By a hairbreadth, the year 2008 could have been quite a good one for Lithuanians. The first half of it looked highly optimistic – not only when authorities planned the state and municipal budgets where optimism is never a scarcity, but also when market forecasts were made. The fever of the crisis that hit global markets in August knocked at Lithuania’s door later – somewhat in October. Banks became the omens of the crisis, much the same as they herald growing prosperity. In good times they lend money, in bad times they don’t. But once you are used to easy access to money, it is never easy to shift to a starvation diet. But even October didn’t seem to be so menacing because, to our joy, the right-wing parties won the parliamentary election, promising the Lithuanian voters market reforms. The President offered them to form a new government, which they did. We tied plenty of our hopes to this fact as the right parties are usually less populist, they conduct reforms that build the foundations for long-term economic growth and are in favour of a small but effective government.
Changes in political circles have taken a toll on us at the Lithuanian Free Market Institute when the fourth President of LFMI Remigijus Šimašius was offered and accepted a proposal to become a Minister of Justice. A nicely named Ministry and Minister. And very big challenges. We saw Remigijus off with a minister’s portfolio where we inscribed his words written back in 2004 in this newsletter: “Wishing and striving for a better life, the government can assist people in just one way – to become smaller, irrespective of today’s or tomorrow’s topicalities.”
What happened after the approval of the new Government resembled a bad dream, a horror movie or some other kind of art when the story begins to develop in a way you didn’t plan or expect, especially as it develops very rapidly and dramatically. The new Government’s anti-recessionary plan, drawn at speed on co-operation with several Keynesian analysts and passed by the Parliament, came as a total surprise even to the leftists.
Now we are witnessing the decisions made by our Government*
– we all see them in gas stations and stores, we feel them at home and at work. We are searching for ways to adjust to them and to come through the economic hardship. Full of hope, we’ve seen the New Year in. What will it bring to us?
The first month will pass quickly: the Government will need to form and approve its programme’s action plan where it could table the good news for the market. These are badly needed! There are several solutions that might help overcome this nightmare, injecting some hope of recovery. First and foremost, to my mind, is to eliminate corporate tax on reinvestments. This is an old and amply debated measure that has already been partially implemented and incorporated into the election programmes of two ruling parties. It wouldn’t even have repercussions for the national budget in the year 2009 which will be plagued by the crisis. But the benefit would be gigantic! Now that Lithuania applies a 20-percent profit tax and the same rate on dividends, the country has become overly unattractive for business. Even before that we couldn’t boast of foreign investments, but the current tax rates will scare away any. Investments are what Lithuania needs the most. It’s not consumption but namely investments that determine prosperity.
The other two pivots on which we could build our hopes of a better life are the healthcare and education (not just in higher education) reforms. Although it’s not feasible in one year, but in four years these reforms could give juicy fruits. The Lithuanian Government’s programme contains welcome provisions in this respect – most importantly, these provisions must be included in the action plan and be implemented. I won’t go deep into details, but overall, reforming these systems would not only ensure high-quality services, but would also allow economising budget revenues that have been lavishly shelled out for these areas to date.
In the course of the first three months, the Government will be able to ascertain the efficiency of its anti-recession plan. In the first quarter, the bulk of the new tax rates and changes of the tax base will have “demonstrated their teeth,” and those which won’t will not produce any results later in the year either. So we will see whether the national budget collected additional revenues from higher VAT, whether the raised excise duty rates met their expectations, what signals are being reported by Lithuanian border guard services and healthcare institutions regarding the consumption of shadow “goods” and how the State Social Insurance Fund is dealing with its budget deficit.
The second quarter of 2009 will come as a critical try-out to the Government. Money will be a lack – that’s as sure as fate. The Government may move either to correct its mistakes or to deepen them even further, which will determine our life not just in 2009, but also during the entire term of this Parliament. It’s certain that no new revolutions or reforms will take place until presidential elections on May 17 and until their second round and elections to the European Parliament on June 7. That’s the way life goes: the best tool that disciples politicians is not a voter-given mandate, but fear that during the next elections this mandate will be granted to their political opponents. This tool is both disciplining and, on the other hand, discouraging from unpopular reforms. So the new Government will have a chance to scrap fruitless decisions and do everything to prevent socialism and populism from triumphing in the 2009 elections. Mind it, such a danger really exists since the right parties have strongly disappointed the country’s electorate.
It’s possible that the Government will attempt to borrow money, perhaps even from the International Monetary Fund. On April 1 the currency board system will celebrate its 15th anniversary in Lithuania: it has made Litas a solid and credible currency that has withstood internal and external crises. In times of crises, politicians always tempted to entrench upon the Litas’ stability. It’s because governments find it much easier to print money out of air than trim expenditures. The second half of this year will be crucial – those willing to unplug the tap of the Lithuanian currency will not lack. There is not a single circumstance under which the currency board scheme, safeguarding Litas from politicians’ whims, loses its power of automatic functioning. It is only politicians’ reluctance to cut boosted public spending that may come as a threat to our national currency. And since the biggest price bubble has surfaced in this particular sector, it is in the politicians’ power to explode it. This is the biggest challenge, so let’s wish our government to stand up to it.
* Measures set forth in the anti-recession plan that took effect as of 1 January 2009:
– a 19-percent rate VAT (formerly a 18-percent rate);
– a 5-percent rate VAT break removed from a number of goods and services, including press publications; all kinds of events of art, culture and sport; museums and exhibitions; hotel and passenger transport services; ecological food products; fresh iced meat; live, fresh and iced fish. All these items are applied a uniform 19-percent rate VAT;
– until June 30, a 9-percent rate VAT will be applied to non-periodicals and state-compensated pharmaceuticals;
– a 15-percent rate of the personal income tax (formerly a 24-percent rate), plus an additional 6-percent healthcare insurance tax – overall, 21 percent;
– the non-taxable minimum eliminated for medium- and high-income earners, applying it to low-income earners and working people with children (different sizes);
– a 20-percent rate profit tax (formerly 15 percent rate);
– a widened circle of payers of social insurance contributions, including persons who receive royalties, farmers and sportspeople.
Other changes that took effect from 1 January 2009:
– increased excise duties on petrol, diesel and liquid gas;
– increased excise duties on alcoholic beverages and tobacco products;
– increased prices of natural gas and electricity.