The Government. A Victim? No, the Culprit!

For the Lithuanian government, 1999 started in a shambles. Used to lavish spending habits, the officials have had a hard time since January trying to raise planned revenues for the national and social security budgets. It didn’t take long to name the culprits. The parliament blamed the finance ministry and the tax authorities for doing a bad job collecting taxes. The finance ministry and the tax authorities blamed entrepreneurs who, according to realists, had no money to pay and, according to populists, are inconsiderate of the welfare of society. Entrepreneurs blamed the government for meddling and the Russian crisis for derailing Lithuania’s largest trading routes.
We seem to have come full circle. The government is the victim, and Russia with its crisis is the culprit. Let’s just wait until the crisis is over and then simply continue in the same old fashion. No lessons learned, no conclusions drawn, no changes made. Wait until Russia recovers and then move on. Such attitudes have prevailed among the officials looking for ways out of the current financial predicament. Move on, but where to?
Government Entrepreneurship
Despite the ongoing privatisation of state assets, the image of the state as an entrepreneur remains popular and unmasked. The complete fiasco of the centrally planned Soviet economy did not shake the belief that the state can run business. It simply has to be a good government, economic and committed, they say. Some people didn’t believe in all this but still supported, or at least tolerated, certain decisions regarding government economic activity. The trust in entrepreneurial abilities of government manifested itself best when the government started to borrow and extend guarantees far and wide, and when the privatisation fund grew so much that the money appeared to be worth “employing.” True, there was some criticism, but not of state borrowing or liabilities – only of the scope of borrowing and the ways the money from privatisation was used. These two examples – state debt and the use of proceeds from privatisation – best illustrate government’s entrepreneurial capacities and their fiasco.
The restoration of lost savings seems to have provoked the strongest opposition from the supporters of state investment. Indeed, this move has many flaws. Its only advantage is that the money goes where it should go when state property is privatised – to the people. Only when the money from privatisation goes to private hands does true privatisation, as opposed to the sale of state property, take place. Paradoxically, compensation of depreciated savings is being criticised for the very reason that the money goes to private hands. It is claimed that this will augment imports, the current account deficit, and the country’s fiscal deficit. We must recognise, however, that proceeds from privatisation are used one way or another regardless. The only question is who – the state or the people – decides how it should be spent. If the money is used to finance state investments, it means that privatisation has not taken place, that the property has simply changed its form. At best, the money turns into new state assets.
The use of the proceeds from privatisation in 1998 and 1999 indicates that the worst happened with that part of the privatisation revenues that was not used for savings compensation (this portion appears to be much bigger than the one-third prescribed by law). The ideologists of state investment can triumph: Millions of litas have been spent who knows where; and no one knows if they will ever come back. Meanwhile, the most transparent use of proceeds from privatisation we have had so far – savings compensation – is still under attack, ostensibly because of a lack of money. True, the money from the sale of the Lithuanian Telecom is already gone. But privatisation continues and will be bringing in more money. The biggest problem remains with the revenues that are not used for savings compensation but squandered here and there. It would be better to end the use of the one-third of privatisation income for “economic programmes” once and for all and to allocate the future income from privatisation for pension reform. After all, savings compensation, being tied to a concrete source of income, is at least a transparent process with an end, whereas dissipating money on alleged state investments is not.
The champions of state borrowing are also supportive of state entrepreneurship, even if they do not want to admit it. In addition to the popular geographical pseudo-argument that governments borrow the world over, they claimed that government bonds are an excellent instrument for risk diversification; that they are safe because the state does not go bankrupt; that the money borrowed at bad times will be returned when things get better; that the money will be used for public investments and will help improve the business environment; that the debt limit (60 percent of GDP according to the Maastricht Treaty) has not been reached yet… And so on and so forth.
Lulled by such illusions, the government has kept erecting the pyramid of state debt that has been skyrocketing ever since T-bills were first issued. The ideologists of state borrowing consoled themselves by the hope that the favourable economic climate and satisfactory budget revenues would put off the collapse of the pyramid until “the next tenure.” Constant admonitions by LFMI that the state must spend according to real rather than paper revenues were ignored.
