LFMI’s study “Principles of a Proliberal Tax Reform”

When in late 1991 LFMI came out with the idea of abolishing direct income taxes, the proposal was generally considered to be extreme and unacceptable. Despite that, LFMI went on to foster the idea of abolishing corporation tax and effecting other major changes in tax policy. The next year one political party, the Liberal Union, included the removal of corporation tax in their electoral programme. Over time LFMI’s plan increasingly gained popular support and became a platform of major political forces in Lithuania (the Conservative Party, the seventh and eight administrations). Now the abolition of corporate income tax is scheduled for the year 2000. As the first step, investments were made tax-deductible as of April 1997, ultimately subverting the most distortionary tax imposed on business activity.

LFMI’s policy reform proposal, “Pro-liberal Reforms: Lifting the Tax Burden,” is a result of seven years of focused research and policy advocacy efforts. It presents a framework for a fundamental tax and budget reform. We envisage a tax system that would help liberate creative human powers and provide conditions for the pursuit of well-being by means of efficient work, private ownership, and free exchange. The principles that will make this possible are: a revenue-generating, as opposed to regulatory, role of taxes, minimum effects of taxes on economic processes, fairness as understood in the classical liberal tradition, a declining tax burden, transparency, and effectiveness.

LFMI’s plan is designed to replace an arcane and unwieldy tax system so as to minimise its destructive effects on market processes and economic agents, to ease and even out the tax burden, and to cut down the cost of tax administration. The unrivalled tax in this respect is capitation tax, when every person carries an equal share of the cost of the state. However, replacing other taxes with capitation tax requires society’s profound understanding of the essence and purpose of government. To achieve this will take years of educational efforts, so LFMI proposes an urgent plan to shift to a single, VAT-based tax, plus earmarked, or trust fund, taxes. In the process of reform, other taxes should be removed alongside steady cutbacks in government functions and public spending. Changes to budgetary policy are designed with a view to achieving an efficient use of resources, lifting the tax burden, and curtailing redistribution. The study identifies all possible ways of lifting the burden of the state, indicating the place of, and a coherent program for, the proposed tax and budget reforms.

LFMI indicated two alternative ways of eliminating direct income taxes. One of them involves the removal of corporate income tax as the first step, with a subsequent abolition of personal income tax. The other approach consists of phasing out both taxes by steady and equal cutbacks in the tax rates until their complete abolition. LFMI favoured the latter, a more neutral method. We recognised, however, that it is also a vulnerable approach politically, for it involves more risk that the reforms may be halted halfway. Thus, abolishing corporation tax first and personal income tax as the next step appeared to be a more realistic and feasible way of reform. Today, the removal of corporation tax has become government’s agenda for the year 2000.

Right from the outset LFMI persisted in promoting the ideas of tax reform, which increasingly received response and support from the public and political circles. LFMI effected change in the seventh administration’s platform in 1996, preventing the adoption of a progressive income tax regime, securing equal tax conditions for all economic entities, and achieving increased procedural transparency. The current, eight administration has changed fundamentally its approach to tax reform by switching from unsystematic, ad hoc decision making to planned policy actions. A program for revising tax legislation was approved, establishing almost all of LFMI’s proposed principles of a tax system. In addition, a budget reform was launched, providing for a balanced budget, the abolition of 18 extra-budgetary funds, increased transparency, and program budgeting.

Drawing on its policy reform conception, LFMI has over the past two years effected other major changes in tax policy. In response to LFMI’s strong opposition to inheritance and gift tax, close relatives were exempted from the tax, and the tax rates were reduced from 25 to 10 percent. Severe criticism from LFMI resulted in suspension of real estate tax for natural persons and a registration tax for industrial property. The Law on Foreign Investment was amended, scrapping all forms of tax relief for foreign capital and putting all businesses on an equal footing. As a result of direct pressure from LFMI and the capital market participants, the original 29 percent tax on capital gains was reduced to 15 percent, and a minimum tax-exempt level was set. The government and major business associations approved of LFMI’s proposals for revision of stamp duties to ensure that they are not used to obstruct market entry and reflect only the costs of government-provided services. In addition, the State Tax Inspectorate and the State Social Insurance Fund are proceeding with the consolidation of tax administration and information systems.

