Inflationary pressures, not least in food and energy, have been dominating global news headlines since the conflict in Ukraine started. And households across Europe are worried that the so-called “cost of living crisis” is here to stay. That’s despite official inflation rates in most European countries recently coming down. The narrative expects prices to fall further, but the consumers ING Bank has been speaking to in Germany, Belgium, the Netherlands, Spain, Luxembourg, Poland, Romania and also Turkey beg to differ. Most expect prices to stay well above what they consider “stable” for at least three more years.
Three-quarters of people whose saving habits were impacted by inflation say they’re saving less because they can’t afford to or to be prepared for future price increases. This should have a negative impact on discretionary spending. Only one in eight say they’re saving less to spend their money now.
More than 80% of consumers reported changes in their savings behavior, with the vast majority being related to rising prices. Being forced to reduce the amount that goes into savings was by far the most-selected answer in all countries. The most popular choice among consumers interviewed is to save more in order to be better prepared for rising prices.
Consumers were asked to compare the percentage of their net income they now spend on various groups of goods to what percentage they had been spending 5 years ago. Here, food and energy top the list. In most eurozone countries, spending on savings and retirement provision suffered, whereas the non-eurozone countries had considerably larger fractions reporting increases rather than decreases.
When it comes to make an assumption about the percentage of income they’d be spending five years down the line compared with today, most consumers do not appear to believe in any sort of base effect. Instead, they expect to spend more of their income on those categories that have already seen the largest increases.
In this context, and with parliamentary elections approaching, Polish families are set to receive a 60% increase in child benefit payments from next January, under a policy the ruling party hope will help win them a third term in office.
Introduced in 2016, the “500+” child benefit program has proven hugely popular among Poles hoping to see living standards move closer to those of western Europe, helping the Law and Justice (PiS) party to attract support well beyond its conservative Catholic base. Holding onto voters won over by the 500+ program will be key if the government is to remain in power, Reuters say, and PiS has now made the increase in benefits to 800 zlotys per month for each child.
However, with double-digit inflation eating into living standards and the presence of fighters from Russia’s private Wagner mercenary force in neighboring Belarus adding to worries about security, the ruling party PiS is believed to face a tough fight in the election. Opinion polls suggest that PiS will remain the largest party but lack a parliamentary majority.
“PiS must pursue such a policy because some of its voters do not have right-wing views but supported PiS because of their economic interests. To retain this group’s backing, PiS must introduce such reforms“, said Rafal Chwedoruk, a political scientist at Warsaw University. Doing so, the ruling government puts the cost of the increase in child benefits at 24 billion zlotys, or around 0.7-0.8% of GDP.
Why not to focus on government spending- alongside income taxes cut instead?
Last June, the Polish government presented an updated fiscal plan for 2023 with a PLN24bn (0.7% of GDP) higher deficit target, mainly on additional spending.