Public finances to be independent of politics cycle


2012 10 03


Vilnius, October 3. The Government  approved the draft Republic of Lithuania Law on Stabilising Budgetary Policy and a block of amendments to its secondary legislation submitted by the Ministry of Finance.

The block of the Laws aims at establishing a long-term base to maintain sustainable public finances independent of the politics/electoral cycle, and to create all prerequisites that the cautious management of public finances and debt reduction would not be a choice, but a duty.

The draft Republic of Lithuania Law on Stabilising Budgetary Policy aims at ensuring that State Treasury reserves are accumulated which, after the start of the hardship, could be used to finance government functions. Such reserves could be also an important element, if upon demand, negotiations on borrowing at cheaper interest rates than the ones on the market with international financial institutions would be held.

The demand for regulating the procedure for accumulation of the State Treasury reserves for crisis management was particularly obvious after the hardship in 2008. The attempt to secure efficient and stable financing of government functions was made as far back as 2002 by establishing the Reserve (Stabilisation) Fund. However, incomprehensive legal regulation of the activities of the Fund did not secure that the resources accumulated in the Fund were adequate to the resources of the State reserve necessary for maintaining economic viability during the financial crunch in autumn of 2008.

According to the draft Law on Stabilising Budgetary Policy, upon emergence of economic possibilities (especially – upon necessity to tame inflationary pressures), the accumulation of the State Treasury reserves for hardship management will start. The main purpose of the reserves would be to finance public services during economic hardship by avoiding or minimising debt growth. The resources could also be used to increase the share capital of the Bank of Lithuania or to maintain the State debt below the critical financial stability margin and to cushion effects of external economic crises on Lithuanian economy. The accumulation of such a reserve would create prerequisites for further enhancement of financial markets’ confidence in stability of Lithuanian public finances. Under increasing confidence of financial markets, general interest rate will decrease, private investments will increase, and better paid jobs will be created for the residents.

The block of the Laws would allow to avoid severe side-effects faced during the latter hardship: the implementation of pro-cyclical policy during economic heating periods, when temporary revenue is transformed into fixed costs or permanent tax reduction and creates “the illusion of welfare”, becomes painful pro-cyclical saving during economic recession.

Though it is suggested that draft laws would come into force from 2014, in fact, transfers to the reserve account could be planned only when no borrowing will be necessary for this purpose. However, the requirements planned for budget policy will be applied from the date of the Law coming into force.

To secure the management of the reserves from politics, it is suggested to assign this function to  Bank of Lithuania, which is an independent institution and has extensive experience in managing official national reserves. 

The block of the Laws also envisages the requirements stating that in the election year, during the period of the new Government formation and at the beginning of its work, the State Treasury would dispose of the sufficient amount of resources. It will help to ensure financially smooth change of governments by avoiding the situations, when the newly formed Government starts its work by inheriting only current debts without any financial resources.

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