We have always recognised that sustainable political changes depend on people’s thinking, so to influence it has been our primary target. Evidently, people today relate the tax burden to state functions and public spending, oppose regulatory role of taxes and favour flat tax rates. A few years ago all this was considered to be questionable. Eight years ago it was unthinkable. We are also proud to say that LFMI has originated in Lithuania celebration of Tax Freedom Day, a day symbolising the greatest human value—freedom.

This paper presents a framework for tax and budget reforms developed by the Lithuanian Free Market Institute. The first part of the paper identifies all possible ways of lifting the burden of the state, indicating the place and role of the proposed tax and budget reforms. The remaining measures—revision of government borrowing as well as monetary and banking policies—are featured without proposing explicit policy actions.

The framework for the promoted reforms builds on LFMI’s consistent and focused efforts in conducting research, exploring the history and geography of taxes, and providing input to the policy making process and public debates in Lithuania. These activities have furnished LFMI with the expertise necessary to formulate the goals and principles of a pro-liberal tax reform. As you familiarise yourself with the present material, you will see that the direction and steps of the reform in question have not been prompted by fortuitous findings, personal preferences, or intuition. They draw on the principles which are consistent with that vision of a free market which we in Lithuania have been fostering ever since the restoration of independence. The spirit of and approach to the proposed reforms tally with the most progressive trends around the world.

The reform proposal draws a picture of tax and budgetary systems that would facilitate the accomplishment of the goals attached to pro-liberal reforms. The proposals may look extreme but they are simply coherent and logical. They delineate a sequence of action for an invariable pursuit of the aim chosen. The society’s and government’s readiness to effect change is an essential precondition, but it is worthless in the absence of a timely and exhaustive programme of what to do, why, and how. We believe our mission was to work out such a programme.

I. Lifting the burden of the state

direct, or paid in taxes

To lift the direct tax burden, or the level of taxes, a budget reform should be adopted, aiming at the privatisation of government functions, expedient financing, and a balanced and transparent budget.

indirect , or the costs of tax compliance and collection

For the indirect tax burden to be reduced, the current tax system should be replaced, enacting simple and accurate procedures for tax computation and payment as well as automatic tax administration that would occur regardless of the administrator’s will.

hidden, or the impact of taxes on the economy, market participants, and allocation of resources

To minimise the hidden tax burden, an economically neutral tax system must be installed, a system that would do the least possible damage to economic activity and perform, not a regulating, but revenue-generating role.

Tax and budget reforms should be combined with the revision of GOVERNMENT BORROWING as well as MONETARY AND BANKING POLICIES. The dilution of the value of money and the use of loans in financing government functions should be outlawed, for the burden and redistributive potential thereof are, not only cumbersome, but hidden from society. Since the issue of notes and coins can be delegated to both the central bank and commercial banks, adherence to a rule-bound issue of money and a hundred percent reserve requirement by commercial banks is equally essential. No loans should be taken on behalf of the state—neither domestically nor internationally—so that the burden of government spending would not be disbursed over generations.

If the burden of the state is to be reduced, changes must occur in attitudes to the role and functions of the state in economic affairs and social life. The curtailment of government powers and functions will lead to a steady decline in the cost of the state and unleash private sector opportunities. The adoption of the proposed reforms would enable a shift to a social order that will provide conditions for financing common needs and supporting the needy on a voluntary basis.

