As the Lithuanian economy moved away from a sustainable growth path last year and the population ran out of money, we could see stagnation or recession across Europe this year. According to experts, the time is not far off when we could see tax changes. We may not have reformed, but we could see a few innovations, such as a change in property tax; economist Nerijus Mačiūlis spoke to Žinių radijas programme Atviras pokalbis, lrytas.lt reported.
The recession was known in advance
2021-2022 was the time when economic growth broke away from a sustainable path, said Nerijus Mačiulis, Chief Economist at Swedbank. Consumption grew beyond its means, property prices rose by more than 50% in three years, and the economy grew by more than 50% in three years.
“This is an unprecedented boom. Some social groups have not seen the crash, but a large part of society has been consuming and buying a lot. For a while, one of the main concerns was that if you ordered a new car, you had to wait a year for it to be made, that you couldn’t get a table in restaurants without a reservation, and that travel was sold out.
When consumption exceeds potential, it is called overheating, which always leads to more inflation,” the economist said.
He said many people have been inadequate with their money during inflation. Those who did not know how to invest were afraid or did not want to, decided to spend it.
But this overspending is ending, and that is why economists say we experienced a recession in the fourth quarter of last year.
“Nobody is saying that we will have a deep hole in 2023, but growth has stalled, prices, appetite, and expectations will have to adjust, so it is hard to expect GDP growth this year,” explained Mačiulis.
Gintautas Paluckas, Social Democrat and Vice-Chairman of the Seimas Committee on Economic Affairs, assured that this year’s economic development had been known for a long time, since the middle of last year, because already then the manufacturing industry had started to signal that the number of orders was decreasing, or that it was stopping; Scandinavia and Germany, our export markets, would hire fewer workers, and would not raise wages very much.
“But we will see how the European markets recover. Earlier, there was talk of a deeper recession, but now there is talk that Europe might come out of its economic troubles more easily than thought.
We will see how our businesses recover, too, some of which may be more difficult, such as construction, furniture and housing. We can see that in Scandinavia, the fall in house prices is still in full swing, so the property market will not recover quickly.
And the forecasts of a 9-10% rise in wages in Lithuania this year are optimistic, as many businesses have stopped hiring additional staff, and wages in the private sector may not rise as much,” the politician said.
However, Mačiulis has a different opinion on wage growth: “Paluckas says that 10% seems optimistic, but let me remind you that the minimum wage alone has been increased by 15% since January, so all wages will have to go up.”
The economy will not grow because of 4 factors
According to Mačiulis, four factors will affect the economy of Lithuania and the euro area as a whole this year.
“It’s like four horsemen pulling us by our legs and arms and making us feel uncomfortable,” the economist said.
One of them is inflation. Although it is receding, the price rises are still at high levels, and all feel the consequences – wages, social benefits, and pensions have not caught up with such rapid price increases. Thus, the population’s purchasing power is expected to remain this year similar to last year. For this reason alone, it is difficult to envision a recovery in retail sales and consumption.
Secondly, the energy crisis. Although natural gas and electricity prices are currently lower on the exchange, this does not mean that they will not rise again. If China suddenly starts repurchasing large quantities of LNG, which it has hardly bought in the last year, the price could go up again. Mačiulis recalled that, overall, the European Union (EU) still imports 8% of its natural gas from Russia. If this flow were to stop, it might have to look for new measures to reduce gas consumption even further.
“We have to wait another year to be cautious about what is happening in the energy market. There could still be fluctuations”, the economist warned.
The third factor is the rise in interest rates, which almost no one can avoid, not even those with no loans. “It can also affect you indirectly. For example, maybe your employer has borrowed money, and the cost of servicing the debt is also rising for the business, which can affect you. So everyone is affected by more expensive money, even those who do not have any loans,” Mačiulis explained.
Fourthly, global demand is weakening, and trade is slowing down, which can be seen in export markets.
“Sweden’s GDP is declining, Estonia is already in recession, Latvia is in a similar situation, and Germany’s fourth quarter last year was also negative. So it is hard to expect that when our main export market is in a consumer economic downturn, we will somehow defy the laws of economics and continue to boom,” said Mačiulis.
According to him, we will see a slowing economy, perhaps stagnation, but it is not a severe drop that would translate into high unemployment.
We have a problem with the electricity
The interlocutors have much to cling to even with the current low electricity prices.
There is talk that if electricity prices remain low, the money for compensation may not be needed. According to Mr Paluckas, if there is an opportunity for the state to borrow less, it should be used because interest rates are high now. However, there is another problem.
“Energy prices have fallen, but residents have long-term contracts with fixed higher prices. This is a pebble in the politicians’ garden, and we have an unpleasant situation,” the MEP said.
Mačiulis also pointed out: “If prices on the stock exchange are falling and staying low, while residents have fixed their prices at a high level, it means that the money from the state budget for compensation is going to the companies that are selling the already cheap electricity at a very high price. We have a problem, and this should be addressed somehow.
But we can be happy that the state will not have to borrow a lot for the compensation, so we can concentrate on adjusting public finances in the long term and get back to the issue of tax reform.”
Reminded of the property tax
Mačiulis refers to tax reform as a change in all taxes, not one or two, which is unlikely to happen this year.
It is acknowledged that unjustified exemptions could be scrapped, which would create more money in the budget that could be redirected to, for example, increasing the salaries of public sector workers.
Mačiulis also believes that the change to the property tax proposed last year was not a bad idea, as the current property taxes are “crooked, slippery and do not bring many benefits to the budget”, and a change could raise around €100 million for the budget. This money would go to municipalities, which could use it to tackle local problems and invest in infrastructure.
“Such a tax would also prevent unjustified price rises. Most countries differentiate between first homes, which are basic necessities, and other homes, which are no longer basic necessities.
This then discourages speculation, buying and selling, and in the last three years, we have seen an entirely new type of business, whereby homes are bought from developers early and sold a year later for 20-30% more. It is legal, and there is no penalty. The person has found a loophole, made money, and is a good guy. But there is a side effect – property prices have risen so much that young families are no longer buying. This is already a social problem,” said Mačiulis.
He cited the example of Singapore. There, a second or third home’s seller must pay a 15-20% transaction tax. The amount of tax depends on who you are: citizen, resident or foreigner. According to Mr Mačiulis, foreigners pay the most – around 35% of the transaction amount. In his opinion, this way, speculation in the real estate market is quickly prevented.
G.Paluckas agrees that certain exemptions should be abandoned. “It has been estimated that the total amount of various concessions amounts to almost EUR 4 billion. Some of the concessions are understandable, but some of them can be argued about,” he said.
However, Paluckas is not in favour of changing the property tax at the moment. He said that with interest rates rising so much and residents having to pay almost twice as much in loan repayments, it would not be appropriate to put the property tax burden on their shoulders.
However, Mačiulis is categorical: “There is never a good time for new taxes. And I disagree that the property tax would be a heavy burden. Half of the low-value dwellings would not have to pay anything at all, while the other dwellings would have to pay an average of around €15 per year.
A packet of butter will cost that much soon, so that money is not a huge burden.”