The budgetary objective approved by the Seimas reminds to “tighten the belt”: it ensures that it will not be met

The Seimas resolution adopted on Tuesday: In 2022, the structural government deficit will not be able to exceed 1 percent. Gross domestic product (GDP). This is an extremely low indicator, considering that a deficit rate of 7.3 percent is planned for this year alone.

Economists estimate that 1 percent. it would be almost impossible or even risky to reach this indicator.

Tadas Povilauskas, an economist at SEB Bank, estimates that according to current forecasts, it will not be possible to approach a balanced budget next year, pensions or benefits will be approved according to indexation, salaries will increase and more funds will be needed.

Swedbank chief economist Nerijus Mačiulis hopes that next year’s rapid economic recovery will help the state manage its negative finances.

However, the chairman of the Budget and Finance Committee of Seimas Mykolas Majauskas assures that no one intends to save next year: the resolution is adopted only because it is required by law, but at 1%. no one will look at the gauge.

The Ministry of Finance also considers the approved goal to be a formality.

Majauskas: it would be very difficult to reduce the deficit so much and it doesn’t make much sense

M. Majauskas explained that the contradictory resolution of the Seimas arose due to the obligation enshrined in the Constitutional Law for the Implementation of the Tax Treaty.

“It just came to our notice then. 2009 The experience of the crisis shows that fiscal consolidation in times of economic recession reduces aggregate demand and is likely to cause significant economic damage. Therefore, this year we plan to increase spending only through the inclusion of a part of the funds from the EU Economic Recovery Fund ”, assures M. Majauskas.

He explained that the law requires that a medium-term structural deficit goal be established before March 15 of this year.

According to this law, the Seimas must determine the structural deficit of the general government sector, which must not exceed 0.5 percent. GDP in cases where the public debt / GDP ratio is less than 60%. The structural deficit can be set higher, up to 1%. GDP ”, says M. Majauskas.

Therefore, the Seimas has set the goal of the maximum possible deficit that the current public debt allows to reach, that is, 1 percent. indicator. 2021 the public debt will represent about 52 percent. GDP

“Already in this year’s draft budget, the structural deficit for next year was planned to be significantly higher: 2.1 percent. Taking into account that the structural deficit is expected to be extremely high this year, up to a 6.4 percent, which will be reduced to 2.1 percent per year. It can be very difficult and I don’t know if it makes a lot of sense, “says M. Majauskas.

He noted that the deficit will decrease, due to the fact that in 2022. Currently, significant amounts of economic subsidies are foreseen for companies currently affected by the pandemic.

“The deficit will also decrease due to the recovery of the economy. However, these factors may not be sufficient, so it is likely that it will be necessary to adjust the forecasts in anticipation of a greater structural deficit”, says M. Majauskas.

The EU Economic Recovery Fund provides Lithuania with around € 2.2 billion, a significant part of which will go towards investment later this year.

“We will be able to name specific figures when the Government approves and presents the revised budget project to the Seimas,” said M. Majauskas.

Ministry of Finance: it will not be necessary to follow the rules

The Ministry of Finance also explained that the approved goal complied with the provisions of the law, but that it was not necessary.

“The medium-term objective set by the Seimas for 2022 is not the significance of the government’s structural balance, which should be achieved in 2022,” says Deputy Finance Minister Mindaugas Liutvinskas.

According to him, the European Commission (EC) applies a general exemption from the Stability and Growth Pact for the period 2020-2022, when EU countries are not subject to the EU-level fiscal discipline rules of the Stability Pact. and Growth (SGP).

“Currently, in the presence of high uncertainty related to the COVID-19 pandemic, setting a medium-term goal is more of a formality, as the EC has a global SAP exemption and Lithuania has exceptional circumstances during which the application of the fiscal discipline rules are suspended. This means that in practice the medium-term goal is not being applied at this time, as is the mechanism to address it, “says the vice minister.

The EU’s economic recovery and resilience plan is currently under development, which provides for more than € 2 billion. additional costs. These expenditures will be neutral to the budget balance, they will not increase the deficit, but will help promote economic recovery.

In 2023, it will return to more sustainable budget deficit rates, with minimum requirements from the European Commission. The targets will then be set for a period of three years, instead of one, as was customary in the past under normal circumstances.