II. A framework for a pro-liberal tax reform

Defects of the Current Tax System

The existing tax system in Lithuania distorts the workings of the market, cripples individual motivations, fuels the expansion of the shadow sector as well as reduces and impedes the growth of real incomes. Tax policy initiatives launched over the past years in Lithuania resulted in a multi-level tax system wherein value created is taxed several times at different levels. A total of eighteen taxes, marked by ambiguous rules of application and costly administration, constitute an unjustifiably cumbersome tax burden. All of said taxes are used as tools for regulating the economy, either openly—through varying tax rules and tax rates, or covertly—through untransparent and personalised enforcement of laws. Plagued by a host of weaknesses and defects, the Lithuanian tax system calls for comprehensive reform.

The Purpose of the Reform

The purpose of pro-liberal reforms is to liberate creative human powers and provide conditions for the pursuit of well-being by means of efficient work, private ownership, and free exchange.

The purpose of a pro-liberal tax reform is to replace the tax system so as to minimise its destructive effects on market processes and agents, to cut down the cost of tax administration, and to ease and level the tax burden.

Anticipated Results

The adoption of the proposed reforms would lift the tax burden in all its forms, building an environment conducive to the pursuit of prosperity and allocation of resources to their most efficient uses. Tax cuts would unshackle opportunities for Lithuania’s goods and services to compete internationally and provide a natural, viable basis for competitiveness.

Principles of a Proliberal Tax Reform

Before launching a comprehensive reform, it is essential to formulate and justify the bedrocks of a new system. This approach will ensure a consistent enactment of the reform, preventing eclectic, incoherent decisions and attempts to copy the models adopted in other countries. The formulation of principles applicable to taxes would facilitate the building of a targeted tax code. The objectives attached to this reform proposal can be accomplished by employing principles derived from the traditions of classical liberalism.

The revenue-generating, not regulating, role of taxes. Taxes should be a tool, not for regulating the economy, but for raising budget revenues.
Economic neutrality. Taxes should have the least possible effect on economic decisions of market agents, regardless of the area of activity.
Fairness. The share of the cost of government should be equal for all tax payers, although it may be proportional during the transition process. Redistribution programmes, if any, undertaken by the state should be financed, not by means of tax policies, but from the state budget.
A declining tax burden. The tax burden should be reduced steadily by cutting government functions and trimming their financing.
Single taxation. One and the same taxable object should be taxed only once.
Transparency. The law must establish accurate and explicit rules of computation and payment of taxes.
Universality and automaticity. Taxes should be charged universally and at uniform rates, without special relief or favours for individual industries, entities, or products. The computation and payment of taxes should occur automatically, regardless of the tax administrator’s will or interpretation.
Inexpensiveness of tax administration. Budget revenues should be collected at the lowest possible cost of tax compliance and collection.

The Centerpiece of the Reform

The direction and steps of the reform were chosen based on the assessment of how different taxes conform to the principles of a pro-liberal tax system. The unrivalled tax in this respect is capitation, or poll, tax. Yet, replacing other taxes with capitation tax requires that society perceive properly the essence and purpose of government and be ready for change.

Value added tax (as a type of tax rather than its concrete form applicable in Lithuania) ranks second. A VAT-based tax system is vastly superior to another reform option—a tax code based on income taxes. The superiority of VAT is attributable to the fact that, if charged without relief, it prevents manipulations, is fairly easy to administer, and is generally recognised as a man’s tax. Borne by individuals, the burden of VAT is easy to assess. Direct income taxes provide opportunities for direct government interventions in economic processes. They are marked by complicated and costly administration, while tax-induced damage and distortions are hidden and insidious.

The central premise behind the reform is a shift to general VAT by phasing out direct income—both personal and corporate—taxes. Other taxes should be either repealed or redesigned so as to make the whole system conform to the principles at issue. The broadening of the tax base and passage of new rules should be outlawed. VAT would become the principal source of budget revenues, and other taxes would be earmarked, or specific, taxes. Earmarked taxes should be charged directly on the services (or functions) that continue to await privatisation. They would be paid only by the recipients of public services, thereby preventing redistribution. Tax rates should equal the costs of services, and the revenue raised should be allocated to finance the functions concerned. A tax system composed of general VAT and earmarked taxes is not an end in itself. It is merely a fully-blown and fully-fledged reform.

