State of the Union: Lithuania

Lithuania’s political and economic scene in 2007 was characterised by turbulent events in the economy yet stagnation in key sector reforms. The political parties have been gearing up for the 2008 Parliament elections, so 2007 has been abundant with populist initiatives, including progressive tax legislation. Meanwhile, crucial reforms in the healthcare, higher education and pension sectors were the objects of heated debates that produced barely any action or visible results.
One of the most significant topics in 2007 was the steep increase in consumer price index, which over the course of the year rose by 8,1 per cent. Although food became more expensive in many countries around the globe, Lithuanian politicians claimed that prices in the home market cannot be rising due to the international tendencies. Instead, statesmen were quick to blame the producers in having arranged cartel agreements, even though no evidence of such agreements and their influence on the price increase has been found. Meanwhile, private banks continued to increase their loan portfolios: loans to private individuals rose by 65,6 per cent between mid-2006 and mid-2007, further fuelling the inflation.
High inflation and a budget deficit, coupled with inflationary problems in Estonia and Latvia induced rumours that all Baltic currencies, including the Lithuanian Litas, might be devalued in the near future. Compared to the other Baltic states, the Lithuanian case was the strongest against devaluation. The Law on Litas’ Credibility guarantees not only a fixed exchange rate, but also a 100 per cent back up in foreign reserves of all the currency in circulation. The population awaited the worst case scenario. It took several months for central bankers, analysts and politicians to realise that devaluation would not resolve any of the country’s problems, but would only add new ones. By the end of 2007 the idea of Litas’ devaluation had faded away, although international analysts still worry about the future of Litas.
All eyes on the monster
The hottest topic of political and public life in 2007 in Lithuania was the creation of a “national investor” – a merge of two state-owned energy companies and a private one in order to build a nuclear power plant. As agreed when Lithuania joined the European Union, the existing nuclear power plant in Ignalina will have to be shut down in 2009. This shut down would increase Lithuania’s energy dependency on foreign sources; thus, in 2007 the Parliament began exploring the idea of building a new nuclear power plant. The national investor, which the media and public have nicknamed the ‘three-headed monster’, would build the new power plant as well as set up connections to Sweden and Poland. However, the creation of the national investor lacked transparency, for there was no open competition for private investment within the new organisation, leading many to question why one specific firm was chosen by the Government. Currently, a triumvirate of the companies is still in the throes of a fiery debate on the conditions of the merge.
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 appears particularly dangerous in the current period of sharply rising inflation and a forecasted economy slowdown. Finally a long-awaited and (some may say) somewhat overdue reform in state finances came with the Law on Fiscal Responsibility, which established a limit on the budget deficit. It is, however, questionable whether the limit will be adequate.
Fiscal responsibility is only part of the problem with Lithuanian state expenditure. Other problems, such as lack of transparency, effectiveness and clear-cut aims of the budget programmes, cannot be solved with the help of a single law. Programme-based financing replaced institutional budgets 5 years ago, yet the programmes’ goals and targets are often still tailored to suit the needs of a given institution. Deeper reforms are very much needed and one can only hope that the newly elected government will have the courage and political will to take up these challenges.
Sticking to the schedule, Lithuanian personal income tax has been decreased twice in less than two years: from 33% to 27% in mid-2006, and since 2008 the rate was further cut to 24%.Lithuania’s international competitiveness is, however, still being hampered by this tax rate, since rates are considerably lower in many Central and Eastern European countries.
Perhaps the most alarming initiative in 2007 was the Prime Minister’s and Social Democrats’ determination to introduce progressive personal income taxation. The bill was, however, not even proposed because it immediately encountered strong opposition within the Parliament and among prominent economists, as well as from Lithuanian President Valdas Adamkus. Yet it may be too early to celebrate, for the Social Democratic Party, which heads the minority government, has declared progressive taxation among its star attractions of the Parliamentary election’s programme.
Lithuania is one of the few countries that still collect contributions to the social insurance fund as a percentage of one’s personal income, however large it is. Many analysts have warned that the lack of a “ceiling” up to which contributions should be made is hurting Lithuania’s job market and international competitiveness. Currently, many companies have located their headquarters and thus the highest-paid jobs in Latvia, where “ceilings” on social insurance contributions exist. Although the Ministry of Economy has proposed the introduction of such “ceilings”, the move was opposed by the Tripartite Council consisting of the Government, trade unions and employers’ organisations, as well as the Parliament.
Health and Education: the way to the peoples’ heart?  
The public sphere in 2007 has been occupied by numerous discussions and debates on healthcare and higher education reforms. The situation in both areas is very similar: it is agreed that reforms are vital, there is an appearance that something is being done, yet no visible results have been produced. There is a widespread lack of understanding of the roots of the existing problems; it is still thought that we should first increase the funding and improve the conditions of the employees and only afterwards look for ways to improve the quality of the system.
The higher education sector is plagued by lack of funding, followed by an ineffective use of funds, spread of pseudo-education and decrease in education’s prestige. In mid-2007 six out of nine parliamentary parties reached an agreement on the broad guidelines of higher education reform. Subsequently, the Ministry of Education and Science came up with a new Draft of the Law on Higher Education. Among the more important changes, the Bill proposes to bring in private funding into the student loan system and end state regulation of the tuition fees, whereby each university would have the liberty to set its tuition fees.
However, these proposals would only modestly alter the existing system without changing the distorted incentives within it. Pro reform stakeholders and analysts propose abolishing institutional funding in higher education and introducing funding individual students instead (like a school voucher system) as well as deregulating higher education fees.
The Lithuanian healthcare sector is afflicted with numerous difficulties. The supply of healthcare “products” does not meet the patients’ demand; thus, the quality of those products is low and under-the-counter payments to the doctors are commonplace. There is no competition among the public healthcare providers, meaning the system itself is ineffective. The situation is worsened by the regulation of health services’ prices, and, consequently, low wages of the healthcare sector employees and parallel shadow payments. The functioning of the private healthcare sector is burdened with overregulation, discriminatory tax treatment, large subsidies to the public sector, lack of clarity on what kind of services are financed with public money and provided by public institutions. The only glimpse of hope came with a reform-promising document entitled ‘Outline for Further Healthcare System Development in 2007-2015’ which was developed in the first half of 2007. It has, however, not yet been approved as an official strategy or a legal act.
Currently there are no conditions in Lithuania for private health insurance to come into being. Although this type of insurance is legally allowed, it is too risky for insurance companies to insure separate individuals; thus, additional private health insurance can only be purchased through the workplaces. In the autumn of 2007 the Government’s Strategic Planning Committee approved the conception of voluntary supplementary health insurance through healthcare savings accounts. However, many questions still surround this model: even though it is called voluntary health insurance, it would be more accurate to call it a health savings account . When proposals of the model were made, discussions of the existing problems were mostly left out, meaning that attention was focused on ways to increase the overall funding of the healthcare sector.
Judging from the past, parliamentary elections will be accompanied with political intrigues as well as a multitude of empty promises and populist proposals. Hopefully, people will elect new leadership that will thaw the frozen reforms.
Remigijus Simasius is the President and Kaetana Leontjeva is a Policy Analyst at the Lithuanian Free Market Institute