Lithuanian Budget Juggles Fiscal Priorities

by Tatiana Smolenskaya, Tax-News.com, Moscow

27 October 2009

Austerity measures within Lithuania’s budget for 2010 are not sufficient, President Dalia Grybauskaite said last week, urging a review of fiscal policy.

The budget, which has been approved by parliament, assumes a total public sector deficit of 9.5% of gross domestic product by the end of 2009.

The budget includes deep cuts to public sector services and welfare payments, that will consolidate the budget by LTL2bn (USD871m).

Grybauskaite argued in a statement to a press conference that “the deficit is too big and saving is too small,” and that although the government intends to increase social security taxes - by 2%, providing an additional LTL400m - she stated that further austerity measures are necessary, but could not be found on the tax side.

Lithuanian Prime Minister, Andrius Kubilius concurred with Grybauskaite stating that, whilst desirable, there was no room for tax increases this year or next. Kubilius announced that the government would instead focus on slashing government spending by an additional 5% in 2010, but revealed that there was “no realistic area” for immediate additional cuts.

However, via a statement obtained later by the Wall Street Journal, the government announced that it would introduce temporary tax cuts for businesses in 2010, in an effort to increase revenues and economic activity in Lithuania.

The government said the corporate income tax rate would be slashed to 15% from 20%, and 7.5% from 15% for small businesses. "These tax reductions will promote entrepreneurship by Lithuanians and, importantly, send a strong welcome signal to potential foreign investors,” the government explained.

Finally, according to Lithuania’s Finance Minister, Ingrida Simonyte, the government is also considering introducing a real estate tax, and has revealed that if introduced, such a levy would come into force before end-2011.

According to the government statement, the nation’s tax take, which is projected to be LTL14.4bn for 2009, will deteriorate further by around LTL1.25bn by the end of 2010.

Lithuania continues to resist turning to the International Monetary Fund for fiscal support, as has been seen in moves by other embattled Eastern European nations.

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