Reform Steps

Stage I. Urgent Tasks

The first stage of the reform is designed to address the most pressing problems confronting the current tax system and to lay the foundations for the removal of income tax and other taxes which fall short of the requirements attached to the proposed tax system.

The most imperative tasks of this stage are:

1. To replace the functioning tax laws and establish accurate, explicit rules of tax compliance and uniform tax rates.
2. To repeal tax breaks and outlaw the granting of tax relief by all tiers of government.
3. To revise the functioning laws so as:

– to ensure that corporate income tax is not charged on profits artificially fuelled by laws or regulations and to cut the corporate income tax rate;
– to cut the personal income tax rate and to set the upper earnings limit on social security contributions;
– to unify the collection mechanisms of social security contributions and income tax, and to lay the foundations for fully-funded private pension insurance;
– to provide conditions for “buying out” the right to run a business with a lump-sum tax and without incorporating a firm;
– to replace the procedure for the computation, payment and accounting of value added tax, minimising its destructive effect on tax payers;
– to repeal real estate, land, and inheritance and gift taxes;
– to replace the procedure for setting road tax by charging an annual fee on vehicle registration in the place of a turnover tax;
– to levy excise duties only on three categories of commodities—alcohol, tobacco, and petrol;
– to replace the procedure for estimating the customs value of goods and to cut customs duties with a view to phasing them out;
– to set the level of stamp duties based on the cost of services rendered.
Stage II. Long-term Tasks

1. With budget reform and the changes stipulated above in place, to reform direct income (corporate, personal, and lump-sum income taxes) taxes and other taxes that run counter to the principles of a pro-liberal tax reform.
2. To enact regular cutbacks in the level of social security contributions.
3. To finance all government expenditures, including social outlays, from a unified state budget.
4. To charge earmarked taxes on government services (functions) that have not been privatised.
5. To adopt reductions in the rate of VAT each year in the annual budget.

There are two alternative ways of eliminating direct taxes. One of them involves the removal of corporate income tax as the first step, with a subsequent abolition of the tax on personal income. The other approach consists of phasing out both taxes by steady and equal cutbacks in the tax rates until their complete abolition.

The first approach is more acceptable in the current circumstances. The recently enacted exemption of reinvested profits can be viewed as the first step towards eliminating corporate income tax. Yet, this approach involves serious pitfalls, such as the likelihood that the reform will be halted halfway. The outstanding tax burden on labour will stimulate artificial capital flows and underreporting of incomes, a prospect likely to spawn imprudent attempts to resort to other forms of taxation or revert to the current arcane and unwieldy mess of taxes.

The other alternative requires profound understanding of and commitment to steady reductions in the tax burden. Its coherency and anticipated results would gain broad-based public support, reducing the risk of the reform being terminated upon the replacement of government.

Replacing the Current Tax System

Corporate Income Tax

Defects and effects

Corporate income tax is clearly incompatible with the principles of a pro-liberal tax reform due to its nature as well as computation and payment procedures. Corporate income tax is invariably used as tool for government interventions in economic affairs.

The defects of corporate income tax:

– The procedure for cost recognition lacks transparency, causing a great deal of uncertainty regarding the tax base and leading to taxation of profits artificially inflated by laws and regulations.
– Corporate income tax is charged on projected profits, resulting in unjustified crediting of the state by enterprises.
– The ambiguous procedures for tax computation, couples with the existing tax breaks, render the tax easy to circumvent. Corporate income tax thus fails to serve its primary purpose of revenue mobilisation.
– Corporate income tax is invariably used in regulating the economy and therefore turns into a tool for government incursions and unfair competition.
– The administration of corporate income tax is very costly. Its yield fails to offset the cost of computation, payment, and administration of the tax.


