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Lithuanian Government trims public spending, lowers profit tax rates

Date

2009 10 19

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In the teeth of the global economic downturn, the Lithuanian Government has approved Year 2010 budget - decisive measures for reducing public sector spending while maintaining expenditures at a sustainable level.

Spending cuts, which include trimming public sector wages and social benefits programmes, helped to consolidate around 2 bln. litas and limit 2010 state sector budget deficit to 5,183.7 mln. litas, or 6.21 percent of GDP.

According to the newly approved 2010 budget plan, the Government expects revenues of 13,152 mln. litas in 2010 (not including EU support funds), a drop of 1,245 mln. litas from 2009. Public expenditures for 2010 are foreseen at 18,328 mln. litas, 891 million less than in 2009.

The draft budgets of general government are prepared following the scenario that GDP will be decreasing by 18.2 per cent in 2009 and by 4.3 per cent in 2010. Economic growth is foreseen for 2011, when the planned real GDP growth rate will constitute 4.5 per cent.

EU structural support funds will rise to 7,891 mln. litas, an increase of 1,474.5 mln. litas over 2009. These funds will be invested in all sectors of the economy and lead to a significant boost in competitiveness. Total budget revenues, including EU support funds, will amount to 21,044 mln. litas. 

The progressive nature of the cuts was carried also in Social security budget, targeting of social assistance through stricter eligibility requirements and thus helping to protect the most vulnerable from the brunt of the adjustment. The proposed increase in social security contribution by 2 per cent will strengthen the link with accrued benefits. These reforms, combined with the planned reduction in non-wage related current outlays will generate savings of about 3½ percent of GDP in 2010.

Thus both state and social funds spending cuts brings consolidation amount to 5 billion litas, or approximately 6 percent of GDP.

Just three areas of government spending are expected to grow in 2010: funds allocated for the co-financing of EU-backed investment projects (up 435 mln litas); healthcare funding (up 337 mln litas due to a fall in receipts brought on by a drop in personal income. Though structural reform started in the area of health care will help to maintain additional savings of around 300 mln. litas already in year 2010).; debt servicing costs (up 589 mln. litas owing to higher borrowing costs to finance the deficit).

The steps to improve the efficiency of health, education and social care spending being planned and thus will yield savings.

In October, Lithuania successfully raised $1.5 billion through an international debt sale, a sign of investor confidence in the Government's management of the economy.

Lower corporate taxes

The Ministry of Finance believes it is in Lithuania's best interests to return to having one of the lowest corporate tax levies in the EU.

According to the budget plan, the 2010 corporate profit tax rate will be reduced to 15 percent, down from 20 percent in 2009 (and 7.5 percent for small businesses, down from 15 percent in 2009.)

According to research carried out by the Ministry, these new rates will not have any significant adverse effects on tax receipts.

These tax reductions will promote entrepreneurship by Lithuanians and, importantly, send a strong welcome signal to potential foreign investors.

 

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