Lithuania hikes up VAT by 2 percent

  • 2009-07-29
  • By Rokas M. Tracevskis

THIS IS LEADERSHIP: Taxes go up as economy sinks

VILNIUS - On July 22, the Lithuanian parliament approved a rise in the country's value-added tax (VAT) to 21 percent, up from 19 percent. It is considered to be a controversial step by Lithuanian economists. On July 23, the parliament also approved further cuts in government spending. Lithuania's economy may contract between 15 percent and 20 percent this year, according to Finance Minister Ingrida Simonyte. The parliament's decisions increased the gloomy mood in the recession-crippled country.

These highly unpopular decisions of the parliament should bring Lithuania's budget deficit in at 4.8 billion litas (1.4 billion euros) which makes up 4.8 percent of GDP. According to Prime Minister Andrius Kubilius, the figure could be 7 percent if not for the government's action in raising taxes and cutting spending. Revenues for 2009 are set at 20.8 billion litas and spending at 25.6 billion litas.
"We just try to avoid the destiny of Iceland, and we don't want to run for help to the IMF [International Monetary Fund] like Latvia," said Kestutis Glaveckas, MP of the Liberal Movement, which is one of the smaller partners in the Homeland Union 's Christian Democrats-led ruling coalition.

"It will raise prices while consumption and production will fall, and the black market will grow," Valentinas Mazuronis, MP of the opposition Order and Justice Party, said during the parliament's discussion before the vote on the increase.
Sometimes heated protests from opposition in the parliament's sitting were turned into jokes which would be more suitable for some sleazy bar or late night show. Julius Veselka, MP of the Order and Justice Party, proposed introduction of a preferential tariff for contraceptives. "We can collect some money and help you with this problem," Kubilius answered while Rimantas Dagys, Kubilius' party MP, played card games on his computer.

The VAT rise comes into power on September 1.
"I don't think that this step of savings and tax changes is the last one. The Lithuanian economy should be on the same level as its exports. Now the exports are on the level of 2006 while social benefits are 1.7 times higher than three years ago," Rimantas Rudzkis, chief analyst with the DnB Nord, told the biggest Lithuanian daily Lietuvos Rytas. The daily's article on the VAT rise speaks for itself, "Government of losers is a hostage of its own illusions again".

On July 23, the most popular Lithuanian news Web site asked it's readers to answer this question: "Do you agree with a VAT rise up to 21 percent?" Among 5,823 participants of this poll, only 8 percent said "yes" while 88 percent said "no" and 3 percent marked the field titled "I have no opinion on it."

On July 24, Atgimimas, Lithuania's weekly for political and economic analysis, published an interview with Morten Hansen, head of Economics Department of the Stockholm School of Economics in Riga.
Hansen said that it is just a question of time when Lithuania will follow the footsteps of Latvia and will ask for IMF help. He also touched the theme of the biggest and rather exotic fetish of economics in the Baltics 's their currency boards. Hansen urged governments to consider devaluation of litas and not be afraid of currency devaluation.

"Indeed, this word is a fearsome taboo in Lithuania, Latvia and Estonia. […] I'm not sure that cutting of wages is the best solution. If the government would say that the value of the litas is reduced by 25-35 percent, the people and economy would withstand it quite painlessly. It was done by many countries 's Russia, Belarus, Sweden and other countries. It is important in this case that such a process would be under control and without panic. An example of such control could be a move to another value for the litas, having approval of the European Central Bank," Hansen said.