A Jungle of Budgetary Policy

In Lithuania the government redistributes roughly one-third of gross domestic product. One-third is a substantial portion, therefore the policy of state revenues and expenditure should be a matter of central consideration. Unfortunately, no one – neither the wealthy nor the poor- is so slipshod and negligent about his or her budget as is the government in redistributing other people’s wealth. The government does not pursue clear-cut objectives, nor does it conform to consistent principles and restraints.
Since 1990, a time when Lithuania started constructing its independent budget, not a single administration has attempted to elucidate the purpose of budgetary expenditure. Not a single administration has defined what public functions should, what may and what must not be financed from the state budget. They have neglected to do it, being too indulged in taking proud in a separate, albeit identical in terms of quality to the Soviet one, Lithuanian budget. Hence, budgetary reform has failed to feature in the economic reform calendar.
Small wonder the inventory of functions to be financed from the 1997 budget, as compared with 1991 and 1993, has remained virtually intact, as if no privatisation and liberalisation had taken place during these years; as if the Lithuanian economy and society had remained stagnant. The headings of certain expenditure categories, it is true, have changed. What in 1991 was called expenditures on financing production, compensations and payments for enterprises and loans for economic entities (sounds archaic, doesn’t it?) was in 1993 disguised under other headings and programmes. What was still left was called “expenses not assigned to the major expenditure categories”. The headings kept changing. What contradicted the letter of the ongoing transformation was carefully disguised. But contradictions to the nature of the reform persisted.
The proportions between expenditure categories changed too, though in the wrong direction. For instance, “expenditures not assigned to the major expenditure categories” made up a total of 29% in 1997, as compared to 7.7% in 1993. This category may picturesquely be called “this and that”. When financing of subordinate public – or perhaps not even public – functions accounts for one-third of government spending, there is no point in counting on a purposeful, transparent budget. Not only has budgetary policy failed to keep up with economic transformation. Outdated and unchanged, it has become a roadblock to other reform initiatives. Financing of “this and that” has become a prop to parasitic practices and the creation of a pseudo-market.
In 1996 a referendum was held on whether half of the state budget should be allocated to meeting social needs. The very formulation of the question revealed the philosophy of those at the helm of the state. They raised this issue as if proposing that half of the budget be allocated to filling our – Lithuanian citizens’ – demands, and the other half be retained by the government to distribute according to arising needs. State officials disclosed a shamelessly profligate mentality. Yet nobody rushed to rescue the common, at least next year’s wealth. Why only half but not the whole of the budget? After all meeting common – thus social – needs is the sole purpose of the budget, isn’t it? What does a fixed portion of the budget assigned to financing social needs mean without determining a maximum level of the budget? Increase the budget and you will have enough money for both social needs and needs that can hardly be called social. Under such circumstances any attempts to “rationalise” the budget will be futile unless we have clear-cut principles of compiling the budget and know the precise purpose it serves.
What principles do we think should govern the construction of the state budget?
The government should first and foremost expend to the extent of generated revenues. Suggestions on the ways to ensure a balanced budget are frequently confined to a partial modification. It is advised to plan revenues as the first step, make expenditure assumptions based on the projected revenue inflows and thus avoid a budget deficit. One should not forget, however, that it is fairly easy for the government to plan revenues, for it exerts a direct influence upon them. It is highly questionable whether the total tax burden would ease on changing only the procedure for structuring revenue and expenditure, bearing in mind that a balanced budget may be pursued by increased tax rates.
The pursuit of a balanced budget should therefore occur side by side with trimming of the budget itself, in terms of both its maximum level and functions financed. The 1997 budget deficit of 11% could have been avoided by financing only those functions that failed to be exposed to privatisation and therefore continue to be performed by the state. The budget could even have run a surplus if the state did not finance the provision of services for which consumers pay directly and did not extend to commercial entities and a whole range of establishments support that obviously does not fill “public needs”.
Undoubtedly, all kinds of “incentive” programmes have no right to feature among expenditure categories. The beneficiaries of such programmes are, as a rule, narrow interest groups. Moreover, support extended to them from taxpayers’ money erodes the competitive environment and converts the powerful market mechanism into a morass demanding an ever-increasing number of victims. Identifying and eliminating inherent difficulties of operating a business as well as improving the business climate and removing bureaucratic barriers to private business activity is the only as well as generally acceptable and applicable incentive. It should become the central task of the government and the standard of its work. This issue of the newsletter proposes a comprehensive approach to tackling the problems of business activity. LFMI will seek to ensure that an approach like this rather than a perfunctory attitude shapes economic policy in Lithuania. Changes initiated by LFMI would cost the budget nothing. Moreover, they would alleviate market distortions and allow to trim the costs of regulatory activities and the costs incurred by private entities through meeting bureaucratic requirements.
A transparent budget requires that the government abandon shadow financing consisting of extra-budgetary funds, programme funding (a high-flown heading disguising subsidies) and financing of commercial entities via founder ministries. Public resources are distributed by parliament, and this principles should be abided by universally and unconditionally. The parliament, in turn, should take decisions based on the inventory of expenditures explicitly established by law. It should be specified by law what functions must be privatised as immediate priorities without further delay, what functions will be privatised in the long run, and what functions are not designated for denationalisation.
Legal provisions of this kind would not only become a basis for financing public functions but provide guidelines for those who distribute and receive public resources. “Trimming” of financing would then dumbfound neither service suppliers nor beneficiaries. The society would not be deluded with hollow promises that the government will “help, support and remember” as soon as it has money in hand. People whose activities will cease to be financed by the government in the future would start searching for other sources of funding and getting ready for commercialisation or privatisation of these activities. People who keep buying at subsidised prices or keep receiving services allegedly for free would also know that such inefficient redistribution will terminate one day, allowing people to pay only for what they use directly.
People will eventually see the connection between curtailing public functions and reducing the tax burden, measures that will allow people to enjoy a bigger portion of money earned. We all seem to agree that it is the private sector and not the government or the budget that has to expand. Yet many are apprehensive of such changes, for… Who, if not the budget, will take care of the poor and the disabled? Who, if not the budget, will finance art, culture and education? Who if not the budget… ? Alternative ways such as private profit-making activity and charity have been disregarded as potential substitutes of state paternalism. Yet attitudes to the non-governmental sector as well as voluntary work and financing are changing. Recognising the direct connection between the private sector’s involvement in carrying out activities that yesterday were performed by the state and a steady reduction in government powers, LFMI places budgetary reform high on Lithuania’s economic reform agenda.