The international institution has assessed the Lithuanian economy and the proposed tax changes: a risk is particularly sensitive

He promises a recovery in the second half

Borja Gracia, head of the mission in Lithuania, said that the Lithuanian economy has shown good results, but the Russian invasion of Ukraine last February has changed a lot, influenced by inflation, interest rates high and weak external demand, which is why economic contraction was seen at the end of last year and beginning of this year.

“The first half data shows the economy is weakening, and one of the areas of weakness is the labor market (…), but the economy is expected to recover in the second half, as expected for the rest of Europe,” B said at a press conference hosted by the Bank of Lithuania on Monday. Grace.

“Consumption is expected to recover faster than manufacturing, with rising investment, especially public investment such as the RRF (A measure to revive the economy and increase resilience – editor’s note)”, he added.

However, for the moment, the fund is worsening the country’s GDP forecast for this year: it forecast minus 0.3% in April. fall, he now sees a deeper decline.

“Economic contraction is expected to reach minus 1.4% this year and inflation to remain at 9-10%, but at least inflation should slow significantly in the coming months,” he added.

According to him, inflation will continue to slow next year and the economy will grow by around 2.5 to 3%. But domestic measures are also necessary, because European methods alone are not enough to manage inflation.

“With inflation already below nominal wage growth, we expect consumption to pick up, especially in the second half of the year.” At the end of the year, external demand should increase enough for the economy to recover,” the mission chief said.

According to him, inflation in Lithuania has been constantly higher than in the euro zone, which represents a big risk for the competitiveness of Lithuanian companies compared to foreign companies.

“We see this as the biggest risk for the competitiveness of Lithuanian companies compared to foreign companies,” the expert explained.

The government’s plan not to spend by subsidizing energy prices is a good decision, Gracia said, given the expiration of compensations for electricity supplied to residents (although compensations for gas have been extended).

“From a short-term perspective, the objective must be to maintain macroeconomic and macro-financial stability, but it is very important not to forget the long-term perspective, so that the convergence process continues to be successful, it is important to emphasize the importance of structural reforms, for example in the health sector”, explains B. Gracia.

Assessment of the tax reform: “we proposed it a long time ago”

Asked about the government’s planned tax reform, the expert said it was a move in the right direction.

“In terms of tax reform, we welcome the excise tax, which has the dual purpose of generating revenue, but also has a CO2 component that will contribute to the green transition. We have long recommended that the country move in this direction said B. Gracia.

“In a broad sense, the Lithuanian tax system is too focused on taxing labor, when it should be much more focused on taxing environmental protection, capital and property. We think this package goes in that direction,” he said.

Finance Minister Gintarė Skaistė says the government continues to implement a fiscal policy focused on long-term sustainability and not increasing inflationary pressures.

Gintare Skaiste

“It is extremely important to implement structural reforms that increase the productivity and resilience of the economy to future shocks, including in areas such as education and health care. It is also important to accelerate the green transition by developing the capacities of renewable energy resources – we are directing significant investment capacities for this purpose,” said Minister of Finance G. Skaistė in a statement from the Ministry of Finance.

Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, says the fight against inflation is not over yet: “In a complex and difficult economic environment, inflation has not yet been brought under control for good and the central banks still have to finish their work. We are on the right track: price growth in Lithuania is constantly slowing down, as also shown by the latest estimate in May,” says G. Šimkus in the ministry’s announcement.

According to him, one of the most important factors for the long-term growth of the Lithuanian economy will be to ensure the supply of highly qualified workers.

Gediminas Simkus

The Ministry of Finance announced at the end of May that IMF experts will pay attention to the business and labor market environment, competitiveness, the situation in the energy sector, progress in the implementation of green transformation and other relevant issues during the nearly two-week mission. .

In May, the department presented an improved set of tax proposals, one of the changes being to equalize the minimum monthly wage (MMA) and the non-taxable amount of income (NPD) within five years.

According to the ministry, in the recommendations of the Organization for Economic Co-operation and Development (OECD), Lithuania proposes to bring the taxation of individual activities closer to the taxation of income from employment relationships, so that much attention is given to this issue in the tax reform bill.

Among other things, it is proposed to switch to the traditional property tax for the real estate object, instead of the sum total of their values, by expanding the tax base. Preferential taxation is applied to residential accommodation – half the population will not have to pay property tax, the average tax would be around 14 euros per year.

A month ago, the Seimas approved amendments to the excise law, which will phase out fossil fuel benefits and subsidies, and excise rates will be systematically increased, the environment ministry said. From 2025, there will be a carbon dioxide component based on the fuel type’s CO2 emissions, which will increase proportionally each year.

The founding agreement of the IMF obligates member countries to endeavor to implement such economic and financial policies that would ensure national and international financial and economic stability. Currently, 190 countries of the world belong to the IMF. Lithuania became a member of this Washington-based organization in 1992.

Source: The Delfi





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