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Final Budget Assessment – After the New Government Decisions

Date

2016 11 21

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The European Commission (EC) has announced its opinion on the euro area Member States’, among others also Lithuania’s, Draft Budgetary Plans for 2017. It was stressed that Lithuania’s public finances are on the right path; however, the Commission noted also a certain risk concerning compliance of the budget for 2017 with the requirements under the Stability and Growth Pact.

So far the Commission has not assessed the implementation costs of one of the key elements of the Lithuanian budget – social model – as possible to be deducted in the assessment of general government financial indicators following the fiscal discipline rules under the Stability and Growth Pact. In 2017 these costs would make up 0.6% of GDP of the projected general government deficit of 0.8% of GDP. However, the Commission notes that Lithuania has sufficient fiscal space to make use of the temporary clause in pursuit of the medium term objectives.

“The Stability and Growth Pact foresees a possibility for the European Union countries, which implement important structural reforms, not to include their costs in the assessment of the public finance balance. Lithuania has already addressed the European Commission with this issue; however, we received an answer that the social model will be assessed no earlier than the new Government of the country repeatedly provides the European Commission with the Draft Budgetary Plan for 2017 and alongside with it also the information on the social model – an important structural reform of social and labour market areas, the implementation of which would contribute to the  long-term general government sustainability and strengthening potential economic growth as well as would reduce risk of non-compliance with the requirements for 2017 under the Stability and Growth Pact “, said Acting Minister of Finance  Rasa Budbergytė. She also noted that the European Commission welcomes the improved tax administration measures taken by Lithuania and stressed the necessity also further to pursue responsible budgetary policy.

In autumn macroeconomic forecasts announced on 9 November the European Commission projected moderate Lithuanian economic growth and stressed that public finances of the country are on track to achieve fiscal targets. The deficit of public finances projected to make up 0.8% of GDP, in the European Commission’s opinion, is in line with the deficit target of the outgoing Government. It emphasized that small increase in taxes (e.g. excise duties) and better tax administration roughly match lost revenues due to the increase in non-taxable income and the reduction of social insurance contributions.

The projections of the structural general government deficit by the European Commission and the Ministry of Finance are similar: according to the EC forecast, it will represent 1.4% of GDP, according to the Ministry – 1.3% of GDP, and it will be the same as the projected average structural deficit of the whole euro area.

The Ministry of Finance reminds that Lithuania provided the European Commission with detailed information on the social model (structural reform of social and labour market areas) and following the procedure requested to assess its compliance with the Stability and Growth Pact. It is envisaged that the aforementioned structural reform alongside with the increase in non-taxable income rate will significantly contribute to increasing economic growth possibilities and reducing social inequality, thus implementing the European Council recommendations for comprehensive reorganisation of the pension reform and labour market reform and creating better conditions for employment.

Additional information:

In drafting the Law on the Financial Indicators of the State Budget and Municipal Budgets for 2017 Lithuania followed all fiscal constraints set by national and EU legislation and strategically uses the possibilities provided for in legal acts to carry out the necessary structural reforms and reasonably increase the general government structural deficit for 2017.

The projected nominal general government deficit (0.8% of GDP) and the structural deficit (1.3% of GDP) for the next year are in compliance with the fiscal constraints established by the Lithuanian and EU legislation in case the increase in expenditure is attributed to funding of the social model as it is planned in the draft Budget submitted to the Seimas of the Republic of Lithuania (Parliament).

Press release by the European Commission.

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