On the 100th day of the current government’s work, the most important draft law for next year was submitted to the Seimas- the state budget. But even before this round number was reached, not only the opposition but also members of the ruling coalition began to criticise Finance Minister Valys, as reported by Laiko Ženklai on lrytas.lt.
One of the Democratic Party leaders, Butkevičius, was particularly outraged that the draft budget had been drawn up without consulting their partners. He even hinted that the parliamentary group would vote freely on this document – not everyone would necessarily support it.
Indeed, the figures set out in next year’s draft budget are particularly bleak. Lithuania acknowledges that next year it will breach the Maastricht criterion, which stipulates that the government budget deficit must not exceed 3 per cent of gross domestic product (GDP). The draft figure is 3.8 per cent. Moreover, it is suggested that by 2028 the deficit will have reached 4.6 per cent.
Even the President’s Office, which has broadly endorsed the draft budget, has said the deficit should fall back below the 3 per cent threshold by 2029. Finance Minister Valys has so far been unable to explain how it can achieve this.
At first glance, one might agree with the opposition, which is fiercely criticising the government and, in particular, the Ministry of Finance.
State budget revenue next year is projected to reach EUR 22.2 billion, whilst expenditure is forecast at EUR 27.9 billion. The shortfall is enormous, so the country will need to borrow heavily.
Debt servicing costs are expected to exceed one billion euros as early as next year, and could reach two billion by 2029, according to forecasts by the State Audit Office. Total public debt, which has long hovered around 40 per cent of GDP, will reach 48.2 per cent of GDP next year and will increasingly approach the 60 per cent of GDP threshold set out in the Maastricht criteria.
The minister of finance argues that many EU Member States currently fail to meet the Maastricht criteria – the figure cited varies between ten and twelve. In such cases, the European Commission is unlikely to impose sanctions beyond formal reprimands. However, another major problem arises when a country’s debt rises, and it uses borrowed funds to refinance previous loans: bond buyers become wary and raise interest rates.
Lithuania currently pays around 4.5 per cent per annum on its long-term bonds. This is even less than France or some other long-standing EU member states. However, when you borrow billions, the sums involved are staggering.
Nevertheless, the large budget deficit is also driven by objective factors, chief among them the funding of the national defence system, which next year will amount to more than EUR 4.8 billion, or 5 per cent of GDP. When this sector purchases goods or services, it must pay in advance, even though it often does not receive them for several years.
Consequently, a large proportion of the expenditure is accounted for now, whilst it will not be included in the accounts later on.
Expenditure on other items raises further questions. Pensions will rise by more than 9 per cent next year. By a similar proportion – by several tens or even one hundred and fifty euros – the average monthly salary of judicial assistants, statutory officials, cultural and artistic workers, academic staff, coaches and teachers will increase. The minimum monthly wage will rise by more than fifty euros.
This is understandable: annual inflation is forecast at 3.3 per cent, so most people’s incomes should rise faster than that. However, another warning sign is that GDP is forecast to grow by only 2.2 per cent.
The new so-called Family Package will cost a further EUR 150 million; it provides for support for home ownership, childcare and employment services, and even free school meals for primary school pupils, which will be introduced gradually. However, it remains to be seen whether these are the most essential measures given the severe budget shortfall.
As for revenue, everything is being staked on consumer spending. Revenue from value-added tax is projected to rise by one-tenth to EUR 8.33 billion, and revenue from excise duties by more than 12.5 per cent to EUR 2.56 billion. With wages on the rise, personal income tax is expected to bring in almost 10 per cent more than this year – EUR 4.335 billion.
Meanwhile, corporate tax revenue is expected to be even lower than was forecast when this year’s budget was adopted. This is hardly surprising: although the rate has risen from 15 per cent to 17 per cent over the past couple of years, businesses are simply making less profit as they face significant costs driven by rising energy and fuel prices.
If the budget were drawn up based on public policy rather than accounting principles, options for generating more revenue would be considered when expenditure rises so sharply.
One source could be a property tax on residents. It was recently amended, but has so far proved ineffective – due to the narrow tax base, the revenue generated is insignificant.
The ruling parties have hinted that certain tax changes may be considered – for example, those relating to gambling and the like. However, at best, these would take effect from July next year. Perhaps the region could reduce its highest excise duties on fuel and generate revenue from increased consumption.
On the other hand, it is not realistic to make up the missing billions through such measures alone.
Although the figures in the draft budget may seem daunting at first glance, it is possible to live in debt for a year or two while external threats exist and a particularly large amount of funding has to be allocated to defence. The problem, however, is that this has been the case for almost decades on end. And it makes no difference which party or coalition is in power.
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