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Polish child benefit hike could hamper inflation fight, say economists

By Alan Charlish and Pawel Florkiewicz

WARSAW (Reuters) - Poland's ruling nationalists are hoping a pledge to increase child benefit payments can help them deliver a third straight election victory this year, but economists warn the move could make fighting inflation harder.

The '500+' child benefit programme played a crucial role in the Law and Justice (PiS) party's election victory in 2015, and despite initial criticism from the party's political opponents the idea of universal child benefits is now widely accepted in Poland.

However, with inflation in emerging Europe's largest economy in double-digit territory, the value of the 500 zloty ($120.71) monthly payment for each child has fallen to less than 340 zlotys in real terms, according to mBank.

It is in this context that PiS party leader Jaroslaw Kaczynski, who holds no official government post but is widely viewed as Poland's main decision-maker, announced on Sunday that the benefit would be increased to 800 zlotys a month from January, should PiS win elections expected in October or November.

Kaczynski also said prescribed medicines would be free to people over 65 and under 18, and the government would abolish tolls on state-owned national highways.

Inflation was 14.7% in April, down from a peak of 18.4% in February. Analysts polled by Reuters expect it to fall to single digits in the fourth quarter and PiS maintains introducing higher benefits from January will not slow the downward trend.

Economists are less optimistic.

"The plan... increases the likelihood of inflation remaining at an elevated level in 2024," said Bank Pocztowy chief economist Monika Kurtek.

Santander Bank Polska said that the changes would have the effect of "stimulating domestic demand but also making it more difficult to fight inflation."

Central banker Henryk Wnorowski said that by the time the increase came into effect inflation would not be a "significant problem", but that nevertheless it would have "a stimulating effect on inflation".

SPENDING PRESSURES

Prime Minister Mateusz Morawiecki put the cost of the increase in child benefits at 24 billion zlotys, or around 0.7-0.8% of gross domestic product (GDP). Currently '500+' costs Poland around 40 billion zlotys per year.

In 2022, total Polish government spending was around 517 billion zlotys.

Poland's finance ministry said in an emailed response to Reuters questions that the changes "will not have a significant impact on the stability of public finances."

Morawiecki said the government's plans would be financed through further improvements in tax collection and increased revenues due to faster economic growth in 2024.

However, Federico Barriga-Salazar, a director at Fitch Ratings said they would add to a series of expenditure pressures, including plans for higher defence spending, which could lead to higher deficits and an increase in public debt over the medium term.

"The impact on creditworthiness will depend on whether the authorities can offset such measures with cuts elsewhere, or increase revenue, even though at present there seems to be limited appetite for the latter," he said.

However, with household budgets stretched and an increase in benefits likely to be popular with voters, the question for Poland's main opposition party, Civic Platform (PO), is not whether child benefits should be raised but why they are not being raised now.

PO leader Donald Tusk said on Tuesday that the party would submit a bill to parliament that would mean the increase would come into effect from June 1.

($1 = 4.1422 zlotys)

(Reporting by Alan Charlish; Editing by Christina Fincher)