A New Budget with Old Problems

Since 1996 the Lithuanian Free Market Institute has been submitting to the government and to parliament policy papers for the budget legislation that highlight old but major weaknesses of budget planning. The government has recognised that the principles and procedures of budget formation require thoroughgoing change. Yet, no firm action has been taken so far. Three years ago a fundamental budget reform was thwarted by parliamentary elections. The new government that took the helm two years ago ran, as it appeared, short of time to scrutinise all budget-related problems. Last year budget reform was confined to minor changes in form. Even though a radical reform was slated for 1998, the quality of the 1998 and subsequent budgets remained unchanged.

In trying to shake off this arduous task, the government has repeatedly mumbled a lame excuse that conceptual problems can be addressed only after current problems have been ironed out. Sadly, there is no way out of this vicious circle. Unsolved conceptual problems engender difficulties in the current budget, which, in turn, set back fundamental reforms.

Similar excuses are used to shield the government’s reluctance, or inability, to cut its functions, which would subsequently reduce its level of funding. Most government functions (except public administration or state defence) are not, or at least should not be, the sole responsibility of the state. Why then does the government still cling to such areas as transportation, communications, utilities, and agriculture? What is their aim and what is the cost that society pays? Unfortunately, every year brings the same: the budget is compiled without clear answers to these questions. The worst of it is, not only does the government fail to curtail its powers but it is expanding them by establishing new agencies and aid funds and planning new expenditures for them.

LFMI has stressed on many occasions that before the government decides to finance any state function, it should answer two questions. First, are these expenditures justified by specific aims of public benefit? Second, to what extent will they distort economic relationships in the financed sectors? The smaller the distortions, the better for the government itself, market agents, and tax payers.

Obviously, the government has failed in its task of implementing new principles of budget formation whereby funding is allocated to programmes rather than to separate sectors. One of the reasons why programme budgeting did not give desired results is that institutions simply tuned up their expenditures to make them fit programme labels projected in the budget.

It is already evident that the Year 2000 budget will be riddled with the same problems, as no decisions have been made to break the vicious circle.

On December 14, the parliament approved the Year 2000 budget proposal, with budget revenues projected to be 8.962 billion litas and expenditures, 9.762 billion litas. The planned budget deficit is 800 million litas. Just as before, the budget is not consolidated and does not reflect all budget revenues and expenditures.