LFMI: the euro launch needs government’s efforts to trim budget expenditure, not raise taxes

On September 28, 2006 LFMI held a press conference to present its position and recommendations regarding the means to control inflation in light of the adoption of the euro.

According to LFMI, seeking to meet the Maastricht criteria, Lithuania should not impose artificial means of price regulation, levy new taxes or expand their base of taxation and advance increases in excise duties. Lithuania should regulate the level of inflation by the following means: to reduce the growth of budget expenditure and seek to balance the budget, to decrease the state debt, to improve conditions for competition, to liberalise the land market, and eliminate subsidies for housing loans.

These measures put forth by LFMI are targeted not only at curbing inflation but at the same time are healthy for long-term economic development.

LFMI pointed out that the major factor to push up the level of inflation in the future will be rising prices of fuel and heating, which do not depend on, and can hardly be affected by, any government-imposed anti-inflation tools. In addition, the basic cause of inflation is usually government-conducted emission of money. However, this is not the case in Lithuania (except the “imported” inflation of euro emission) as the currency board system operates in the country since 1994. Other sources of inflation are tax increases (e.g. excise duties), restrictions of competition (e.g. in the energy sector), state-stimulated consumption (e.g. subsidies for house loans and heating services).

LFMI highlighted that some factors that have an effect on price growth, such as climbing wages, are the signs of a sound economy and should not be viewed as harmful and therefore controlled.

LFMI is of the opinion that although an earlier introduction of the euro would be welcome, however, it does not deserve sacrificing economic stability and the factors that determine long-term economic growth. Lithuania, LFMI argues, should aim at controlling inflation taking into account its economic interests in the first place and apply only such measures that would contribute to long-term economic well-being. LFMI believes that the recently proposed tools to cushion price growth – an introduction of the real estate tax for residents, price control and advanced increases in excise duties – are inappropriate and should be abandoned altogether.