General government balance is better than expected, however, amounts accumulated in state reserves are lower than planned. The National Audit Office as an independent fiscal institution has carried out an assessment of the Stability Programme of Lithuania for 2019, to provide an independent opinion on the 2018 general government balance and debt, as well as to assess compliance with the fiscal discipline rules in 2018.
Also, to provide an assessment of the general government balance and debt projections, and risks for 2019-2020 as well as to assess the fiscal stance for 2019-2020, the National Audit Office press office announced.
In the fiscal institution’s assessment of the Stability Programme of Lithuania for 2019, it is noted that government revenue grew at a faster pace in 2018 than expenditure. This led to 92.4 million Euros higher surplus than in 2017. Despite of better than expected general government balance indicator, the amounts accumulated in the state reserves were 38.3 million Euros lower than planned in 2018. According to the fiscal institution it amounted to 497.7 million Euros or 1.1 % of GDP.
According to the National Audit Office, the main factor that led to 126.1 million Euros better general government surplus in 2018 than projected by the fiscal institution is the representation of expenditure on an accrual basis. This means that as long as the purchase is not delivered, the expenses incurred are not considered as an expenditure.
“The impact of tax administration improvement on the revenue in 2018 was lower than planned. The economy grew at a faster pace than projected, but there were no major increases in major taxes and social security contributions. The decomposition of factors influencing the impact of errors in tax plans by the fiscal institution indicates that the 91 million Euros revenue from personal income, corporate and value-added tax was due to faster than projected economic growth rather than the improvement of tax administration,” said Senior Adviser of the fiscal institution Saulė Skripkauskienė.
Need for a neutral fiscal policy
In the view of the fiscal institution, the fiscal discipline rules were complied with in 2018, with the exception of the expenditure growth limitation rule.
The growth of general government debt has been modest over the last few years and stood at around 40 % of GDP. In the medium term, general government debt will be reduced by the economy that is likely to grow faster than the average interest rate. The general government balance is projected to be at 0.1 % surplus in 2019, whereas a 0.2 % of GDP deficit is projected in 2020.
The favourable position of the Lithuanian business cycle in 2019-2020 warns of the need for a neutral fiscal policy. According to the fiscal institution’s assessment, Lithuania’s fiscal policy continues to improve its direction but remains pro-cyclical. This means that good times are not exploited to accumulate a sufficient fiscal space to carry out a counter-cyclical or at least neutral fiscal policy during the recession. The fiscal institution estimates that the fiscal effort of the Government envisaged in the Stability Programme for 2019 is not sufficient for a neutral policy.
Together with the assessment of the Lithuanian Stability Programme for 2019, the fiscal institution has provided the scoreboard of fiscal risks. In 2018-2020, most of the macroeconomic indicators show a low level of fiscal risk. The real effective exchange rate (REER) has moved from low-risk level to an average level of risk in 2018. This shows reduced competitiveness of Lithuania and it might be a warning sign of the economic slowdown. Out of fiscal indicators, the nominal and structural government balance and the planned accumulation of financial state reserves in 2019-2020 indicate the average and high-risk levels.