Izgorodin: impossible to achieve such a goal, there is a risk

Aleksandras Izgorodinas, an economist at SME Finance, says that it is really impossible for Lithuania to reach 1%. structural deficit.

“It’s theoretically achievable, but he has a very stellar smile. It will all depend on how fast the Lithuanian economy recovers, and especially how fast domestic demand recovers; the income side of the budget is more dependent on this aspect. More than 50 percent of the fiscal revenue of the budget, as has historically been the case, consists of VAT and excise taxes, ”says A. Izgorodin.

See two possible scenarios: one bright and the other threatening.

“The good news is that consumption can really pick up, as the population now has around $ 18 billion. In the form of bank deposits in euros. But the question is whether residents will really start spending and consuming that money. A lot. It will depend on the progress of the vaccination, of COVID-19 ”, says A. Izgorodin.

According to him, things could have gone worse if the fourth or fifth wave of COVID-19 arrives again next year.

“It can undermine consumer expectations and they may decide to focus even more on saving than on consumption, even though they really have money to consume. If that risk scenario occurs, the budget tax revenue will fall accordingly, and the budget spending status will remain more or less fixed and even higher due to financial support. I think that it is really impossible to achieve such a goal, “says A. Izgorodin.

Povilauskas: this is not a commitment

T. Povilauskas, economist at SEB Bank, assures that the approved deficit target is not a compromise, the European Commission will not evaluate the indicators achieved due to the current pandemic next year.

“The budget for next year will be set as much as necessary and what the Government and the Government will see”, T. Povilauskas is convinced.

SEB Bank forecast in January that the budget deficit would reach around 3.5% next year, which would not allow it to reach the target set.

“According to our January forecast, we would not reach -1%. GDP. There is still a lot of water to swim in by the end of next year and it is not yet clear what it will really be like. Everyone who remembers the 2008-2009 crisis, he thinks that a sudden transition from a large deficit to a balanced budget is basically impossible, ”says T. Povilauskas.

According to the economist, the state simply has nowhere to slash spending, while revenue growth, while fast enough, will not be enough. SEB Bank expects more than 4%. economic growth next year.

“Both last year and this year, the salaries of public sector employees were growing, pensions were growing by 9% last year and this year by more than 10%. But all of this is done with borrowed money. Looking ahead, until 2022, the formulas suggest that pensions will have to grow similarly, with public sector workers also expecting wages to rise, albeit at a slower pace. There will simply be nowhere to cut costs, ”says T. Povilauskas.

Mačiulis hopes the budget will be covered by the economy; now no savings should be made

Swedbank economist N. Mačiulis expects that already in 2022, the growth of the Lithuanian economy will significantly exceed potential and this will improve public finance indicators.

“The most likely scenario is that the majority of society is vaccinated, the sectors that are now frozen are recovering, such as accommodation, restaurants, leisure and services. There will probably be no additional need for the various business rescue measures or mitigating other consequences of the pandemic. It is probably not necessary to plan for a very large budget deficit, ”says N. Mačiulis.

He hopes that Lithuania will not have a large deficit next year.

“Lithuania is one of the least affected by the pandemic both last year and this year. I would say that the desire to balance public finances as soon as possible and not to approve the budget deficit further would be very welcome,” says N. Mačiulis.

However, the economist assures that there should be a clear dividing line between this year and next: this year the state cannot save until the economy is restricted by quarantine.

“It is clear that the support measures must remain and must not be, I do not want to say a stingy word. But support should not be reduced until the second wave of the pandemic and the second quarantine are over and a large section of the public is vaccinated. Clearly, the state is running a large budget deficit and all the bailouts come from borrowed funds. But we must also admit that borrowed funds do not currently impose a burden on future generations, because they borrow at zero and negative interest rates, ”says N. Mačiulis.

It notes that Lithuania will receive a large amount of money from the EU for investments in economic transformation, digitization and green areas, and additional budget support from the EU will be provided for seven years.

“This year, it must be agreed that there will be a budget deficit, it is necessary to spend money so that we are ready for a rapid economic recovery, probably in the second half of this year and especially next year”, N. Mačiulis notes.