LFMI Position on 2008 National Budget

Having annually analysed Republic of Lithuania’s state budget and local governments’ budgets financial indices law projects since 1996, the Lithuanian Free Market Institute has consistently pointed out the same problems. Budget formation still lacks coherence; although there is a formal program-based allocation of funds, underneath it all the budget funds are in fact being distributed to institutions. The programs are often ineffective and lack clear-cut aims, yet their existence is not questioned for the sake of keeping the institutions alive.
In 2008 the budget revenues will be 29.4 billion Litas, which is 7.2 billion Litas more than in 2007. Budget expenditure will constitute 30.4 billion Litas, or 6.8 billion litas more compared to 2007. Despite continuous economic growth and an unprecedented increase in budget revenues, the Government has still been unable to form a budget without a deficit. The planned deficit is particularly dangerous in an environment of sharply rising inflation and a forecasted economy slowdown. While the inflation is about 7.6 per cent, the budget expenditure is rising by 30 per cent. In such circumstances the government becomes the main contributor to the inflationary process and may endanger the Lithuanian economy’s soft landing scenario. It is officially claimed by Government officials that the budget deficit will fit into the 0.5 per cent of GDP limit enforced by the newly enacted Fiscal Discipline Law (which will limit the budget deficits starting from 2009, so it does not actually apply to next year’s budget). However, the 1 billion Litas deficit is actually about 1 per cent of GDP, because some of the state expenditure, such as land restitution expenses, is not counted into the deficit. Spending more than budget revenues will only contribute to the already spiralling inflation (in October 2007, the year-on-year Consumer Price Index rose by 7.6 per cent) and goes against the Government’s public claims that it is doing everything in its powers to keep the inflation down.
Hundreds of millions Litas of taxpayer’s money is still being spent on subsidies, such as direct payouts and programs that supposedly enhance “economic growth competition.” Money is spent despite the fact that the subsidies’ negative effects on competition and market processes are becoming increasingly more obvious; the position of interest groups is improved at the expense of all the taxpayers; corruption routinely follows the distribution of subsidies.
LFMI has urged the Government to reduce the funds allocated to the public sector. In 2008, all 13 Ministries will see an increase in their allocations. Out of 21 governmental institutions, less funds will be directed to only three, while the rest will experience an increase of as much as 7 to 91 per cent.
Lithuanian fiscal discipline and national debt will once again be worse compared to our neighbours, Latvia and Estonia. Both countries will have excess budgets in 2008. Speaking about debt, all three countries are well under the Maastricht criteria of 60 per cent, yet in this case it would be proper to compare Lithuania to its neighbours rather than look up to Western European countries that have accumulated much more debt throughout the past decades. Although all three states began taking on state debt after leaving the USSR, the Lithuanian debt (18.2 per cent of GDP) is much larger than either Latvia’s (10.6 per cent) or Estonia’s (4.0 per cent).
All in all, the 2008 budget demonstrates the government’s inability to respond to the current economic challenges; instead, the authorities could jeopardize the economy’s soft landing.