Thursday, 14 April 2011

Its the economy stupid

In the run up to an election the last things you want are increasing inflation, rising interest rates and slowing growth. Yet this is precisely the lethal cocktail that may await Mr Tusk's government as the parliamentary elections approach in the Autumn.

Latest figures have shown that the prices of goods and services rose - year on year - by 4.3% in March. This is the highest rise in prices since 2008 and was higher than expected by analysts. Moreover, the cost of basic food products are growing the most - sugar 39.4%, poultry 9.9% and flour 4.9%. A rise in the price of such products obviously affects the poorest the

The rate of inflation is now higher than the growth in wages - which rose on average by 4.1%. The salaries of many employees grew less than this or even declined and salaries of public sector workers (excluding teachers) are being frozen.

The squeeze on people's incomes will be made worse by the probable decision by the National Bank of Poland (NBP) to raise interest rates. The NBP aims to keep inflation at around 2.5% and it is therefore extremely likely that base interest rates will be raised again by at least half a percentage point by the end of this year. With private debt having expanded rapidly in recent years, higher interest rates will further negatively hit people's living standards. Another effect of rising interest rates is the possible appreciation of the Polish Złoty, worsening the prospects for exporters.

PiS have already recognised that the rising cost of living is a potential vote winner. In 2005 they managed to convince voters that the economic policies of PO would worsen their material position. They are trying to repeat this again - with Jarsosław Kaczyński carrying out a publicity stunt by shopping in a local store to highlight the rising cost of food. This week PiS are putting forward a bill in parliament that would rule out the possiblity of a further rise in VAT.

Some may argue that these actions are populist and designed to win support for a more sinister political project. And they may well be right. Yet one of the highest VAT rates in Europe is certainly adding to pressure on people's incomes.

Donald Tusk is heading into this year's elections with a clear political advantage and faces an opposition that repels large sections of society. However, there is nothing like rising costs and falling living standards to turn political fortunes against a ruling party.

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