The Lithuanian government wants to introduce a so-called temporary solidarity contribution by banks that should fund military projects. How would it work and why did the Lithuanian Banking Association file a complaint to the European Commission?
Why does the government want a windfall tax for banks?
Lithuanian banks are expected to earn record profits this year. “We look at exceptional circumstances in the banking sector,” Finance Minister Gintarė Skaistė recently pointed out in an interview. “And it’s not exceptional because banks were very prudent, were planning these profits. These profits are coming like a lottery win because government and society supported the businesses.”
Skaistė is referring to state measures during the coronavirus pandemic that have reduced the loss potential for banks and also increased the level of liquidity in the financial system. According to her Ministry, Lithuania has witnessed the fastest-growing level of deposits in the euro area. Accordingly, the residents’ accumulated deposits were 11 billion euros higher than the loans. As the European Central Bank (ECB) increased reference interest rates, Skaistė thinks the unexpected net interest income of banks “should be divided in a spirit of solidarity”.
How will the military sector benefit?
The Finance Ministry says the war in Ukraine has additionally highlighted the need for military mobility in Lithuania, an investment with an estimated cost of 963 million euros. The so-called temporary solidarity contributions are expected to generate about 410 million euros, 100 million less than in the first version of the law.
As the Finance Ministry stated, the money would contribute to projects that would ensure Lithuania’s capacity to receive allies, expand the capacities of airports and seaports, reconstruct military roads necessary for transport, renovate bridges or to build new infrastructure. In total, 26 different projects were counted, Finance Minister Skaistė said.
Further reading
How does the windfall tax work?
The solidarity contribution should be paid for 2023 and 2024. The government’s proposal would impose a tax of 60 percent on the part of a bank’s net interest income that is more than 50 percent higher than a four-year average.
“When the discussion started and we proposed the first version of the bill, banks and credit institutions were saying publicly that they will decrease the credits for the businesses and people,” Skaistė said.
Taking into account the proposals and complaints it received, the Ministry of Finance and the Bank of Lithuania recently revised the draft law. Among other things, a clause was included with the aim of completely excluding new credit activities from the tax. “In this way, we eliminate any doubts that the temporary solidarity contribution can influence the normal activities of credit institutions and the business decisions they make,” the finance minister points out in a press release.
What are critics saying?
The Lithuanian Banking Association has already filed a complaint to the European Commission. “We think it’s state aid to the sectors that also have higher than usual profits, although they are excluded from the tax,” the association’s president Eivilė Čipkutė said in an interview.
Referring to military infrastructure, Čipkutė stressed there was no doubt that everybody agrees on the need to strengthen defence. “However, we think it should not be done by only one sector,” the president of the Lithuanian Banking Association pointed out. “This is a common public good that all of the companies and people in the country would benefit from. Therefore we think, if there is a need for additional funds to finance defence, it should be solidarity across the board.”
There were also critical remarks by the European Central Bank. The ECB wrote in a statement: “Imposing a financial contribution on the banking sector could have negative economic effects by making credit institutions less resilient to economic shocks. A sound capital base of credit institutions is essential to fulfil their role of credit intermediaries within the economy. Higher costs and reduced credit supply can adversely affect real economic growth.”
However, the Bank of Lithuania told BNS the ECB’s opinion had to do with the first version of the bill and that the updated bill presented by the Finance Ministry already takes the ECB’s comments into account.
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