By Rodrigo Garrido VALPARAISO, Chile, May 21 (Reuters) - President Michelle Bachelet promised on Wednesday to improve health and education services and give pensioners more cash as Chile heads into local elections seen as an acid test for her unpopular government. Bachelet said her government would create a $6 billion fund to pay for thousands of grants for gifted students to study abroad. "We are betting on the future," Bachelet told Congress during her annual annual state of the nation address in the port city of Valparaiso 60 miles (100 km) west of the capital. She said the money would be invested abroad, and that the interest would pay for the grants, but did not say whether the government would fund it from windfall copper revenues, or taxes or some other source. Bachelet also promised to invest $600 million over two years in improving healthcare, and seek to cut import tariffs on plant machinery to help business remain competitive at a time of increasing global economic volatility. Her center-left government has been hit by a string of sometimes violent protests by students angry at an education system and free market economic model they say hurts the poor. As Bachelet spoke, police in full riot gear outside Congress used water cannon and tear gas to disperse protesting students and workers who marched with banners and pulled down metal barricades. Bachelet took office in 2006 but her tenure has been strained by protests and scandals, including the sacking by Congress of her education minister for not preventing financial abuses. She has also faced sharp criticism over a botched revamp of the capital's bus transport system. Bachelet herself alluded to municipal elections due in October, seen by many as a litmus test for the center-left coalition she leads in the run-up to the next presidential election in 2010. "The fact is that this is an election year, and to parties and candidates, I say we must raise the quality of debate and in the municipal elections discuss how we can improve the lives of each citizen," Bachelet said. Pensions would be increased sharply, and 1.5 million pensioners will receive an extra payment of 20,000 pesos ($42) each. "We are going to put additional help into the pocket of many Chilean homes," said Bachelet, who has already given handouts to poor families to offset the impact of rising international food and fuel prices. Inflation is running at its fastest pace in more than a decade, and Chile's central bank this month raised its 2008 inflation target to 4.7 percent. It also trimmed its full-year economic growth target to 4.0-5.0 percent, citing the impact of slowing global economic growth. "The international panorama presents new challenges," Bachelet said. "So we have to act with more wisdom than ever." ($1 = 471.30 pesos) (With reporting by Simon Gardner and Antonio de la Jara in Santiago; Editing by Kieran Murray)
Demonstrators run from an armoured police vehicle during a rally in Valparaiso city May 21, 2008, as Chilean President Michelle Bachelet delivered her state of the nation address inside Chile's congress. ...