– To replace the procedure for income and cost recognition and to establish through legislative amendments accurate, explicit and clear-cut rules of tax compliance.
– To terminate corporate income tax breaks and set a uniform proportional tax rate.
– To enact steady cutbacks in the tax rate.

– To repeal corporate income tax.
– Personal Income Tax and Social Security Contributions

Defects and effects

Personal income tax coupled with social security contributions account for 49 percent of marginal labour costs, causing widespread underreporting of real incomes. The overall tax burden on labour force is, at the level of cost planning, heavier than the tax burden on capital, thus violating the principle of economically neutral taxes. As the shift is made to new principles of corporate taxation and the tax on corporate income is abolished, the tax burden on labour will continue to stimulate artificial cash flows and underreporting of income. Since personal income tax overlaps VAT, thus breaking the principle of single taxation, its application, loaded with all its weaknesses, is completely meaningless. A complex, costly, and insecure procedure for income declaration is another compelling argument for the removal of personal income tax. When the tax on personal income is repealed, the state will finance redistribution programmes, if any, from the state budget.


– To charge a flat rate tax, eliminating all exemptions and deductions.
– To set the upper earnings limit on social security contributions.
– To combine cutbacks in personal and corporate income taxes, with a view to levelling the tax burden on labour and capital.
– To unify the collection of social security contributions and personal income tax, and the administration of their information systems.
– To lay the foundations for private fully-funded pension system by exempting payments to fully-funded pension insurance from personal income tax and social security contributions and by reducing the level of the latter.

– To repeal personal income tax.
– To finance all public spending, including social welfare programmes, from a unified budget.
– To replace the principles of social security and eliminate the current social security contributions.

Value Added Tax

Of all the functioning taxes, VAT is the most easy to redesign so as to make it consistent with the principles of a pro-liberal tax system. It functions automatically, prevents voluntary decisions, and can hardly be used as a regulatory tool. Today VAT is charged on the tax base embraced by corporate and income taxes.

Defects and effects

– The exemptions and breaks applicable to VAT encumbers its administration and impairs efficiency.
– The taxable value of imported goods is estimated wrongly, distorting their final prices. This is due to VAT being levied, not on the true price of the goods, but on administratively fixed “customs” price, which comprises customs and excise duties on top.
– The treatment and taxation of import and export of services is inadequate due to fallacious criteria.
– Elaborate and convoluted procedures for paying, remitting, and accounting VAT are destructive to economic activity and discredit the tax itself.


– To abolish VAT relief, except when the charging of VAT on services would prove excessively complicated or hardly workable.
– To formulate explicit definitions of import and export of services and to level the taxation of goods and services.
– To replace the procedures for accounting and remitting of VAT.
– To link the taxable value subject to VAT to its true price, excluding excise and customs duties.

– To adopt reductions in the rate of VAT each year in the annual budget.
– Road Tax

Defects and effects

The inadequate tax base of road tax turns it into a turnover tax. Road tax undermines businesses, especially ones that create value which accounts for a negligible part of the final value of a product.


Road tax should be an earmarked tax allocated for the construction and exploitation of roads. Taxable objects should be identified based on the criteria of road exploitation and should be in no way related to incomes generated. For this reason, road tax should be an annual registration fee on vehicles.
The annual registration fee on vehicles should be paid by the owners of vehicles, be they natural or legal entities.

Excise Duty

Defects and effects

Traditionally levied on luxury goods, excise duties have turned into a fiscal tool. Their application alongside VAT violates the principles of tax neutrality and universality. Excise duties provide an open invitation to contraband and illegal trade. Both international and Lithuanian experience suggests that excise duties discourage savings, divert resources from their most efficient uses, and fail to eradicate the habits they are aimed at. With the passage of general VAT, excise duties should be the subject of central concern.

The size of excise duties charged on imported goods depends on the customs value of goods including customs duty, while excise duties imposed on Lithuanian goods are fixed based on the sale price excluding VAT. For this reason, excise duties deepen the disproportion of prices resulting from the application of customs duties.


