2022-05-05
Long-term financial liabilities assumed on the basis of temporary revenue growth will increase the general government deficit
Implementing 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.