Getting Priorities Right

People in Lithuania are closely watching the new government as it takes its first steps. The government’s programme delineates a whole range of actions that would help strengthen people’s freedom to work and create wealth. It envisages accelerating reforms that are underway, as well as initiating reforms in areas that have long been in dire need of change. Now it is vital that these intentions do not remain only on paper. However, this may prove to be the case as the government’s programme is rather equivocal in terms of dates or deadlines. The direction that these essential changes must take, and the way to implement them, is clear. What remains to be done is to implement them in a fast, coherent and steadfast manner. Many of the planned moves can and should be made without further delay.
The most imperative task for the new government is the approval of next year’s budget. The biggest challenge is posed by the problems related to the budget structure. To tell the truth, this challenge has existed as long as Lithuania’s independent budget has because not a single government we have had so far has been smart enough and bold enough to rise to it. Despite the fact that the preceding administration gave its blessing to the principle of strategic planning, there are no clearly defined objectives that are to be achieved with the help of government expenditures. As usual, taxpayers’ money has been doled out to areas and establishments that have traditionally been financed by the state. Evidently, it is now too late for a fundamental revision of budget formation, but there is, at least, still time to prevent new public outlays and to eliminate expenditures on obscure ends and narrow group interests. There is still time to scrap public investments that are not real investments because they will never give any return. There is also time to scrap government guarantees that are not guarantees at all, but rather costs transferred to the future.
Not a single administration has learned a lesson from the mistakes and scandals that have tainted the privatisation process when obscure methods of privatisation and broad powers of privatisation executives have led to ineffective deals and turned privatisation into a hotbed of corruption. Privatisation is still far from being complete; therefore, it is vital to ensure that future sales of state property are transparent and efficient. The new government should transfer privatisation to the stock exchange and forego obscure tenders, enigmatic negotiations and other behind-the-scenes deals.
Transparency and efficiency should also underlie the allocation of income from privatisation. Revenues from the sale of state property should be used to carry out the privatisation process, to complete the savings compensation programme and to switch from the pay-as-you-go pension system to fully funded insurance. Financing pension reform would be the most effective use of privatisation income, as it would reduce government liabilities and ensure that privatisation revenues are transferred to private hands instead of remaining in the state’s pocket. Besides that, income from privatisation is, by far, the only real source from which the costly exit from state social insurance can be financed. Likewise, the state should meet the obligation it has assumed by promising compensation for depreciated savings. This is an obligation to the people and should be fulfilled, despite its unprecedented nature. The most defective use of privatisation income is the financing of economic and corporate welfare programmes. Although they are called programmes, money is channelled to individual companies and their projects. Given that it is impossible to give money to every company, the money is doled out to selected ones according to unknown criteria.
Promised tax cuts are, by far, the most anxiously awaited move of the new government. But this work should begin by reducing certain tax rates and abolishing corrosive and loss-making taxes, rather than by devising new exemptions, as the government has planned. Reducing taxes for particular types of business or services violates the principle of equal market opportunities. Sadly, the new government, too, is shilly-shallying about ending the corporate income tax. The biggest problem with the profit tax is not the tax rate per se, but complicated administration causing continuous disputes and demanding endless explanations and improvements. As usual, it is feared that the abolition of the tax would drastically reduce budget revenues. Here one could mention what occurred in Estonia. After the corporate income tax was eliminated, revenues from dividend taxation became three times as big as was previously collected from the corporation tax.
There is a significant chance that the principles of the road tax will at long last be replaced. The present calculation of the road tax on companies’ turnover is unjustified and unfair. Rather, the road tax should reflect the use of the road infrastructure. It is equally imperative to end destructive property taxes – the real estate tax paid by companies and organisations, the inheritance and gift tax, as well as the land tax. These taxes inflict an extremely heavy burden, especially in terms of indirect implications and costly administration, while generating negligible revenues.
Reducing bureaucracy should also be featured among the most urgent tasks of the new government. It is necessary to curb the powers of controlling institutions to take punitive actions against economic agents, to cut fines to the minimum, to end economically incomprehensible relicts like penalties on turnover and one-sided exaction of fines. Penalties should discipline businesses, but not destroy them. Administrative fines should be imposed only in exceptional circumstances when other disciplinary measures – such as warnings or information disclosure requirements – fail to give results. In general, serious violations should be investigated only in court. Likewise only the courts should have the right to impose large fines.
A whole range of de-bureaucratisation proposals approved within the Sunrise programme is waiting to see the light of the day. Bureaucracy is so widespread and entrenched in many areas that it diverts people’s time and energy from their activities. It enslaves businesses by making them serve government fancies and whims. It is essential to eliminate mandatory bills of lading and the archaic control of working hours with the help of time sheets. It is also necessary to automatically recognise quality certificates issued in EU and EFTA countries, to simplify enterprise registration and liquidation procedures, and reporting requirements to Sodra, tax inspectors and the Statistics Department.
The government’s programme defines rather explicit and concrete steps aimed at simplifying labour relationships. At present, unjustified restrictions are imposed on labour contracts. One cannot conclude a labour agreement with a foreigner; also, restrictions are applied to part-time jobs. It is important to abolish, or at least to reduce, the mandatory minimum wage, which harms those who are supposed to benefit from it. Employers pay one or another wage not because the government says so, but because they make such agreements with their employees. An employer hires labour only if he values the worth they create more than the wages he pays them. When it is forbidden to pay less than a certain level, those for whom employers cannot pay the established amount will either be fired or will work illegally. It may look paradoxical at first glance but, if the aim is to stimulate job creation, it is necessary to remove obstacles that prevent an employer from dismissing hired labour. At present, many businesses do not take risks of investing and creating jobs, only because dismissing employees is too complicated and costly in Lithuania should their business plans fail.
The choice of the steps that will be taken without delay and those which will be pushed aside will determine the direction and success of the government’s work. It will also determine our opportunities for creating a better life. The new cabinet has announced an action plan for the first 100 days. Although it provides for a number of urgent policy decisions, such as abolishing the ban on tobacco advertising and the capital gains tax, recognising EU product quality certificates, and simplifying procedures for land acquisition, many imperative tasks have been left out. Obviously, the longer they are postponed, the less time there will be to implement necessary reforms, and the longer people will have to wait to see improvements. If the most important work will be again put off until the last months, many decisions will be hasty, reckless and erroneous. The worst of it is, those in power will not only lose time but also destroy people’s trust and opportunities.