Analytical instrument developed to strengthen evidence-based management of public finances

The Ministry of Finance has developed an analytical instrument to assess the impact of expenditure and revenue policy decisions on long-term sustainability of the country’s public finances. The debt scenario and sustainability measurement instrument will be extremely relevant for the transition to the three-year budgetary planning and will strengthen evidence and risk-based management of public finances.

Analytical instrument will be used when preparing draft State budgets and, if necessary, making significant tax and/or expenditure policy decisions.

“Although Lithuania is currently not facing challenges of debt sustainability – we have one of the lowest levels of indebtedness in the euro area – it is important to properly assess the potential long-term consequences of decisions when planning general government finances, especially in view of the challenges posed by an ageing society. The developed analytical scenario modelling instrument will enable responsible budgeting and properly weigh the consequences of revenue and expenditure decisions on public finances not only in the short term, but also in the medium and long term”, says Minister of Finance Gintarė Skaistė.

The Ministry of Finance by using this instrument prepared the first Assessment Report on General Government Debt and Financial Sustainability (available here). The report states that, depending on the orientation chosen for general government fiscal policy – revenue and expenditure, the debt dynamics of the country and its sustainability may be very different. The assessment illustrates how different policy orientations in the long term (in 2027-2070) may lead to very different debt levels and estimates of sustainability indicators.

The report presents several types of scenarios: compliance with fiscal discipline rules, unchanged expenditure and revenue level policies, unchanged policy and additional costs of an ageing society, convergence of primary general government expenditure and revenue (% of GDP) with the EU average and other general government revenue growth scenarios with expenditure growth scenarios. At the same time, all scenarios look at the wider field of alternatives and provide guidance to policy makers in finding the most favourable combination of fiscal policy measures.

Among the scenarios modelled in the Assessment Report on General Government Debt and Financial Sustainability are those scenarios where rising expenditure is not covered by long-term sources of revenue. Over time, high or recurrent general government deficits could lead to high interest expenditure and exponentially rising debt.
The report notes that in order to take into account the long-term challenges and respond to the growing needs of society, it is of the utmost importance to plan general government finances considering both the amount of expenditure and possible revenue measures.

The published report not only implements the provisions of the Government Programme related to the Government’s ambitions to care about long-term sustainability of Lithuania’s general government finances but is also relevant in preparation for medium-term – three-year budgetary planning and implementation of the new risk-based EU fiscal framework (after final agreement between Member States is reached).