Budget, EU – Baltic States, Financial Services, GDP, Legislation, Lithuania

Economists emphasize that a surplus budget is not valuable in itself, while delay of key structural reforms may in the long term leave Lithuania in the periphery of the European Union (EU) in the trap of medium income.

"Lithuania's projected budget is more cautious, we may be more inert and avoid more drastic decisions, unlike Latvia and Estonia. I would say we're going with the flow, and although it sometimes helps us to avoid mistakes, which are made by countries that do not fear brave changes, people's complaints and emigration shows that the residents are not happy with going with the flow," Tadas Povilauskas, senior analyst at SEB Bankas, told BNS.

Lithuania's 2018 budget projects the surplus of the public finances to account for 0.6% of the GDP, which is 0.5%age points more than this year (0.1% of the GDP). If the plans are translated into reality, Lithuania's public finances will be in the green for the third consecutive year.

"When it comes to the balanced budget, we should first of all thank the people of Lithuania who generated the taxes and waited patiently without demanding a sharp increase in their income. Salaries of the employees of the public sector have been virtually unchanged for a long time since 2009 and saw some increase in the recent years only, pensions have also been virtually frozen. The good news is that this will not be the case anymore, pensions are already being indexed, salaries in the public sector will also increase, and the budget surplus provides the safety that the growth would not stop in the nearest future, at least," Zygimantas Mauricas, senior economist at Luminor bank, said in an interview to BNS.

Nevertheless, in his words, a comparison of the national budgets of the three Baltic states suggests that Lithuania "has got a bit carried away with the austerity" and, unlike Latvia and Estonia, does not have a long-term vision of public finances.

Latvia, which had balanced public finances in 2016, is this year again in the negative zone and is projecting a budget deficit next year – it should amount to about 1% of the GDP (0.1% points above this year's level). Estonia, which expects to balance its public finances this year after a deficit in 2016, intends to next year spend more than collect – its deficit should be 0.1% of the GDP.

"Our budget next year envisages growing income for those with the lowest salaries only. Is is a good thing, however, the Latvian and Estonian tax changes have an impact on the middle class and the income of people with higher salaries," said Povilauskas.

Mauricas emphasized that Latvia and Estonia realize that the period of economic upsurge and generous EU support would not last forever, therefore, both countries are working hard to reform their economies and do not fear a resulting deficit in public finances.

"The budget should be used as a tool for specific objectives, therefore, Estonians and Latvians are probably doing the right thing by planning a certain deficit. The deficit is justifiable, as they are doing something that will give them a better future. Meanwhile, Lithuania is still living in the understanding that the budget is a purpose in itself rather than a tool to achieve objectives," said Mauricas.

The economists say Lithuania is left with little time for structural reforms and related tax changes, as 2019 will bring the presidential and the local governmental elections, 2020 will mark the election of the new parliament and 2021 may bring a considerable decline in the EU support.

"If our government was far-sighted, if halting emigration were our priority, we would have to ask the European Commission for an exception to allow deficit and reforms, which would increase the nation's income and reverse the emigration flows. This is in part what Latvia and Estonia are doing, and it would be a better path for Lithuania than accumulating reserves. I do not think that a reserve of a few hundred million euros will calm the people thinking about emigration and cause them to stay in Lithuania," Mauricas stated.

Lithuania's ratio of public spending with the GDP should next year grow by 0.7%age points to 36.4%, however, will remain the lowest across the Baltic states and among the lowest in the euro area. Latvia's public finance spending will account for 37.5% of the GDP in 2028 (0.2% points above this year's level) and Estonia's spending will make 40.1% of the GDP (0.1% above this year's level).

All three Baltic states are planning the biggest share of their spending on social benefits. Lithuania is in the lead in terms of the figure (14.7% of GDP), followed by Estonia (13.8%) and Latvia (12%). The second-biggest group of spending is salaries of employees of the public sector, with Estonia in the lead with 11.1% of the GDP, followed by Latvia and Estonia with 10.5% and 9.4%, respectively.

Estonia also ranks first in terms of the share of public finances for intermediate consumption – 6.6% of the GDP, also spending the most on investments (5.6%). In Latvia, the figure are 6.2% and 4.5%, standing at merely 5.6% and 3.4% of the GDP in Lithuania.

In Lithuania's revenue of public finances should next year make 37% of the GDP (1.2% points above 2017), as compared with 36.5% in Latvia (0.1% points more) and 39.9% in Estonia (0.1% points less).

The bulk of the revenue in Lithuania comes from social insurance fees, while Latvia and Estonia benefit from production and imports taxes. In Lithuania, social insurance fees should make 13.4% of the GDP next year and production and imports duties should generate 12.1%, while the respective numbers in Estonia are 11.9% and 15.2% and in Latvia – 9.6% and 14.1%.

The largest share of income, property and similar taxes is projected in Estonia at 7.4% in 2018, as compared with 7.2% in Latvia and 5.8% in Lithuania.