Lithuania’s Social Democratic Party has signed a coalition agreement with the Democrats “For Lithuania” and the controversial Nemunas Dawn party. The agreement, among other things, outlines the main policy directions. What can people in Lithuania expect economically over the next four years?
Under the signed coalition agreement, the three parties agreed to raise the tax-free income threshold (NPD) to the level of the minimum wage, essentially making minimum-wage earners free of income taxes. The highest incomes will also be taxed at progressive rates.
In an effort to curb food prices, the coalition has proposed VAT cuts on fruit and vegetables.
The coalition will seek to reform the second-tier pension system, allowing people to dispose of the accumulated funds more freely. This could potentially mean people withdrawing from the second-tier scheme altogether. People in Lithuania have been added to the privately-run system involuntarily, which has been met with controversy.
The agreement also foresees an acceleration of the indexation of pensions, which would increase in line with the prices.
Energy priorities include allowing consumers to switch back to the state electricity supplier if the market cannot offer a better price.
The coalition agreement also foresees helping young families by seeking to increase funding for non-formal education, increase child benefits and creating more kindergarten places and introducing free meals for primary school children.
The three parties also agreed to focus on the country’s roads by setting up a special fund, as well as to expand intercity bus and rail networks.
In terms of labour laws, the coalition seeks to improve working conditions and curb illegal employment. The agreement also mentions harmonising direct payments to farmers at the level of the European Union, as well as favouring small and medium-sized enterprises and young farmers.
Experts weigh in
“All food has become very expensive since the Covid pandemic. To focus on vegetables is good, but it isn’t too logical,” said Aleksandras Izgorodinas, an economist at Citadelė Bank.
Although the tax cuts on food will be beneficial, it is a risky strategy as the country is trying to raise more funds for defence, he added.
“Next year, spending is growing aggressively because social spending is going up, so it would be important to find a way to compensate the budget losses due to the VAT reduction,” Izgorodinas said.
Aiming to raise the NPD to the level of the minimum wage would also pose some risks, according to the economist.
“Next year, the minimum wage will reach a very high level and we need to understand that the budget will lose some revenue as a result,” he said.
Having progressive taxes makes sense, according to Izgorodinas.
“We have many different types of income in Lithuania, and maybe this would actually be the simplest option to address the inequality problem,” he said.
Meanwhile, ISM university rector Dalius Misiūnas said the idea to allow switching back to the state electricity supplier questions the concept of a free market.
“It’s a good proposal, I just don’t know how to implement it,” he said. “I have repeatedly said that [electricity market] liberalisation is not beneficial to consumers, especially smaller ones,” he said.
The new proposals, he said, contradicts earlier policies.
“On the one hand, we are liberalising the market, but on the other we are trying to regulate it,” Misiūnas commented.
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