The shackles of financial discipline loosened during the pandemic will be tightened again: the state budget will have to be calculated more carefully

From next year, the requirements of the Stability and Growth Pact, which stipulate that member states’ budget deficits cannot exceed 3%, will come into force again in the EU. of the gross domestic product (GDP) limit.

This rule was abolished in 2020 when the coronavirus pandemic began and states committed to generous subsidies to economic sectors with limited activity, financed by borrowed funds.

At the end of the pandemic, the requirements of the Stability and Growth Pact were abandoned for another year due to the outbreak of war in Ukraine, but the rules will be reinstated as early as next year.

Lithuania used the authorization of the European Commission to temporarily disregard financial discipline. For example, in 2021 approved by Lithuania in 2022 the budget deficit reached 3.3 percent, this year’s budget was approved with an estimate of 4.9 percent. deficit. It is true that already in the spring, the Ministry of Finance calculated that the real budget deficit would be much lower and would reach around 2 percent thanks to lower spending and higher revenues.

Could stop EU support

The Ministry of Finance specifies that the deficit planned in the draft budget for next year, which will soon be submitted to the Seimas, will not exceed the 3% required by the European Commission. borders

“When planning next year’s budget, we take into account the return to EU budgetary discipline rules, and we also aim to take into account the budgetary guidance presented by the EC and the budgetary guidance presented in 2023. In the stability program. The needs of the institutions traditionally exceed the possibilities of the budget, the budget itself therefore constitutes a challenge every year”, – Delphi specified by the ministry.

She notes that for countries that do not meet the requirements of the Stability and Growth Pact, the European Commission can apply the excessive deficit procedure, during which public finances are more closely monitored, and plans must be coordinated with the EC.

The excessive deficit procedure can be applied when the state budget deficit exceeds 3 percent. GDP or public sector debt exceeds 60%. GDP is not falling fast enough.

In this case, the country that does not meet the Maastricht criteria receives recommendations on how to correct the situation of deficit or excessive debt within a certain period.

“If the State does not respect the corrective action plan set and does not correct the situation of excessive deficit or debt within the period specified in the recommendations, the payment of structural funds could be interrupted and the State of euro zone could also have to pay 0.2 percent. a fine equal to GDP”, the Ministry of Finance highlights possible sanctions.

According to her, non-compliance with budgetary discipline could also become a negative signal for investors and rating agencies, which would likely lead to a reduction in Lithuania’s debt rating, which would mean that the state would have to borrow more expensively on the financial markets.

Certainly, the ministry emphasizes that discussions are currently underway regarding the revision of the EU budgetary rules: “Thus, the tax requirements applied to the states could change in the future depending on the outcome of the political agreement.”

An argument for rejecting offers

Although the Ministry of Finance draws attention to the sanctions that threaten EU countries that do not respect the rules of financial discipline, the economist of the SEB bank, Tadas Povilauskas, emphasizes that these rules are not engraved in stone and that there were a number of examples in the past where States violated them but received no fines. It is true that the economist notes that it is not necessary for Lithuania to provide more than 3% in next year’s budget. deficit.

“A certain ceiling will be set, which must be respected in order not to get too angry with the European Commission.” On the other hand, we know from experience that these rules do not imply that it cannot exceed 3%. There are countries which have justified larger budgets, explaining why this was necessary for them”, – Delphi said T. Poviauskas.

The interviewer emphasizes that Lithuania has so far scrupulously complied with the requirements of the Stability and Growth Pact and exceeded budget deficit indicators only during the period when this was possible. He is convinced that this line will be followed in the future.

“As for next year, it is normal to expect that the Ministry of Finance, when presenting the draft budget in early October, will achieve less than 3 percent deficit. And the rules of discipline financial budget will constitute a good argument for the ruling coalition to abandon various spending proposals coming from the opposition or the presidency. It can be said that there is 3 percent. the deficit requirement and present your proposals”, declares the SEB economist.

When asked whether the requirement to maintain a low budget deficit can become an additional argument when presenting tax reform to the Seimas, T. Poviauskas replies that these issues are not related. First, many of the changes proposed in the reform would only take effect in 2025-2026, so the following year’s budget would not be affected. Furthermore, additional budget revenues that would result from higher self-employment taxes and other changes will have to cover the costs of the NDP’s expected increase.

Savings were made possible thanks to energy prices

T. Poviauskas is convinced that increasing the budget deficit and financing state needs with borrowed funds is useful only when it is necessary to stimulate the state economy, but Lithuania will not have to do it next year.

Tadas Poviauskas

“In the Lithuanian economy, we do not have and we do not expect an economic recession in the coming quarters, as was the case during the pandemic or the first months of the war. Thus, more than 3 percent it There must be no deficit,” says the economist.

According to him, last year it was expected that the state budget deficit this year would reach almost 5%, as it was determined that subsidizing the prices of energy resources would require a lot of funds. However, the circumstances turned out to be more favorable than expected, so that this year again the real budget deficit will not exceed the limits set by the EU.

“First of all, it didn’t take a lot of money to offset electricity and natural gas prices. The budget was being prepared while we saw very different prices on the markets. If I’m not mistaken, it was planned to allocate almost a billion to subsidize energy prices. EUR, around 300 million will actually be spent. euros. This is a huge saving,” says T. Poviauskas.

He also notes that residents’ salaries are also growing faster than expected, meaning the state treasury is being supplemented more generously by collected personal income tax.

Source: The Delfi

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