VILNIUS - Lithuania will see a rapid and large decrease in most of its main economic indicators this year and next, with gross domestic product slumping by 17 percent this year and another 4.5 percent in 2010. This gloomy outlook was reported by the Lithuanian Free Market Institute (LLRI) after carrying out a survey on the Lithuanian economy in September, reports news agency ELTA.
According to the businessmen surveyed, unemployment will rise to 15 percent this year, with a further increase in 2010.
The growth of the informal economy appears to be the most alarming result in the survey. By the end of this year the informal economy should account for almost a quarter of Lithuania's GDP, before rising to 27 percent next year. LLRI analyst Vytautas Zukauskas thinks that the growth of the informal economy is due mostly to tax increases, especially the VAT increase, raised to 21 percent. He also predicts that next year unemployment will grow at a slower pace as "Companies will choose a policy of not sacking their employees, but search other ways to cut costs."
Head of the Institute Ruta Vainiene says that the situation might worsen unless taxes are reduced in the short-run. "Each percentage point added to VAT affects other economic indicators. The government will attempt to save the economy by cutting legal salaries, which will again hit the already crippled [State Social Insurance Fund Board] SoDra," she said. Vainiene believes that it is only possible to improve the situation through tax reductions, rather than through tax increases and salary cuts.
Survey respondents expect that prices will increase at a slower pace this year and in 2010. In 2009, consumer prices will grow 2.8 percent, and 1.9 percent next year, compared to an increase of almost 10 percent last year. They also feel that the decommissioning of the Ignalina nuclear power plant, planned for the end of this year, will result in a number of problems as well, including more expensive electricity, up by an average of 5 percent.
Signs of economic recovery are seen only for export and import markets, though only next year. This year, these numbers are expected to drop by 13.9 percent and 22.1 percent, respectively.
Prime Minister Andrius Kubilius says that he has learnt nothing new from the survey. "It would be difficult to expect something else from the Free Market Institute. We knew that the informal economy in Lithuania would reach about 20 percent 5-6 years ago and I see here nothing new. It is also known that the informal economy grows during times of crisis," he says.
The LLRI analysts call for a return to the 19 percent VAT rate and no more tax increases to cut the informal economy, though this goes against government plans, says Kubilius.
The Prime Minister could not say what level of income has been lost to the state budget due to the growing informal economy. "It is difficult to say as there might be very different interpretations, but we need to speak in very simple and clear termsâ€¦ the ones that avoid paying taxes and pay salaries in envelopes are harming not some abstract state, but the schools for their children, pensions received by their parents, and so on. It turns out to be very specific, when you speak not about an abstract state, but about the use of taxpayers' money."