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Wednesday, May 22, 2024

Valorization of 500 plus to 800 plus and inflation. Economists: pouring high-octane gasoline on a fire

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500 plus is to be increased to PLN 800 per month. This was announced on Sunday by the president of Law and Justice, Jarosław Kaczyński. According to Prime Minister Mateusz Morawiecki, the cost of indexation is PLN 24 billion. Economists fear the effects of this promise, especially its impact on already high inflation.

Szymon Wieczorek, an economic expert of the Jagiellonian Institute, in an interview with TVN24 Biznes, notes that his calculations show that raising benefits 500 plus up to the level of PLN 800, it takes into account price increases and the recent depreciation of money.

– Generally, this will be a pro-inflationary measure and will hinder the task of the National Bank of Poland when it comes to lowering inflation to the set target through interest rates. This effect may be quite strong if the rate hike is implemented in the manner announced by the CEO Jaroslaw Kaczynski – immediately to the level of PLN 800 from 2024 – said Wieczorek, noting that as a consequence it may even cause further increases in interest rates.

The economist reminded that the NBP’s inflation target, i.e. the level to which the central bank wants to bring inflation down, is 2.5 percent. plus, minus 1 percent – This means that the NBP’s inflation target is in the range between 1.5 and 3.5 percent – he added.

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Meanwhile, the latest GUS data indicate that in April, inflation was 14.7 percent. and was higher compared to April last year by 0.7 percent, but at the same time lower than in March this year, when it was 16.1 percent.

Would an increase in installments be better?

The expert of the Jagiellonian Institute notes that perhaps it would be better to increase the benefit gradually and spread it over time. For example, over the course of 2-3 years, increase the current 500 plus by PLN 100-150.

– However, with such a plan, it will certainly affect the prices of goods and services and there is no need to cheat. No comments that it will not affect inflation with the stick of the Vistula will not turn back. It is best to take such issues into account faster and carry out indexation earlier in the face of inflation, Wieczorek points out.

Our interlocutor also notes that with such an increase, the costs for the budget will increase significantly. Until now, they amounted to about PLN 40 billion a year, and after increasing the value of the benefit by PLN 300, they may amount to about PLN 65 billion.

– An increase in the amount of the benefit by 60 percent will generate proportionally higher costs, and PLN 65 billion corresponds to this proportion. It will also mean spending 0.8 percentage point of GDP more. This is quite a noticeable increase that can translate into budget deficit – underlines.

“We can discuss how much, but it will definitely increase”

The change of the Family 500 plus program into the Family 800 plus program is also described as a pro-inflationary factor by economist Marek Zuber from the WSB Academy.

– We hear various explanations, especially from experts associated with the government in recent years, regarding various processes. Here, however, the situation is really clear. If we add money, it means relatively more consumption, that is, more demand, and more demand means more inflationary pressure. Of course, we can discuss how much inflation will increase, but it does not have to increase, it is enough that it decreases more slowly, but this effect will certainly occur – he explains.

According to the economist, indexation of 500 plus will affect inflation also because the benefit is not dependent on income.

– Therefore, in the case of more affluent families, we can talk about additional demand, not related to, for example, buying food or covering the most necessary expenses – he points out.

Read also: How much will election promises cost? Calculations

Zuber notes that both the ruling party and the opposition are running an election campaign based on promises related to increasing various types of spending. In his opinion, “we are dealing with shouting at these ideas”, although, as he adds, “it was basically certain that PiS would valorize 500 plus, because this is its flagship program”.

– I see a lot of good when it comes to the effects of introducing 500 plus. However, since the beginning of its implementation, I have reservations related to the fact that it is addressed to everyone. There is currently no evidence that 500 plus increases fertility. And if it does not increase fertility, it is an ordinary social programme, and if it is a social programme, it should be targeted at and limited to people with lower incomes. It is a pity that the rulers do not want to go in this direction, but we know what it is about, the votes of the voters, Zuber points out.

Throwing sand in MPC modes

The economist points out that the problem of the populism of this campaign, this pressure to increase spending, is primarily that we are at the height of the fight against very high inflation, which we have not seen in Poland for 25 years.

