VILNIUS - Lithuania's incoming prime minister has said that he will slash government spending and reduce the fiscal deficit to around 1 billion litas (290 million euros) in an attempt to save the country from an all-out economic crash.
Lithuania's fiscal deficit may be around 0.7-0.8 percent of gross domestic product (GDP) in 2009, incoming Prime Minister Andrius Kubilius said.
The deficit will be decreased from 5.2 billion litas to 1 billion litas.
"Such radical problem solving would mean that a country's finance system avoids bigger problems. However, passing this plan will demand strong political will and real solidarity," Kubilius told Lithuanian radio.
The crisis prevention plan worked out by the coalition would be a constituent part of the government's program, he noted.
"This is a condition for the government to start working. If the parliament rejects that plan, we will have to look for other political solutions, another government," Kubilius said.
Kubilius said in his blog that unless radical measures are taken to shore up the economy, that Lithuania could be looking at an economic situation similar of that in Iceland. Iceland's economy recently tanked, sending shockwaves through Europe.
Another policy Kubilius mentioned is cutting government spending on public sector. This would also lead to the cancellation of job posts that are currently not filled.
Jonas Cicinskas, head of European Studies Academic Department at the Institution of International Relations and Political Science, said that this could lead to a brain drain.
"It will cut jobs and will spill over to private enterprise 's over time this may lead to a new wave of emigration. This is something we are accustomed to and we know the possibilities available for us."
Under the 2009 national budget draft worked out by the Kirkilas government, the deficit will reach 2.6 billion litas next year, which will bring it close to the 3 percent GDP limit.
TAX REFORM
In addition, coalition partners are considering making a flat tax rate of value-added tax and profit tax, Kubilius said without specifying any precise rates.
"Exemptions will be annulled, it will be very convenient for business, the tax system will be simple," Kubilius said.
Kubilius said his government would leave a reduced value-added tax (VAT) rate on heating in place for the current heating season, but would abandon it in the future.
"For example, we do not want to touch the reduced VAT on heating, although socially it is unjust in that it makes heating cheaper not only for less well-to-do people, but to also to other people, including both members of the Seimas [Lithuanian parliament] and business people who earn 100,000 (29,000 euros)," he said.
Currently, the VAT on heating energy is 5 percent, compared with the standard VAT rate of 18 percent.
Political analysts think this could be good, depending on how it is followed up.
"They are following these other new states like Slovakia, Romania and Bulgaria 's all this is to encourage foreign investment," said Cicinskas.
"An aggressive taxation system might help, but it depends how they continue after this. They would like to change the tax threshold, which is currently done by the amount of children in the family. They want to change it to an income-based system. This will bring them money to the budget," Cicinskas said.
Normal people stand to benefit from the tax cuts, but are cautious in the turbulent economic climate.
"It's good. It means I will have more money to pay for electricity and heating, but I'm not sure that it is a good time to make changes because it might leave a hole in the budget and it isn't the right time for that," Jurate Baskyte, a sales manager for a music store, told The Baltic Times.
A flat rate of 19 or 20 percent on the three taxes is being considered. Currently, the personal income tax rate in Lithuania is 24 percent, the VAT rate is 18 percent and the corporate profit tax rate is 15 percent.
