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Thursday, May 30, 2024

The cost of election promises – 800 plus, free drugs and free highways. Calculations of economists

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During the weekend election convention of Law and Justice, President Jarosław Kaczyński made election promises. The 500 plus benefit is to change into 800 plus, more free medicines, and free highways. Also private. PKO BP economists estimate that the total cost of all promises will amount to 0.7 to 0.9 percent of Gross Domestic Product, and mBank analysts estimate it at 1 percent.

During the convention of Law and Justice, the president of PiS Jaroslaw Kaczynski announced that from next year the childcare allowance 500 plus will be increased to PLN 800.

PIS it also wants to introduce free medicines for people over 65 and children and youth up to 18 from 2024, and to abolish tolls for passenger cars on state highways, and in the future also on private highways.

PKO BP: proposals more moderate than expected by market participants

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“During the conference, no estimated costs of the proposals or methods of financing them were provided. According to data recently presented by the Ministry of Family and Social Policy, over 6.5 million children currently benefit from the 500+ program, and its annual cost is PLN 40.2 billion. (without limiting conditions) up to PLN 800, the additional annual cost to the budget would amount to approx. PLN 24.1 billion (0.7 percent of GDP), PKO BP wrote in the morning report.

“The cost of introducing free drugs for the indicated groups will depend on the scope of the program, which has not been specified. A certain point of reference may be the cost of the 75+ free drugs program (covering over 2,000 preparations), which in 2022 amounted to PLN 830 million. According to data from the Central Statistical Office, at the end of 2022, there were 2.8 million people aged 75+ and 4.6 million people aged 65-74 in Poland. Extending the current rights for older people to the 65-74 group could therefore triple the cost of the program. The number of children and adolescents is about 7 million people, but in their case the average cost of the drug and the frequency of use are significantly lower. The abolition of tolls for motorways is to cover passenger cars, which will significantly reduce the cost of the program (according to us, to ca. PLN 300m). In total, we very preliminary estimate that the total cost of the proposal is 0.7-0.9 percent. GDP,” added.

According to PKO BP economists, the proposals presented by the ruling party are more moderate than expected by market participants.

“In our opinion, the proposals presented are more moderate than expected by market participants – more solutions were often mentioned and it was expected that they would be implemented already this year” – it was written.

Jarosław Kaczyński on the increase from 500 plus to 700 plus as a “pro-inflationary move”TVP3 Bydgoszcz

mBank: loosening fiscal policy

mBank analysts note that the implementation of the PiS president’s promises means a significant loosening of fiscal policy.

“The indexation of the ‘Rodzina 500 plus’ benefit alone will mean a transfer to the private sector of PLN 24 billion. The other two solutions will also add a ‘small’ few billion. Ultimately, we can talk about a fiscal stimulus of ~1% of GDP. especially since it is to come during a period of very high, though falling, inflation. In addition, a significant part of these benefits will be directed to people with a high marginal propensity to consume. This means that a significant part of these funds will probably be spent in a fairly short time.” – stated in the communiqué.

The risk of consolidation of inflationary tendencies

Economists from mBank note that the promises made by the PiS president open the door to a very high risk, which is the “valorisation of fixed benefits”.

It is no secret that indexation of nominal benefits in an environment of high inflation is a very dangerous phenomenon. They may lead to the consolidation of the current inflationary tendencies. This, in turn, means the de-anchoring of inflation expectations and the society’s adaptation to operating in the new macroeconomic regime. From this point of view, fixed benefits have the advantage that from period to period they become a smaller burden for the budget, and thus generate a smaller fiscal transfer. In times like today, they can be said to be automatic stabilizers for price-setting processes. Their ‘moving’ causes them to behave similarly to benefits indexed under the Act (e.g. pensions)” – it was stated.

Decrease in the value of the 500 plus benefit

mBank economists noted that “from a political point of view, adding PLN 300 to the above-mentioned benefit is a tasty morsel. In real terms, this benefit is currently worth less than PLN 340. Over the last 6 years, since the program was launched, the price level has increased by 50 This means that indexation of the benefit to PLN 800 would more than make up for the loss of purchasing power.

However, it was noted that “on the other hand, politicians can always point out that in relation to minimum wage we are still ‘under water’. In 2016, the benefit accounted for 27 percent. minimum wage, and this year (taking into account the pay increase from July) it will be only 14 percent. Raising the benefit to PLN 800 will increase the ratio to 22 percent, but it will still be much less than 6 years ago. Next year, naturally, this ratio will decrease further due to another (double-digit) increase in the minimum wage.”

Change in the real value of the benefit 500+.pngmBank

“Finally, let us add that Poland does not spend little on various types of family benefits – we are on the podium in the EU. Where there is definitely not enough spending, it is healthcare or support for people with disabilities. Space for further actions to increase benefits – we leave the selection of the criterion readers – so it seems very large” – it was concluded.

Main photo source: PAP/Leszek Szymanski



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