100 days of the president – solely tax tariff increases won’t solve problems

They say that only after the first one hundred days can you really begin to be more critical of a president’s decisions, choices and behaviour. A hundred days is the limit for when the warmup ends, the scoreboard lights up and the real match starts. And so, the limit has been reached and the lot is cast, Indrė Genytė-Pikčienė wrote!

The president is consistently adhering to the “welfare state” leitmotif. So far, this idea of a “welfare state” is based on two pillars – increased redistribution and reduction of income inequality. The concept leaves numerous questions for most and a long term action plan has not been released, only proposals associated with next year’s budget. It is namely the long term strategic plan from the Presidential Palace that is greatly needed. Today, there is a lack of clarity already in both macroeconomics and the political environment.

Income inequality is expected to be reduced by twenty per cent faster than planned by increasing pensions. Whether this must be done is not questioned by anyone. Based on the size of pensions relative to the state budget, we look particularly poorly in the EU context, spending only 5.7% of the GDP on pensions compared to the EU average of 10%.

Nevertheless, the plans for how this is to be financed are a surprise.

When presenting laudable corruption reduction and public procurement transparency initiatives, the president himself was left surprised that with public procurements being put in order, a fifth of their total value could be saved, which could reach even a billion euro. This sum far exceeds the 100 million euro sum being mentioned for raising pensions.

Looking for the easiest way

So why is it that it is the easiest way – raising tax tariffs – is being employed, rather than awaiting this initiative’s effect? If you can’t wait, Lithuania could take a loan. With negative interest rates. Why is the Lithuanian tax system being changed once again, all the while Lithuanian citizens and businesses have yet to fully get used to recent changes? Why worsen the tax environment compared to neighbouring countries?

The stability of the tax system, its stability and laconic nature are some of the core conditions for competitiveness. It would be hurtful if due to constant shifts in the tax environment, unfavourable small initiative taxation Lithuania would lose its impetus in attracting foreign direct investment if the start-up and fintech boom in Vilnius lost momentum. Such actions by Lithuania in the international competition arena is a luxury we cannot afford.

The president emphasised the importance of economic diplomacy, however, no economic diplomacy can help if we do not nurture the business environment and the tax system is burdened with a series of taxes that harm it.

There are other internal resources to improve efficiency: the education and healthcare system infrastructures are still stuck in the last decade despite a vast reduction in population counts over the period. Lithuania allocates far too much money incorrectly. For example, we allocate a larger than the EU average part of the GDP to education, but the average funding per student is actually smaller than in most EU countries. In other terms, much of the funding is assigned to the school infrastructure.

A few more suggestions

State property maintenance also has its cost, however, in Lithuania, there are no plans to let go of it. The relinquishing of internal transactions or at least increasing their transparency could help save at least a few tens of millions of the 456.4 million euro of transactions per year.

Based on the number of civil servants and overall public sector staff per capita, we stand out in the EU context. If these numbers were brought closer to the EU average, the possibility to increase specialist wages would emerge.

The state investment programme is also a leaky bucket for now, with much funding not even going into investments, but instead being expenses that create no value.

Inaccurate populist, electoral initiatives such as the family card, free meals, and children’s money are received regardless of wage. If we want to raise pensions and this must be done, children’s money must be directed to those, who truly need it, not everyone.

Finally, we have heard many a time before the word “solidarity” and the invitation for everyone to contribute to our mutual affair name the STATE. Nevertheless, proposals to contribute even more of our hard-earned money into the leaky financial bucket of the state is not motivating or convincing. First, the holes must be patched. The Estonians succeeded – with a far simpler tax system, they achieve far greater redistribution and most importantly – a far higher quality of public services. And that’s not the only example to follow.

Just raising tax tariffs, without convincing taxpayers that the money they put in will be used responsibly, could lead the opposite results than what is expected.

Indrė Genytė-Pikčienė is a senior expert at the Lithuanian Free Market Institute