2023-05-08
Corrections to the tax system are essential for quality public services
Implementing the functions of the fiscal institution, the National Audit Office carried out an assessment of Lithuania’s Stability Programme for 2023. In 2022, the rules of fiscal discipline applied during the period of exceptional circumstances were complied with. It is expected to return to the full application of the rules in 2024.
The post-pandemic economic situation and high inflation have led to an unexpectedly strong performance of public finances in 2022, but this could be a one-off phenomenon. Inflation increases the level of general government revenue, but expenditure tends to be higher in subsequent years. In the medium term, expenditure may increase due to government commitments and possible decisions by policymakers. In view of revenue uncertainty and upward pressure on expenditure, compliance with fiscal discipline rules will require specific measures in the future.
"Higher budget revenues are essential in order to ensure high-quality public services. Currently, tax revenue-to-GDP ratio in Lithuania is one of the lowest in the euro area. In our view, the changes to the tax system that have been presented are necessary, but the proposals could be more ambitious and could better reflect the recommendations of international organisations. The need to increase the efficiency of public spending should also be kept in mind," said Jurga Rukšėnaitė, Head of the Budget Monitoring Department.
The proposed changes to personal income tax are likely to contribute to a simpler and more neutral tax system. However, the recommendations of international institutions to unify the corporate tax rate for all companies or to lower the threshold for registering for VAT are not being followed.
The presented changes to budget planning, which would allow policymakers to foresee decisions for three years instead of one, are welcomed. This would contribute to more accurate and transparent forecasting of public finances, but risks remain regarding their implementation.
According to the National Audit Office, implementing the functions of the fiscal institution, debt may reach around 40% of GDP in 2026 and is likely to remain among the lowest in the EU. With the economy below its potential level, a moderate stimulus to the economy is foreseen for the period 2023–2024.