2022-10-28
Economic stimulus is needed, but measures should be targeted at the most vulnerable groups in society
The National Audit Office, implementing the functions of the budget policy monitoring authority, assessed the draft Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets of the Republic of Lithuania for 2023 (hereinafter - the draft budget) and submitted its opinion to the Seimas.
The energy crisis caused by the geopolitical situation has led to an increase in electricity and gas prices, which is why the draft budget provides support measures for the population and businesses.
"International organisations recommend short-term measures targeted towards the most vulnerable groups in society. In our assessment, most of the temporary energy-related measures in the draft budget are not well-targeted. The long-term measures foreseen in the draft budget will continue to contribute significantly to the growth of long-term expenditure not covered by revenue. Such expenditure will amount to 1.6% of GDP in 2023, compared to an average of 0.9% of GDP in 2017-2021. Rising interest rates will make it more expensive to finance deficits and refinance existing liabilities, risks to economic developments remain significant, so it is crucial that decisions to increase spending and reduce revenues are justified," says Rasa Ibelhauptaitė, Principal Economist at the Budget Monitoring Department.
The fiscal institution, the functions of which are implemented by the National Audit Office, projects that the general government deficit in 2023 will be close to the deficit specified in the draft budget and will amount to 4.9% of GDP. However, it is emphasized that it could be higher due to emerging risks. For example, some of the support measures foreseen in the 2023 draft budget are planned for the first half of 2023 only. There are risks that they could be extended for a longer period. In addition, geopolitical tensions in the region and their escalation may lead to higher spending needs for national defence and security. A change in the economic environment could lead to a more sluggish economic development, which would put pressure on additional spending and reduce general government revenues.
Under the conditions of exceptional uncertainty, a strong stimulus to the domestic economy is projected in 2023 without the application of fiscal discipline rules. As rising interest rates lead to more expensive deficit financing, it is important to note that, in the face of rising expenditure that is not covered by long-term revenues, specific measures are needed in the future to achieve a reduction of the general government deficit in the period 2024-2025.