– In the absence of the prerequisites for a comprehensive reform, excise duties should be levied on three categories of goods—alcohol, tobacco, and petrol.
– To preserve the coherency of pricing, excise duties levied on imported goods should enter into the price of goods, excluding customs duty.

To repeal excise duties.

Customs Duty

Defects and effects

Import duties are intended to protect domestic producers. Yet, embedding import duty in the prices of imported goods entails prejudicial consequences for all—consumers and producers. Export duties are tailored to shield producers and consumers, but in reality they distort the competitive environment and benchmarks for production.

To pursue the abolition of import and export duties through international treaties and unilateral decisions.

Patent Tax

Defects and effects

This tax is inadequately labelled in Lithuania as a “patent” tax. In its essence, it is a lump-sum income tax charged on business activity as a substitute of personal or corporate income tax. For that reason, it may be called a lump-sum income tax. Its only distinction lies in a different form of payment. The tax is charged according to the area of activity, which is incompatible with its purpose of releasing tax payers from accounting requirements. The requirement to pay an additional lump-sum tax on incomes exceeding 50 thousand litas cripples the underlying idea of “buying out” the right to run a business. There is no case for differentiating the tax level and for imposing higher rates on businesses that require more skills and bigger investments.


– To eliminate the “patent” tax on businesses.
– To replace it with a lump-sum tax on incomes derived from commercial activity pursued without registering a firm.
– To set a flat tax rate for all commercial activities.
– To lift the requirement to pay additional taxes for running more than one activity.
– To repeal the charging of additional tax on the share of incomes exceeding a fixed level.
– To lift the accounting requirements relating to the payment of income tax

To combine the elimination of “patent” tax with the removal of personal income tax.

Interest on the Use of State Capital

Defects and effects

Calculating interest on registered stock capital is inexpedient. As the sole owner of state-run enterprises, the state fails to exercise its primary right to net profits, which could provide a significant source of budget revenues.


– To establish through legislative amendment the share of profits retained by state-owned enterprises until these are privatised.

To outlaw public ownership of economic entities.

Stamp Duty

Defects and effects

The rate of stamp duty and its application procedure is incompatible with its economic purpose. The tax serves as a tool for multiplying budget revenues and curbing competition.

The level of stamp duties should be linked to the cost of services rendered.

Real Estate Tax

Lithuania has real estate tax for enterprises and organisations, and land tax. Plans have been made to enact real estate tax on individuals. The destructiveness of real estate tax is attributable to the fact that it infringes upon the fundamentals of private ownership and undermines initiatives to run business activity. The yield of real estate tax usually fails to offset the efforts that go into its calculation and administration.

Defects and effects

– The tax must be paid without having real sources from which to pay the tax.
– The costly and time-consuming process of valuation of taxable assets fuels the cost of tax compliance and collection.
– Property valuation is based on directive indicators, resulting in unjustifiable tax levels.
– Tax breaks violate the principle of economically neutral taxes and enhance opportunities for tax evasion.


– To repeal real estate tax.
– Inheritance and Gift Tax

Inheritance and gift tax, just like other property taxes, encroaches on the institutions of private ownership and family, curbs individual freedom to dispose of private property, and discourages savings.

Defects and effects

– Inheritance and gift tax must be paid without having real sources from which to pay the tax.
– The same property is taxed as many times as it is inherited or received as a gift.
– A directive-based estimation of the value of property results in unjustified tax levels.
– The administration of the tax is costly and unwieldy, and the opportunities for evasion are numerous due to taxation of the most private of transactions.

– To eliminate inheritance and gift tax.
– A Framework for a Proliberal Budget Reform

Defects of the Current Budget System

The principles and rules of compiling the state budget, laid out in the Law on the Budget Structure, fall short of ensuring expedient, transparent and efficient public spending. The said principles and procedures were developed at the time when the main target was an independent budget, which was installed with scant regard being paid to what principles should be pursued on the revenue and expenditure sides. The questions about what functions the state should perform and what financing mechanism should be used remain unaddressed.

