025 to be similar to the 5.8% of GDP forecast for 2024. The organisation described the government's plan to reduce the general government deficit-to-GDP ratio by approximately one percentage point annually from 2026 to 2028 as “ambitious” and potentially a drag on growth, Reuters reports.

“Achieving a prudent fiscal path will require reducing expenditures and boosting tax revenues, while ensuring sustainable pension provision and adequately funding the green transition,” the report adds.

The OECD suggested that Poland could increase revenues by shifting the property tax from an area-based system to a value-based one, taxing vehicles based on emissions, raising fuel duties, limiting preferential VAT rates, and increasing environmental taxes.

In addition, the OECD recommended reviewing Poland's universal family benefits and reducing benefits for higher-income individuals.

Poland's headline inflation has dropped significantly from its peak in early 2023 but has rebounded since reaching the target in the first half of 2024. Core inflation remains high, due to a tight labour market and strong wage growth, the OECD said.

“While the economy has been recovering since mid-2023 as inflation declined, inflationary pressure from the relatively robust labour market suggests that monetary policy should remain sufficiently restrictive to ensure that inflation durably returns to target,” it added.

Furthermore, the report states that with the removal of the remaining government energy support measures in the second half of 2025, headline inflation is expected to rise to 5% in 2025 before decreasing to 3.9% in 2026.