– Each additional money increases it, regardless of whether it is announced by the government or the opposition. It is very likely that the implementation of these ideas next year will mean either keeping interest rates at a higher level for longer, or higher inflation, i.e. this inflation will stay with us longer, or we will even go back to interest rate increases – warns, adding that the descent with inflation from the peak of 18.4 percent. to the level of 8 percent will be much easier than from 8 to the inflation target set by the National Bank of Poland.

As he adds, adding money will be “sand in the gears of this mechanism, which is to lead to the achievement of the inflation target”.

Inflation in PolandPAP/Maciej Zielinski

“The government is the enemy of low inflation”

Also Dr. Sławomir Dudek, president and chief economist of the Institute of Public Finance and a lecturer at the Warsaw School of Economics, agrees with the statement that the increase of 500 plus will be a pro-inflationary measure and notes that until recently the ruling party held such a position.

– President Kaczyński himself, some time ago, when he commented on the proposal to raise 500 plus to 700 plus, i.e. slightly less, said that this could not be done now, because it would be pro-inflationary. Prime Minister Morawiecki himself, in one of his speeches, criticizing the opposition, spoke about the domestic creators of inflation and about the fact that adding budgetary expenses would have such an effect. It was even scary with inflation as high as in Turkey (at that time it was 60 percent – ​​editorial note) – enumerates Dr. Dudek and notes that the head of the International Monetary Fund recently warned against such actions.

– Such transfers without criteria, such as 500 plus, she described as actions that are enemies of lowering inflation. Also here, in my opinion, our government with this decision is the enemy of low inflation and this is adding high-octane gasoline to the inflation fire – the economist points out.

500 plus and child poverty

The President of the Institute of Public Finance notes that 500 plus is the most expensive program in public finance.

– There are studies that say that with a small part of the money allocated to this program, child poverty could be eradicated. Currently, this program is a wasteful pro-inflationary measure that sells well politically, but if there are advantages somewhere, the government hides where the disadvantages are and they will appear in the budget in other places, which we will learn about after the elections – points out Dr. Dudek.

The research the economist talks about is an analysis prepared by the Warsaw Enterprise Institute published in January this year. The report indicated that PiS’s flagship program costs PLN 41 billion annually, and at the same time “the complete abolition of extreme child poverty in Poland could be achieved by spending only 12 percent of the amount currently spent.” “Therefore, nearly 90% of expenditure on the 500+ benefit can be considered pure redistribution of income without an effectively defined goal” – it was written.

Referring to the source of financing of the announcement, Sławomir Dudek notes that so far the 500 plus benefit has been partly implemented by inflation, partly by sealing the VAT gap. – But contrary to what PiS politicians say, this sealing did not even finance the entire 500 plus, not to mention the 13 or 14. Therefore, the government introduced various fees and tributes, small taxes, but the real value of other services also decreased. Spending on education is falling in real terms, teachers’ salaries are dramatically low, which translates into the quality of teaching. Other savings may appear here in a veiled way, in new taxes. The government can also look for money in the wallets of the middle class, for example by taxing housing, predicts the head of the IFP.

The president of PFR is not afraid of rising inflation

In turn, according to the president of the state-controlled Polish Development Fund, Paweł Borys, “the new fiscal spending announced over the weekend should not change inflationary trends in Poland.”

– The CPI index (consumer inflation – ed.) at the end of 2023 will go below 10 percent, and in 2024 it will fall below 5 percent – Borys assessed in an interview with PAP. In his opinion, at the same time, an additional fiscal impulse may boost Poland’s GDP growth in 2024 by about 0.5 percentage point.

– We can’t talk about adding fuel to the fire here, because there is no fire. In the first quarter (2023) we have a recession in terms of consumption, we have a decrease in retail spending, the economy is going through a period of slowdown, so this type of action should not be pro-inflationary, because economic growth is below the so-called potential growth (at the level of) around 3.5 percent, he added.

According to the president of the Polish Development Fund, the new fiscal announcements should also not affect decisions on interest rates. – Of course, the Monetary Policy Council cannot hurry (with reductions – ed.), it must make sure that inflation expectations are actually falling, that the inflation trend is stable, inflation is approaching the target – he added.

Main photo source: Radek Pietruszka/PAP

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