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About the area of activity

Since 1 January 2015, to ensure the monitoring of adherence to the rules of fiscal discipline and the implementation of tasks and to prepare opinions and reports laid down in the Law on National Audit Office, the National Audit Office established a Budget Policy Monitoring Department performing the functions of an independent fiscal institution.

With a view to ensuring the sustainability of general government finances and stable economic development, the following activities are carried out:

  • Assessment and approval of macroeconomic forecasts
  • Evaluation of adherence to fiscal discipline rules (ex-ante and ex-post)
  • Reasonableness of establishment of the structural adjustment target
  • Role in establishment of exceptional circumstances
  • Monitoring of fiscal policy and budget execution
  • Assessment of annual draft budgets
  • Promoting/enhancing fiscal transparency

To strengthen the performance and efficiency of the fiscal institution and to ensure that the opinions and reports submitted are in line with good practice, an Advisory Panel of foreign experts has been set up in the National Audit Office since 18 April 2016. The Advisory Panel reviews and evaluates opinions and reports drawn up by the National Audit Office in implementing the functions of the fiscal institution, and thus ensures the quality control policies and procedures. The members of the Advisory Panel, within their remit, provide advice, guidance, methodological and other assistance to the staff.

COOPERATION

The National Audit Office, in implementing the functions of the fiscal institution, actively cooperates with the members of EU independent fiscal institutions network EU IFIS, fiscal institutions of the Baltic States and other countries.

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News

Picture for Assessment of Lithuania’s Stability Programme for 2022: no specific measures to decrease expenditure projected for 2023-2025Implementing the functions of the fiscal institution, the National Audit Office carried out an assessment of Lithuania’s stability programme for 2022. 

The assessment notes that the medium-term projections for the general government balance presented in the preparation of this programme do not take into account part of the liabilities made by the State, such as increases in wages of healthcare and education workers as well as a need of further increase of the budget for defence up to 2.5 % of GDP . The National Audit Office, implementing the functions of fiscal institution, estimates that as a result of inclusion of these commitments the general government deficit will make 4.9 % of GDP in 2022 and 3.3 % of GDP in 2023, whereas it will decrease to 3.0 % of GDP in 2024 and 2025.

“Lithuania’s 2022 Stability Programme projects a reduction of the structural general government deficit from 3.0 % to 1.0 % of GDP for the period 2022–2025. The structural deficit is expected to narrow as net expenditure is expected to grow slower than the multi-annual potential GDP at current prices, but no specific measures are foreseen to ensure such a fall in the expenditure level between 2023 and 2025. Net expenditure growth over the medium term will largely be driven by expenditure on social benefits and compensation of employees. The impact of the share of capital expenditure is expected to be negative in 2023, which is not consistent with the direction recommended by the European Commission for the promotion of national investment," says Saulė Skripkauskienė, Head of the Budget Monitoring Department.

The level of general government revenue projected in the Stability Programme for the period 2023–2025 remains close to the projected level for 2022. It should be noted that the high level of general government revenues in 2021 was temporary, because it was driven by a favourable economic cycle, one-off measures and a low comparative base. Without taking into account the impact of one-off measures, Lithuania’s fiscal policy is expected to be pro-cyclical in 2022 and to change its direction and become neutral in 2023.

Without additional sources of revenue, the general government debt-to-GDP ratio will increase steadily over the medium term. The indicator will be increased by the primary deficit but mitigated by favourable dynamics in real GDP and interest rates. With interest rates rising over the medium term, general government debt management costs are likely to increase, while debt refinancing may require the replacement of available low-cost Government securities issuances by more expensive ones.

In view of the narrowed application of fiscal discipline rules, a retrospective assessment of compliance with fiscal discipline rules was observed in 2021. 

The Stability Programme is a document in which EU Member States present their fiscal plans for the next three years in April each year. These plans must comply with EU and national rules on fiscal discipline and help to prevent the emergence of fiscal challenges.


Assessment of Lithuania’s Stability programme for 2022

Picture for Long-term financial liabilities assumed on the basis of temporary revenue growth will increase the general government deficitImplementing the functions of the fiscal institution, the National Audit Office carried out an assessment of the revised Draft Law amending the Law on the Approval of the Financial indicators of the State Budget and Municipal Budgets for 2022 and submitted its opinion to the Seimas.

The Draft Law amending the budget 2022 foresees additional expenditure to compensate gas and electricity prices. Although the aim of this decision is to reduce inflation, this type of offsetting reduces incentives to rationally consume resources and stimulates domestic demand, leading to an increase in inflation rather than reducing it. In addition, the costs of compensating gas and electricity prices are distributed equally to all taxpayers, regardless of how much and what kind of energy products they consume. If these kinds of compensation packages are to be applied in the future, it is necessary to foresee the funds for such liabilities.

While the growth of general government expenditure in Lithuania was the highest in the European Union in 2020, the financial instruments chosen helped mitigate the impact of the COVID-19 pandemic and are likely to have contributed to favourable estimates of the economic indicators for 2021. Expenditure related to the management of the COVID-19 pandemic decreased significantly in 2021 (from EUR 2.6 billion to EUR 1.3 billion), but was largely replaced by long-term current expenditure, resulting in further growth in net expenditure of the general government. Net expenditure of the general government is projected to reach a record growth rate of 19% in 2022. The increase in the share of long-term expenditure is driven and will be driven in the future not only by rising defence spending, but also by ageing-related expenditure and other liabilities made. The National Audit Office, implementing the functions of the fiscal institution, points out that there are no additional sustainable sources of revenue foreseen for such expenditure growth in order to avoid deterioration of the situation of public finances.

