articles Ratings /ratings/en/research/articles/240910-your-three-minutes-in-polish-cities-income-reform-should-help-restore-financial-capacity-13241585.xml content esgSubNav
In This List
COMMENTS

Your Three Minutes In Polish Cities: Income Reform Should Help Restore Financial Capacity

COMMENTS

FAQ: Applying Our Analytical Approach For European Green Bond External Reviews

COMMENTS

Analytical Approach: European Green Bond External Reviews

COMMENTS

Analytical Approach: EU Taxonomy Assessment

COMMENTS

Instant Insights: Key Takeaways From Our Research


Your Three Minutes In Polish Cities: Income Reform Should Help Restore Financial Capacity

This report does not constitute a rating action.

The recent reform on the income structure of Poland's local and regional governments (LRGs) should bolster their revenue and improve cash flow predictability.   In our view, the reform, adopted on Sept. 3, 2024, may also help restore the prudent financial framework, which has been temporarily altered over the last few years. The key measure is a change in the calculation of personal income taxes (PITs) and corporate income taxes (CITs) that are allocated to LRGs. This should increase their overall revenue, while replacing the ad hoc one-off transfers from central government. These one-off payments were implemented in 2022 under the previous Law and Justice (PiS)-led central government that introduced the so-called Polish Deal tax reform. We note that the 2022 changes weakened the financial performance of larger cities in Poland, including those that we rate: Lodz (BBB+/Stable/--) and Krakow (A-/Stable/--).

Chart 1

image

What's Happening

One of the main benefits of the new reform is that it will stabilize the share of PIT and CIT that LRGs receive. These tax revenues (contributing about 65%-70% of tax revenue for rated cities) will be calculated based on the actual taxable income of residents and companies located within the jurisdiction of the city. These revenues will also include additional smaller flat-tax revenues, which were previously excluded. In contrast, the existing calculation is more prone to exemptions, which reduces the amount that LRGs receive. The new reform will also bring spending autonomy that merges various past subsidies into one, with full spending discretion.

Why It Matters

Polish LRGs, particularly the larger ones, saw their financial performance deteriorate from 2022 until 2024 (see chart). The tax reform of 2022 slashed their revenues and only partly compensated them with central government transfers. This weakened Lodz's and, to an even greater extent, Krakow's operating performance considerably. Debt rules have also been softened--specifically the rules for balanced budgets and debt servicing (e.g. excluding refugee expenditure among others)--until 2025. Polish public finance law limits an LRG's debt servicing to the average net surplus over the past three- or seven-years (depending on the period initially chosen by the LRG) of operating revenue and privatization proceeds, less operating expenditures. Under the new framework, debt rule softening has been prolonged until 2029. The sudden centralization of budget revenue automatically constrained LRGs' borrowing capacity and ability to finance development projects on the balance sheet, while clouding the medium-term predictability of their finances.

What Comes Next

The final budget will be approved at central government level in 2024, which will provide input for LRG budgets. Although the reform should strengthen Polish cities' finances, it will take time and further reforms to restore sound financial performance and a solid borrowing framework, and achieve higher decentralization.

Related Research

Primary Credit Analysts:Michelle Keferstein, Frankfurt (49) 69-33-999-104;
michelle.keferstein@spglobal.com
Felix Ejgel, London + 44 20 7176 6780;
felix.ejgel@spglobal.com
Secondary Contacts:Maxim Rybnikov, London + 44 7824 478 225;
maxim.rybnikov@spglobal.com
Carl Sacklen, London;
carl.sacklen@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in