2022-09-20
The country’s economic outlook for 2023 is particularly challenging to foresee
The National Audit Office, implementing the function of fiscal institution, assessed and endorses the Economic Development Scenario for 2022–2025 published by the Ministry of Finance on 12 September as suitable for the preparation of the draft budget for 2023. The cancellation of the exceptional circumstances underlying the COVID-19 pandemic, initiated by the Ministry of Finance, and the compliance of the geopolitical situation and its possible negative impact on the financial position of general government in 2022 with the definition of exceptional circumstances is also endorsed. Deviations from the budgetary requirements for the general government are allowed during the period of exceptional circumstances.
After strong economic growth in early 2022, the growth slowed significantly in the second quarter of this year. In the opinion of the National Audit Office it is noted that the tense situation in energy resource markets and the rapid increase in consumer prices, the deteriorating expectations of business and consumers, and the worsening economic prospects of Lithuania’s main international trading partners will create difficult conditions for the country’s economy to grow at the end of 2022 and early 2023. In the September Economic Development Scenario, real GDP growth is projected at 1.6 % in 2022. Slower growth rate of the economy is expected in 2023. The scenario is in line with the assumptions outlined, but the National Audit Office notes that, while the above-mentioned challenges remain, it is possible that the Lithuanian economy could shrink in 2023.
“In August–September, the forecasts of all institutions publishing GDP projections of Lithuania differed significantly. This confirms that currently it is particularly challenging to foresee the economic perspectives for 2023. The increased uncertainty in macroeconomic development and the unprecedented rise in energy prices call for the space for national fiscal policies to react promptly to the challenges that have arisen. It is not known how long prices of energy resources will remain high and therefore non-targeted financial support measures can become unbearably expensive. It is important to focus more on finding long–term solutions, such as investing in renewable energy sources. In addition, the growing long–term expenditure needs to be kept in mind," says Jaroslav Mečkovski, Principal Economist of the Budget Monitoring Department.
International institutions note that targeted measures supporting the most vulnerable groups in society are justified in order to manage risks from public finances. However, horizontal measures, such as tax cuts or various compensations, are appropriate in order to respond quickly to the changed situation, but should not last for more than a few months due to the high budgetary burden and the aim to reduce energy consumption. Measures that do not directly affect the general government balance, such as guarantees or loans, could contribute to a significantly lower deficit and debt at the end of medium–term.
Favourable economic growth and low interest rates from 2020 till the beginning of 2022 prevented the public debt-to-GDP ratio from growing as expected. The tense current situation shows that these favourable factors may be less likely to occur in the future. As the need for various support measures increases, general government debt is likely to increase and it is therefore important to foresee a strategy for debt reduction in the future.