Today, the government has a chance to discover an axiom that the state is not a joint stock company and does not earn profits. That is why it should not be allowed to behave as if it possessed something of its own. Governments should not borrow because their liabilities will always be discharged by others; their debts will always be paid by the people. These will be today’s or tomorrow’s tax payers if the state repays its debts; or the holders of a devalued currency if the state, being unable to redeem internal debt, devalues its monopolistic currency; or the creditors of the government if the state simply fails to fulfil its liabilities and pay off the securities. The pyramid of state debt is crumbling, despite the fact that the debt ceiling set by someone out of thin air has not been reached yet. Every debtor has his limits. The government of Lithuania overstepped its own long ago, when it borrowed at outrageous interest rates, both domestically and abroad.
A good instrument of diversifying investment risk can be found without the help of the government, and not necessarily in Lithuania. Take the Estonian banks, for example. They willingly bought T-bills in Lithuania (which the Estonian government does not issue). Indeed, these are a good instrument, as long as they are not financed out of your own pocket. On the other hand, they are not that good and reliable, as the interest rates showed. Expensive to the debtor and risky to the creditor. In most cases, those who could choose whether or not to buy government securities chose not to. The biggest state creditors are banks and insurance companies, which, forced by government-adopted requirements for investment portfolio diversification and risk management, have no choice but to believe in the reliability of government securities. So far, the entire legal system regulating business activities has been constructed so as to stimulate crediting of the only agent – the government. Failure to repay the debt, like currency devaluation, would set off a chain reaction, only on a smaller scale.
State debt and flaws in state finances have reached a critical point. They can no longer be disguised by improving economic conditions nor justified by any global crisis. And it is not the Russian crisis nor “unsocial” entrepreneurs who are at fault. The government itself is responsible for its current financial predicament, and its next moves will show whether or not it will clear up the mess itself or leave it for others.
There’ Reforms and Reforms
Engrossed in managing its business, which is almost as large as all the remaining enterprises and businesses taken together, the government has failed to fulfil its primary duty. All time and resources have gone towards handling daily businesses’ affairs, such as providing supplies to state-owned companies and negotiating the sales of public property. Much-needed reforms of government functions, the tax system and the business environment have been postponed indefinitely. Tax hikes, new business regulations and controls did not give an edge to the market. Well, the government didn’t even seek that. What they sought was to refine the conditions for the officialdom rather than the business community. The government swelled and bulged so that eventually it began to trample and grind down people and businesses when, in reality, it needed to tighten up and restrict itself.
Plagued by growing taxes, oppressive bureaucracies, absurd and petty regulations, manoeuvring in the corrupt corridors of power, businesses exhausted all their reserves and tightened their belts back in 1998. Today, there is nothing left to squeeze out of them. The government has finally arrived where it should have started long ago. It should squeeze itself and do it now, given that all deadlines were missed long ago.
First, the government must cut its expenditures regardless of which budgets or funds they are financed from. The government must stop investing because it does not know and cannot know what people and enterprises need most. It doesn’t receive market signals because it is outside the market. The government should check the rise of state debt and start gradually reducing it. It must reject all requests, interests and good intentions because it has nothing of its own.
Yet, all this will be insufficient to iron out the inveterate problems in state finances. Government should simply realise that it has no business being in business. Whatever its disillusionment and the collapse of the ideals of “the state”, the government should at long last force out market reforms, and clear the path for individual freedom and initiative. No one says that entrepreneurs are flawless. But they pay for their mistakes themselves. An erring government is a much greater evil than an erring entrepreneur. Unlimited government simply costs too much for us to afford it.
In conclusion, reduction of state liabilities and business liberalisation cannot be delayed any further. Otherwise, Lithuania will get bogged down in the marshes of socialism. There may not be another “tenure” for market reforms.