By Martin M. Sobczyk and Margit Feher

The European Commission said Tuesday that both the Polish and Hungarian economies will grow faster than previously expected due to rising domestic demand.

Poland's "private consumption should benefit from a fiscal stimulus and the dynamic labor market while price pressures are set to remain subdued," it said.

It raised its growth forecast for the country to 3.7% in 2016 and 3.6% in 2017 from 3.5% it expected for both years in the previous forecast.

Since April, the Polish government has been paying a new childcare benefit that is expected to boost disposable income and improve consumer confidence. It is also expected to add to Poland's fiscal deficit, widening to 3.1% of GDP in 2017 from 2.6% of GDP expected this year. The childcare benefit is estimated to cost some 0.9% of gross domestic product, the commission said.

It named the ongoing constitutional crisis in Poland as a risk to its growth forecast. The implementation of some policy decisions considered by the government, such as a proposed lower retirement age and a conversion of foreign-currency loans into the zloty at the expense of banks, could also weigh on economic activity, it said.

The commission raised Tuesday its GDP growth forecast for Hungary this year to 2.5%, from 2.1% earlier, and to 2.8% for 2017, from 2.5% earlier.

Real disposable income and household spending should benefit from a Jan. 1, 2016 cut in personal income taxes, the conversion of foreign-currency mortgages into the local currency and government measures to boost the housing market, it added. The housing promotion scheme is to provide an impulse to the housing market and is expected to take full effect in 2017, it said.

While noting that "the open-ended nature of the new housing scheme is a source of budgetary uncertainty," the commission also considerably raised its forecast for a rise in public consumption this year--to 2.4% from 0.2%.

The Hungarian government didn't release its 2017 budget draft before the commission's cut-off date for the spring forecast, but the commission said it expects the budget deficit to remain stable at around 2.0% of GDP in 2017.

The government intends to loosen the budget next year, before the 2018 parliamentary elections, targeting the 2017 budget deficit at 2.4% of GDP.

The commission noted that the government's "considerable budgetary breathing space" expected for this year and next will likely be used up by the substantial tax cuts and expenditure-increasing measures--including the new housing scheme, additional infrastructure investments and spending on state education.

Write to Martin M. Sobczyk at martin.sobczyk@wsj.com and Margit Feher at margit.feher@wsj.com; Twitter: @margitfeher

(END) Dow Jones Newswires

May 03, 2016 05:15 ET (09:15 GMT)