WARSAW (Reuters) -The Polish government has approved a 2023 draft budget that envisages a deficit of around 65 billion zloty ($13.8 billion), Prime Minister Mateusz Morawiecki said on Tuesday.

The budget sees defence spending at 98 billion zloty, with an additional 30-40 billion zloty to buy military equipment abroad, Morawiecki said.

Average inflation is seen at 9.8% next year versus 13.5% in 2022, with a public sector deficit at 4.2%-4.4% of gross national product (GDP) in 2023 and economic growth of 1.7%, he said.”The cabinet has backed an ambitious budget for difficult times that is backed by conservative assumptions,” the prime minister told reporters.

“Conservative assumptions mean that economic growth will likely be higher than 1.7%, while energy prices that have gone crazy will hopefully go down,” he said.

Poland’s seasonally-adjusted GDP fell by 2.3% quarter-on-quarter in the April-June period as slowing domestic demand, rising interest rates, and companies’ surging costs amid double-digit inflation have started to dampen growth.

Morawiecki said the government was ready for more steps to mitigate the effect of surging gas prices that are already dampening demand for the fuel.

“The economy is adjusting even as it’s expanding. Expected gas consumption will fall to below 18 billion cubic meters this year from 20 bcm last year,” Morawiecki said.Poland’s central bank is expected to hike the main interest rate to 7% in the second half of 2022 from 6.5% now, and the government assumes borrowing costs will start to fall from the fourth quarter of 2023, he added.

Central bank governor Adam Glapinski said in an interview published on Monday that policymakers could raise rates at least once or twice more by 25 basis points if necessary.

($1 = 4.7216 zlotys)

(Reporting by Pawel Florkiewicz, Anna Wlodarczak-Semczuk and Marek Strzelecki; Editing by Frank Jack Daniel and Gareth Jones)