The approaches to compiling the state budget are twofold. One of them consists of allocating funds according to functions. The other approach involves expenditure assignment according to administrators of the money. Neither of the methods are utilised consistently.

Functions outlined in individual expenditure categories are far from uniform. Some of the functions contain outlays which have nothing in common with the execution of the said functions. Certain expenditure groups lack an explicit identification of their administrators. The classification of administrators varies in different expenditure categories.

The analysis of the budget structure points to two complementary conclusions. First, the unsystematic approach serves to obscure the actual structure of budget expenditures. Second, it triggers an imprudent and inexpedient allocation of public resources.

The Purpose of the Reform

The purpose of a pro-liberal budget reform is to redesign the state budget so as to create conditions conducive to lifting the tax burden and curtailing redistribution.

The Principles of a Proliberal Budget Reform

A balanced budget. To terminate the disbursement of redistribution over generations, the state should expend to the extent of revenues raised—that is, expenditures should not exceed revenues, and government borrowing should be outlawed.

Public resources should be distributed by the highest representative institution—the Seimas. The Seimas should lay out the functions of the state in a single constitutional law. Ministries, government departments and other governmental bodies should be allotted such an amount of money as is needed to finance their operational activities (salaries, premises, etc. according to estimates drawn). The expediency of financing any governmental institution should be determined, not by the ministry concerned, but by the Seimas in relevant budget legislation.

The expediency of financing. Funding should be extended for the tasks needed to accomplish the objectives specified by law, but not the areas “traditionally” financed by the state.

A declining tax burden and redistribution. Reductions in both the absolute and relative size of the state budget should be accompanied by privatisation of government functions. Revenues from trust-fund taxes charged on services rendered by the state should be used to finance the said services.

Transparency. Budget legislation should be accurate, explicit and exhaustive. It should outline all objectives, tasks and administrators of public spending.

The budget should reflect all government expenditures. All public revenues and expenditures—including special funds and loans as long as such exist—should be projected in the state budget.

Limited investment activity. Investments should be made, not from the state budget, but with incomes and funds generated by the private sector. Government investments are tolerable as long as they enable the pursuit of objectives set.

Public funds should not be spent on corporate welfare programmes. Public funds should not be used to finance corporate welfare programmes. The assets remaining under state control should be privatised.

The budget should be executed according to strictly established procedures. The distribution of government expenditures should be subject to exhaustive, detailed regulations as well as appropriate organisation. If revenues raised fall short of, or exceed, the projected level, the assignment of expenditures should be reduced or increased accordingly based on established procedures—proportionally to all recipients or in order prescribed by law.

Reform Steps

The Law on Budget Structure should establish a coherent, effective system of government spending with explicit expenditure objectives. Each year the annual budget should formulate tasks needed to accomplish the said objectives.
The law should specify:

1. functions that will continue to receive steady and adequate financing from the budget (national defence, law and order, international affairs, legislature, etc.);
2. functions that are traditionally delegated to the state but could be better performed in the private realm (e.g. general, professional and higher education, health care, culture). Such functions should be financed by way of subsidies, which should shrink and end with the commercialisation and privatisation of institutions concerned.
3. functions the financing of which is prohibited from the state budget and measures that should not receive public funding (e.g. financing of private and state-run enterprises and organisations, losses incurred by commercial structures, subsidies).

The law should:
1. prohibit budget expenditures in excess of budget revenues;
2. outlaw the issue of government bonds (temporary disparities between budget revenues and expenditures could be financed from short-term bank loans);
3. indicate the pace of trimming the state budget; and
stipulate clear-cut requirements for the structure of every annual budget.

It is essential to enact amendments to the Constitution replacing the provisions that are incompatible with the changes adopted and detrimental to an effective social order.