“The increase in the ratio of general government revenue to GDP is temporary, linked to unsustainable growth in the sector’s expenditure. It is necessary to simplify the framework for fiscal discipline, to increase regulatory clarity, to ensure the benefit of compliance with fiscal discipline rules for citizens, i. e. to reduce the impact of economic business cycles and ensure inflation management,” says Saulė Skripkauskienė, Head of the Budget Monitoring Department.

In the opinion it is noted that general government revenue increased in 2021 and its collection from main taxes is above the multi-annual national average. This revenue growth is likely to be temporary as it is driven by one-off factors and a favourable economic cycle. Long-term financial liabilities assumed on the basis of such unsustainable and temporarily driven growth of revenue, will increase the general government deficit in the future. With the further delay of tax reform, fiscal challenges are not addressed, but are postponed to the future.

Opinion on the structural adjustment target set by the draft law on the approval of financial indicators of the state budget and municipal budgets and on the need for additional measures (in monetary terms) necessary to fulfil this target

Picture for Country‘s economic development will depend on the success of reallocation of raw materials import markets, while additional structural revenue would reduce the risk of price increases and financial burden in the futureThe National Audit Office, implementing the functions of the fiscal institution, has assessed and endorses the Economic Development Scenario for 2022–2025 published by the Ministry of Finance on 31 March, which is suitable for the preparation of Stability Programme of Lithuania for 2022. With increased uncertainty over the war in Ukraine, the risk remains that the scenario may not materialise with changes in internal and external conditions leading to a significant change in the economic situation. 

In the December 2021 Economic Development Scenario, the Ministry of Finance forecasted that the country’s economic development in 2022 would remain significant (3.7 %) but would be slower than in 2021. This was mainly driven by disruptions in raw materials and supply chains caused by the pandemic and by rising energy prices. These problems have been intensified by the war in Ukraine launched by Russia in February 2022.

Uncertainty about the further development and duration of the Russia’s war in Ukraine, the sanctions imposed by the European Union and the US on Russia and Belarus, and the impact of possible counter-sanctions, increase the risk of longer-than-expected disruptions in supply chains, higher prices of raw materials and energy resources, and lower expectations of business and households. 

“Lithuania’s international trade volume with Russia and Belarus has decreased since 2014, but the Baltic states have remained the largest importers from these countries in the European Union. In 2021, Lithuania imported mainly mineral fuels, wood and articles of wood, iron and steel, and fertilizers from Russia and Belarus. Imports of mineral fuels are important for energy-intensive industries in Lithuania, such as oil refining or fertilizer production. The changed geopolitical situation significantly increased the need to reallocate the import markets of energy resources and other raw materials", says Saulė Skripkauskienė, Head of Budget Monitoring Department. 

Internal risk factors relate to inflation, the sensitivity of the transport, construction and manufacturing sectors and the expectations of the households as well as business investments. Inflation, largely driven by energy and food prices, has the greatest impact on the purchasing power of pensioners and low-income earners. This may lead to an increase in poverty indicators and the need for additional assistance to support domestic consumption. Furthermore, there is a risk that the projects planned to be financed by the European Union will not be implemented, as the actual cost of project implementation may exceed the forecasted price at the time of design process. 

As the implementation of the tax plan for January–February 2022 does not exceed the multi-annual trend, the uncertainty regarding the collection of excess revenue is high. As the demand for current expenditure increases and revenue remains uncertain, it is important to look for structural sources of revenue that contribute not only to reducing the risk of increasing demand for borrowed funds, but also to managing the risk of debt increases. This may be important in the future if the geographical situation would lead to an increase in Lithuania’s debt service costs. 

The Economic Development Scenario prepared by the Ministry of Finance projects real GDP to grow by 1.6 % in 2022 and inflation to reach 9.8 %. Lithuania’s international trade is expected to be mostly affected by the war in Ukraine, but the country’s economic growth will be supported by household consumption expenditure and investment. Uncertainty is high, but as the geopolitical situation stabilises and markets for imports of raw materials are reallocated, real GDP growth is projected to accelerate to 2.5 % in 2023 and the slowdown in inflation - to 3.0 %. 

The updated heatmap of the Lithuanian economy shows that, against the backdrop of accelerating net inflation in Q1 2022 the temperature of the Lithuanian economy is likely to be higher than in 2021. 

The measures proposed in the package on “Mitigation of the Effects of Inflation and Strengthening Energy Independence” presented on 1 April 2022 are important and targeted in the situation faced by the lowest income households. Meanwhile, measures aimed at horizontal gas and electricity price compensation reduce incentives for rational resource consumption and stimulate domestic demand, which increases inflation. For this reason, additional general government revenue is needed. The demand for similar packages may be repeated, so the question of “who will pay” should not be postponed for the future. In addition to rising defence spending, ageing-related expenditure and other commitments will put pressure on long-term spending. 

Opinion on the endorsement of the Economic Development Scenario