Lithuanian leaders have announced plans to significantly up military spending but have yet to specify where the money will come from. Borrowing, spending cuts elsewhere, EU funds are among the proposed sources, but observers say it is unrealistic to expect no tax rises.
The State Defence Council, which consists of top political and military leaders, decided last week that Lithuania will spend between 5 and 6 percent of its GDP on defence over the coming five years in order to expedite its planned expansion of military capabilities.
That would require substantial resources. Last year, Lithuania spent 2.4 billion euros on defence. It would need double that, if it were to achieve the 5-6-percent target next year.
When presenting the plans, President Gitanas Nausėda insisted there will not be any major tax hikes.
“We will certainly not go down this road of linking more funding for national defence to an increased tax burden on the population,” he said.
Instead, he suggested that the additional military spending will be covered with borrowing, cutting expenditure elsewhere, and perhaps from EU funds.
However Gintaras Juškauskas, an expert at Mokesčių Sufleris (Tax Prompter), says this would not be a sustainable solution. Eventually, the government will have to take the money from taxpayers.
“A government that sends the message ‘we will borrow’ should also send the message ‘we will raise taxes’. The question is, of course, whether this government will raise taxes, because public debt will have to be repaid from somewhere. There is simply no other way, no sustainable way, to repay the loans than by raising taxes. Most likely, these will be long-term loans, and another government that will be in power at the time will have to pay them back,” Juškauskas tells LRT TV.
Vilius Šapoka, a former finance minister, agrees: borrowing, reshuffling the government budget, and expecting the European Union to foot Lithuania’s defence bills will not be enough.
The sums of money are very large, he notes. According to Šapoka, Lithuania needs to think about how to make the most of investments in the defence industry. With the right mix of different sources of funding for defence, Lithuania is capable of achieving its military spending targets, he believes.
The previous conservative government raised the corporate tax by one point, upped excise duties and introduced a temporary levy on windfall profits of banks to pay for additional defence spending needs.
But Šapoka, who served as the finance minister in the centre-left government of Prime Minister Saulius Skvernelis between 2016–2020, believes defence should be funded from broad-based taxes.
“Let’s not pretend that it should be paid by someone else – the European Union or only by the rich, or only by businesses. This is a common cause and therefore everyone’s contribution and involvement is crucial. That is why horizontal taxes should be used: VAT, pollution taxes, a sugar tax could be considered,” says Šapoka, currently partner at the business management consulting firm Insynergy4.
Juškauskas, a tax expert at Mokesčių Sufleris, says it is better to introduce new taxes now than later.
“We will be talking about a much higher tax increase in the future, relatively speaking, because we will need taxes to cover not only the loans but also quite substantial interest payments,” he says. “Take what the pragmatic Estonians are doing – they are probably borrowing as well, but they are already financing a significant part of their defence funding from a sustainable source of increased taxes, even if their taxpayers are probably not very impressed.”
Newsletter
Every Friday morning.
