2011-12-21 - Lithuania’s general government deficit in 2012: reaching 3% of GDP seems unrealistic (MatasM)
Lithuania’s Parliament gave its final approval to the 2012 state budget yesterday. The general government deficit is forecast to reach 3% of GDP, down from 5.3% this year. The Cabinet is aiming to meet the Maastricht criteria next year to facilitate borrowing on the market to refinance its maturing debt, the bulk of which is due in May 2012, and to assist in the possible adoption of the euro in the medium term.
Budget revenues (including EU transfers) amount to LTL28.1bn (EUR8.1bn) and expenditures are to reach LTL28.8bn (EUR8.3bn), resulting in a modest state budget deficit of LTL0.7bn. The main pressure on public finances, however, comes from the social security system (SODRA), which will generate a gaping hole of LTL2.3bn (EUR0.7bn) next year. With the demographic situation continuously worsening due to soaring emigration and lagging reforms, the problem is likely to persist.
The government recently almost halved its economic growth forecast for 2012 to a more realistic 2.5% and was forced to make several amendments to the draft budget. To compensate for a widening shortfall, the government is set to implement a number of austerity measures including budget cuts for investment projects and ministries, as well as diverting a proportion of state-owned enterprises’ profits to the budget. Also, the proportion of social security tax transferred to privately run pension funds will be reduced to 1.5% from the current rate of 2%. Today the Seimas approved the introduction of a luxury real estate tax, while decisions on a tax on interest and luxury cars have been postponed.
Assessment: The budget target of 3% of GDP for 2012 is likely to be missed, due to a worsening macroeconomic environment and sharply deteriorating business sentiments. According to our forecasts, the deficit is unlikely to fall below 3.5% of GDP, while the debt-to-GDP ratio may reach 40%. For more detailed analysis please download our latest Baltic Economic Outlook.
