News2019.10.23 16:00

Stalling budget plans risk instability in Lithuanian public finances, analysts say

BNS 2019.10.23 16:00

The Lithuanian government's inability to convince the country's parliament to pass car and real estate taxes reflects a growing political turmoil in the country, according to analysts. The stability of public finances is also at risk, as it remains unclear how the government will plug budget holes at the very last minute.

The Lithuanian parliament, Seimas, has on Tuesday voted down proposals to expand the real estate taxation base, a tax on bank assets, and a tax on polluting cars.

Now, the government is looking at options to balance its 2020 budget. One way is to convince the lawmakers to cancel the planned increases to child benefits or slow down labour taxation cuts.

Politicians and economists also see fiscal risks in the pre-election adoption of higher benefits without any adequate financial resources. The increased borrowing could stike a serious blow in case there is a recession.

The Finance Ministry predicts an economic slowdown in Lithuania over the next couple of years. Lithuania's economy is expected to grow 3.7 percent this year, 2.4 percent next year and 2.3 percent in 2021-2022.

A trade war with the United States and a disorderly Brexit are seen as the biggest threats to the EU economy, but the banking system is seen as better-prepared for a possible recession than a decade ago.

More than half of the MPs representing the ruling Lithuanian Farmers and Greens Union (LVŽS) and the Social Democratic Labour Party of Lithuania (LSDDP) backed the proposal to expand the real estate tax base on Tuesday.

But the finance minister failed to secure backing from the Electoral Action of Poles in Lithuania – Christian Families Alliance (LLRA-KŠS) and the political group 'For Lithuania's Welfare', which was formed by the former members of the Order and Justice group.

The proposed tax on polluting cars was backed by the LVŽS and several members of the political group 'For Lithuania's Welfare'. But the LSDDP and the LLRA-KŠS did not support it.

Meanwhile, additional taxation of banks and retailers could stumble on legal experts' conclusions that the proposed taxes might be unconstitutional.

Analysts say the turmoil is a result of the politicians' fear to make unpopular decisions ahead of the upcoming general election in 2020, a lack of leadership of Prime Minister Saulius Skvernelis, and also LVŽS leader Ramūnas Karbauskis' focus on his dispute with Seimas Speaker Viktoras Pranckietis.

"The rejection of fairly important bills shows that there's no solid majority that would support the government's proposals," political scientist Tomas Janeliūnas told BNS.

The government's failure to secure more revenue could force it to back away from its plans to increase social security payments and make any significant progress in reducing social inequality, according to Janeliūnas.

Lithuanian President Gitanas Nausėda also ran on a 'welfare state' platform and has asked the parliament to back his 100-million-euro social spending proposal, including faster increases to pensions.

Marius Dubnikovas, a financial analyst from the Lithuanian Business Confederation, says the tax proposals were brought to the parliament by “incompetent people” and decisions are made at the very last minute.

"MP Zbignev Jedinskij, who presented the bank tax bill, is certainly a symbol [of incompetence], as I have no doubt that he was not the one who wrote those proposals," Dubnikovas told BNS.

"We have a problem that we [pass laws] over the last night, like a student who has not done their homework," he added.

Economist Žygimantas Mauricas from the Luminor bank believe the chaos in the parliament is the outcome of the fairly late submission of the tax bills.

He estimates that the government would try to compensate for lost budget revenue by further slowing the increases to non-taxable income.

"I don’t think the government and the Seimas would dare to introduce any [spending] cuts. They made generous promises, and the election year is coming up," Mauricas said, adding that the government might decide on smaller increases to non-taxable income. "The budget might have a small deficit."

Meanwhile the government estimates that the general government surplus will stand at 0.2 percent GDP next year.

Amid the state's growing commitments, stalling tax collection and the failure to resolve the public sector's efficiency, Lithuania might be forced to raise taxes to plug its budget deficit in case of an economic slowdown or a crisis, instead of promoting economic growth, Mauricas says.

"I am concerned about [...] the déjà vu of what we had in 2008-2009," the economist said, referring to rushed tax changes that the then conservative-led government introduced to plug a gaping fiscal deficit.

Read more: Lithuanian parliament rejects car tax

Read more: Real estate tax proposal stumbles in Lithuanian parliament

Read more: Bank asset tax stalls in Lithuanian parliament

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