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2019.08.02 17:44

Will new taxes be enough to pay for new promises?

Algirdas Igorius, LRT TV naujienų tarnyba, LRT.lt2019.08.02 17:44

The prime minister has suggested that a couple of new taxes are to be introduced as early as next year – all in order to keep up with the promises tossed around by the ruling parties. The proposed taxes are nowhere near to cover the extra spending, and the finance minister said that the politicians' schemes will need to pass a "reality test".

The new coalition agreement among Lithuania's ruling parties, which took weeks to negotiate, includes several dozen commitments for social security, healthcare and education.

“The intentions are really good,” said Finance Minister Vilius Šapoka.

And generous, too. The coalition partners have promised to gradually raise social security spending to reach the European Union average within five years.

Moreover, the promises include a 10-percent funding raise for regional roads, free meals for first-year school students and, eventually, all primary school kids. Parents are being promised more ‘child allowance’, students can expect free undergraduate studies, and senior citizens are being promised 100-percent free medication.

The Ministry of Finance has been tasked with evaluating how much all this would cost. Minister Šapoka says delivering on all these promises would require several hundred million euros.

Where is the money to come from? The coalition agreement also lists several potential sources of income to cover the spending – additional income taxes and cuts in public service – but these would deliver only between €10 and €20 million, according to Šapoka.

“We will have to submit the updated estimates to reality test in the autumn and finalize the figures,” he said.

Meanwhile economists say that if politicians were to deliver on all of their promises, it would cost at least half a billion euros.

“Preliminary figures stand at one to several percent of the GDP, a significant sum,” says Žygimantas Mauricas, a chief economist at Luminor bank. “In euros, that would be between 400 million and one billion.”

Increasing the ‘child allowance’ – universal monthly payments to families with children under 18 – to €70 alone will require additional €500 million, says Ieva Valeškaitė, an expert at the Lithuanian Free Market Institute.

“If, in the beginning, the child allowance was a form of support to poor families, once it became a universal payment [...], it takes up a significant part of our public spending, an equivalent to 10 percent of everything we spend on social security or one fourth of our healthcare budget,” according to Valeškaitė.

Prime Minister Saulius Skvernelis has said that his government plans to introduce new taxes on cars and real estate as early as next year, even though the changes have to be approved in parliament.

Finance Minister Šapoka notes that the government previously submitted a similar bill, proposing taxes on second and further residences, that could bring in about €11 million a year.

The suggested tax on polluting cars, which the minister of environment has suggested could stand at €20, would be completely insignificant for public finances, says Raimondas Kuodis, deputy board chairman of the Bank of Lithuania.

“It is not worth bothering speaking about such sums,” he says, which would make up about 0.1 percent of the state budget.

Mauricas, the Luminor bank economist, says that hastily introduced taxes would only bring confusion, resentment and, very likely, be quickly scrapped.

“This is truly self-deception, both the real estate tax and the car tax,” he believes. New taxes require preparation and it would not be possible to introduce them smoothly before 2021 or 2022 at the earliest.

Meanwhile new spending proposals are coming in. Soon after the coalition agreement was signed, one of the signatories, the Social Democratic Labour Party, suggested raising child allowance even more, to €122 per month.

The finance minister says that similar proposals will keep coming until parliament seals next year's budget.

“My role is to balance the needs with what's possible,” Šapoka says, promising a “reality test” for politicians' ideas.

Kuodis, of the Bank of Lithuania, says such ‘coalition agreements’ are examples of strategic non-discipline.

“Parties, in my opinion, should not even write their programmes. They should write notes under some sort of a national strategy – the ship wouldn't be tossed around so much and we'd have fewer superficial decisions,” he says.

If politicians were serious about delivering their promises, they would need to look for big new sources of income or redistribute the state budget in a major way, Mauricas says. More likely than not, the coalition agreement promises will remain unfulfilled.