2020-11-11
Present exceptional uncertainty conditions highlight the importance of responsible fiscal policy
The National Audit Office of Lithuania implementing the functions of the budget policy monitoring institution (Fiscal Institution) has carried out the assessment of the Draft Law on the Approval of the Financial Indicators of the State Budget for 2021 and submitted its opinion to the Seimas. The general government deficit is expected to reach 8.9% of GDP in 2020 and 5.7% of GDP in 2021. The expected revenue for 2021 will account for 37.3% of GDP, expenditure – 43.0%of GDP. According to the Fiscal Institution, Lithuania’s fiscal policy is counter-cyclical in 2020
The general government debt is projected to reach 47.2% of GDP in 2020 and will grow further in 2021 accounting for 50.7%of GDP. In addition to stabilising its growth, it is important to to set the direction of its reduction in order to increase fiscal space.
“Uncertainty remains – taking into account the deteriorating epidemiological situation and possible restrictions caused by quarantine, some of the existing measures or new measures may be needed to stimulate the economy in 2021. If negative risk factors become a reality, estimates of general government balance indicators may deteriorate for 2022–2023. Therefore, decisions on additional long-term liabilities that increase expenditure should be taken responsibly,” says Rasa Ibelhauptaitė, Chief Specialist of the Budgetary Policy Monitoring Department of the National Audit Office of Lithuania.
The Fiscal Institution assessed Lithuania’s general government fiscal multiplicator over the medium term. The analysis has shown that it can be less than 1. This shows that a 1% increase in general government consumption expenditure and investment could lead to GDP growth of less than 1%. Responsible planning of general government consumption expenditure and investment is therefore important in order to stimulate the economy.
The fiscal indicators presented in the updated fiscal risks scoreboard show high level of fiscal risk. Under exceptional circumstances, the general government deficit is increasing, but if the circumstances are no longer in effect, return to the requirements for the general government budgets will be necessary.
The general escape clause of the Stability and Growth Pact has been activated at the level of the European Union, allowing countries to deviate from the requirements for general government budgets. Exceptional circumstances were established in March and the application of fiscal discipline rules has been temporarily narrowed from 2020. The draft budget assumes that in 2022 the fiscal discipline rules will be applied in full.
The structural adjustment target for 2021 has not been set validly, as the structural adjustment targets are not set for the years of exceptional circumstances. With the exception of rules that are not applicable reasonably, the general government budgets for 2021 were drawn up in accordance with the rules of fiscal discipline set out in the Constitutional Law.