The public debt grows, but it does not imply the necessary tax changes: it only sees a danger in the repayment

Through the years – jumped

In 2019, general government debt accounted for 35.9 percent of GDP and increased to 47.3 percent of GDP during the year.

The Deputy Minister of Finance, Gediminas Norkūnas, said that such increase in debt last year was due to the decisions of the Government to increase indebtedness in the face of the uncertain situation of the coronavirus, the need to support the economy during this difficult period and provide the measures necessary to manage the pandemic.

Of the money borrowed last year, he said 3.2 billion. The euro was used to stimulate the economy and finance measures to reduce the effects of the coronavirus, while the state budget did not raise around 900 million euros. income in euros.

According to the Lieutenant Governor, a part of the debt is refinanced each year and compliance with the relevant risk limits ensures the management of this risk, that is, the repayment of the debt.

“In 2020, the relationship between short-term debt by residual maturity and total debt was 9.5 percent. This indicator shows the proportion of debt that will be refinanced during the year,” he explained.

According to G. Norkūnas, the state debt could decrease if the state budget were a surplus and if this surplus was used to pay the debt and not to accumulate reserves.

“A part of the debt is repaid every year, that is, it is refinanced with borrowed funds. In the program of the Government of the Republic of Lithuania, one of the initiatives is to develop a public debt management strategy to return to the optimal level long-term public debt.

Managing the pandemic and the economic recovery would allow us to return to the rules of fiscal discipline and change the trajectory of the level of indebtedness, ”he said.

Asked about how realistic it is that paying the debt will require a change in the tax system and tax increases, the deputy minister said that the tax system and the issue of changing it are directly related to fiscal policy and general government balance.

The danger is the global crisis

Economist prof. Rimantas Rudzkis assured Delfi that he does not see much danger in the current situation in Lithuania due to the significant increase in public debt, but, as he warned, if the debt grew so much every year, it would not be a good sign.

“Last year was the year of COVID-19, when the pan-European and global economies were in decline and domestic policies were adopted around the world to dramatically increase public spending to mitigate the effects of the coronavirus. Even the International Monetary Fund (IMF) ), who has always campaigned for a strict public finance policy anyway, has done the opposite this time and recommended spending increases to avoid a new crisis.

Lithuania did the same as other countries, borrowing and putting money into the economy. 2019 was almost 36% at the end of the year, and in 2020 we ended up with just over 47%. GDP debt. Yes, it is a big leap, but it is unique, “said the economist.

According to him, in 2021 the situation should be a little different and it will probably not be necessary to borrow as much.

Comparing current loans with those of 2008, R. Rudzkis calculated that the situation was completely different at that time. As he explained, then our country did not belong to the eurozone, so it was loaned at 9.4 percent. interest rates, which are now zero, and the economy in 2008 had fallen 15 percent, now just one percent.

“And the current 47 percent of GDP debt in the European context is a very small amount. Most countries have several times the rate.

“I think our economy will start to grow and the debt service will be zero,” he said.

It is true that the economist warned of possible dangers.

“I see the only danger: if there is a serious world crisis. Then it will be very bad: the economy will fall, income will fall.

If inflation rises, central banks will start raising interest rates. They will not do it immediately because they are afraid of provoking a crisis, but they will not be able to do it forever, but if inflation in Europe is 3-4%, there will be pressure from the Nordic countries.

Of course, let’s not forget that inflation will reduce our debt, but the threat that if it does, it will force central banks to raise interest rates, rising interest rates will have two negative effects: debt service expensive and, secondly, it is likely to provoke a global crisis, ”he warned.

Debt will be repaid by a growing economy

When asked how Lithuania could pay the debt, the economist said that like the United States, Germany, France, Italy or other countries, there was no way.

“Nobody in today’s world is paying debts.

They all refinance them. When it comes time to trade debt securities, new ones are issued. I borrow again to pay off my old debt. Everything is determined not by the need to pay off the debt, but by the costs of debt service ”, explained R. Rudzkis.

“It just came to our attention then. The denominator of GDP will grow, the economy will grow, inflation will increase, the value of the loan will decrease. If the economy grows, everything will be fine.

The state should now take care of two things: economic growth and that there are no excessive inequalities of wealth. “,” Added the economist.

It is necessary to change the tax system, but not due to indebtedness

Although public debt grew at a high rate last year, it will peak this year, according to Swedbank chief economist Nerijus Mačiulis, reaching around 51 percent. of GDP.

Speaking about the payment of debts, he explained that the state is not a company or a home that sooner or later has to pay debts. According to him, generally all states refinance debts when the time comes to redeem the bonds, that is, one buys bonds and the other issues them.

“It does not mean that the state should suddenly reduce its debt.

Of course, the state can find itself in a situation like Greece, where international creditors are reluctant to lend and there is no other way than to raise taxes and reduce spending and thus address the issue of public debt. This is very, very far from Lithuania, ”he said, but added that it is necessary to change the tax system in our country and it has nothing to do with arrears.

“The tax system must be unrelated to the pandemic, these are unrelated issues,” said N. Mačiulis.

In his opinion, the budget deficit will contract naturally and will be linked to economic growth, increased employment and the start of operations in the now frozen sectors.

“This means that the tax reform must take into account completely different criteria and address completely different issues than the size of the debt,” he said.