Baltic Budgets offer challenges, opportunities.

  • 2006-10-11
  • By TBT staff
It is fall, and with the falling of leaves from Klaipeda to Narva, also comes the deciding of budgets for the next year. The Budget situation in the Baltic states is positive, rising economic prosperity and corresponding tax revenues, and European Union structural funds have created a situation for the Baltic parliaments to chose on what to invest in for the future.

"I think that conditions will not become worse for business, and that the tax system will remain stable. However, it is important for people to know that social spending will rise, as will pensions." Lithuanian Prime Minister Gediminas Kirkilas told Lithuanian radio on Oct. 10.

Indeed higher public sector wages are planned in both the Lithuanian and Latvian budgets.

In his Oct. 10 radio interview, Lithuanian Prime Minister Gediminas Kirkilas said that next year will see a rise in pay for those in the health and education sector, more money for social protection, and compensation for heating.

In Latvia, more spending is planned also to raise teacher and police salaries, and to provide relief to farmers hit with low crop yields from this year's particularly dry summer.

Estonia and Latvia are both expecting budget surpluses. But with Lithuania's situation a little tighter, the government's spending priorities more under fire.

Critics came out on Oct. 10 with a harsh assessment of Lithuania's 2007 budget plans.

Policymakers assign millions for salaries, cents for the raising of country's competitiveness and postpone reforms again, the Verslo Zinios business daily reported today.

"The revenues of next year's budget, which are expected to be collected on the back of strong economic development will be used to meet the commitments assumed by the government and the parliament in 2005 and 2006, mostly in the social sector, health care and education," he said.

"It is to be regretted that the government does not put the need to boost Lithuania's competitiveness, which would require the cutting of taxes, among the priority tasks." Remigijus Simasius, President of Lithuanian Free Market Institute said earlier in the week.

"The authorities follow the well-known path - to consider the reduction of taxes and postpone the actual measure as much as possible while simultaneously raising expenditures considerably," Simasius commented.

However, budget deficits in both Latvia and Lithuania should remain at acceptable levels, well below the maximum three percent set out in the Maastricht convention.

Lithuanian finance minister Zigmantas Balcytis, while admitting that budget expenditures will exceed revenues by almost 1.5 billion litas (434 million euros), stated that the fiscal deficit of the country should decrease by 300,000 million litas and should not exceed one percent of GDP in 2007.

Latvian finance Minister Oskars Spurdzins also stated said that their new budget will not increase the budget deficit and that Latvia planned that its deficit at 1.5 percent of GDP, or 145.2 million lats (209 million euros).

At a time when lower wages, and better living conditions abroad are luring Baltic workers away from home. Perhaps, some investment in the social infrastructure is a positive thing. Good teachers that are earning a living wage are more likely to create students with the type of skills needed for the economic challenges ahead, rather than pick berries in Ireland.

Often viewed as populist, this type of social spending has been neglected in the Baltic states for some time. Perhaps a year of increased investment in education and health care could be wise during a time of economic growth and budgetary surplus.

However, a careful balance must be created between needed social investments and those also needed to ensure long term economic growth. The two budgetary priorities are not mutually exclusive, returns on social investments are not as empirically calculable as say a tax cut, but they are still an important part for the overall well being of a modern market economy.