The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Vaiva Šečkutė, Nerijus Mačiulis No. 5 • 17 July 2012 Higher growth and reforms improve the budget Budget revenues continued climbing exceeding Ministry of Finance expectations, and from January-June were 2.4% above the plan. The reasons for this were growth higher than the Ministry’s forecast and some decrease in the shadow economy. We forecast that general government debt will peak this year at 40% of GDP but will start decreasing afterwards. The social security fund’s deficit will make up the most of the deficit during this and the following year. Interest and credit default swap (CDS) rates for Lithuania’s borrowing have been falling the fastest among the Baltic countries. The ratification of the Fiscal Pact could be a good sign for the markets and, together with the stable debt level and decreasing budget deficit, should have a positive effect on borrowing costs. middle of this year. However, above-the-planBudget revenues – above the plan revenues mean that neither tax increases norDuring the first six months of this year, national spending cuts are necessary. As any changes hadbudget revenues rose to almost LTL 10 billion – to be proposed before 1 June, it is now clear that4.6% more than during the same time a year ago any above-the plan income will be used to decreaseand 2.4% more than planned. State budget the budget deficit rather than increase expenditure.revenues exceeded the plan by 1.1% over the The higher-than-planned budget income was due tosame time. the higher-than-forecast (by the Ministry of Finance)State budget revenues in January-June 2012, m LTL economic growth. The Ministry of Finance forecast 2.5% GDP growth this year, whereas growth was 9000 137.2 3.9% in the first quarter of 2012 (Swedbank 8000 138 forecasts GDP to expand by 3.3% this year). 7000 However, the higher-than-expected growth was not 6000 128 the only reason behind the better income collection. 5000 The government has introduced some rather 4000 118 successful measures to fight the shadow economy. 3000 106.4 For example, last year, the number of times to 2000 99.7 99.2 108 cross the border of a third country was limited to 101.1 1000 five a month. During any further trip, such goods as 0 98 fuel, tobacco, and alcohol are subject to value- Budget (EU VAT PIT Excise Prof it tax added tax (VAT) and excise taxes. In addition, the supp.excl) duties state tax inspectorate inspects companies that pay 2012 actual 2012 plan their employees lower-than-minimum wages. Earlier 2011 actual Plan execution, % (rs) this year, the State tax inspectorate announced that Source: Ministry of Finance about 5 thous. companies will have to explain if about 280 thous. of their employees really do notAt the end of last year, when the Ministry of Finance work all day. This addresses a quite commonrevised its GDP growth forecast for 2012 down to practice of paying only a fraction of salary officially2.5%, it said that budget revision and additional and paying out the remainder in cash withoutconsolidation measures might be needed in the paying taxes. According to Statistics Lithuania, in Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: email@example.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Nerijus Mačiulis +370 5 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.
The Lithuanian Economy Economic Research Department, Swedbank No. 5 • 17 July 2012the first quarter of this year 18.9% out of all the tax changes will go into effect on 1 January,employed people were part-time employees. The 2013.introduction of cash registers in markets (on 1 May,2011 for food products and on 1 May, 2012 for all General government debt will decreaseproducts) must have reduced the size of the next yearshadow economy as well. The general government debt increased rapidlyEven though measures to fight smuggling mainly during 2009-2010; however, it will peak this year.affect only small-scale illegal activities, the amount We forecast that the general government debt willof excise duties in January-June of this year was decrease from 40% of GDP in 2012 to 39% of GDP2.4% higher than during the same months of 2011. in 2013, while the budget deficit will narrow from 3% to 2%. The social security fund’s deficit will make upRevenues are still 0.8% below the plan, but the most of the deficit during this and the followingprobably only temporarily. Excise tax revenues year.grew at a slower pace due to slower contraction insmuggling – a Nielsen “empty-pack” survey shows General government finances, % of GDPthat the percentage of smuggled cigarettes droppedfrom 43.0% at the end of 2010 to 30.8% at the end 2% 56%of 2011 and 29.3% in the second quarter of 2012. 0% 48%Personal income tax revenue is 6.4% higher than -2% 40%planned and 6.4% higher than a year ago. Theunderlying reasons are the growth in wages and -4% 32%employment due to the recovering labour market -6% 24%and the possibly slightly lower unofficialremuneration. According to the State Social -8% 16%Insurance Fund Board, the number of insured has -10% 8%been rising constantly. During January-May, thedifference between the number of employed and -12% 0%the number of fired workers was 31.6 thousand. 2003 2005 2007 2009 2011 2013f Central gov . (ls) Local gov . (ls)Profit tax revenues exceeded the plan by 37.2% Social sec. f unds (ls) Debt (rs)during January-June of this year. This large Source: Lithuanian MoF, Swedbank f orecastsdeviation was observed because some of thetaxpayers decided to pay taxes in June rather than According to two different estimates made by thein July, as had been expected. In the first half of European Commission (EC) last year, when the2012, compared with the same time a year ago general government deficit was 5.5%, the structuralthese revenues have increased by 10.1% as deficit amounted to 4.6% or 4.3%.1 Based on thecorporate profits rose by about 20% in 2010 and production function approach, the EC forecasts that2011. The profit tax income is growing slower than the structural deficit should decrease to 2.6% incorporate profits because companies are allowed to both 2012 and 2013 (another EC estimate suggestsreduce their payable profit tax (up to 50%) if they 1.9% and 1.7% deficits in those years). As ourhave invested in fixed capital. Furthermore, actual budget deficit forecast is lower than the ECs,companies can transfer losses incurred in 2009 to it is thus likely that the structural deficit should bethe following years and thereby reduce their narrowing faster than projected by the EC andpayable profit tax. reach structural balance in 2014.At the end of June, the Lithuanian parliament The Lithuanian parliament has ratified the Fiscallowered VAT taxes for press; technical assistance Pact, which is supposed to ensure greater fiscalmeans for disabled and their repair; and public discipline. The main rule says that the nationaltransport tickets. According to estimates this would budget has to be balanced or in surplus. This wouldcost the budget more than LTL 100 million, with the be achieved if the structural deficit2 did not exceedlargest losses coming from the smaller VAT 0.5% of nominal GDP. Adherence to this will curbreceipts from the sale of public transport tickets. any irresponsible increase in budget expenditure byPresident Dalia Grybauskaitė vetoed the lawbecause of this loss in revenue from publictransport tickets. According to the President, it is 1 Based on the production function approach, the cyclicaltoo big a burden for the budget and the effect on component of GDP was -0.9%; based on the Hodrick-prices is doubtful. The parliament decided to Prescott filter method, it was -1.2% in 2011 2disregard the President’s veto and passed the law – A structural deficit occurs when a deficit budget is in place even when the economy is at its full capacity 2 (3)
The Lithuanian Economy Economic Research Department, Swedbank No. 5 • 17 July 2012politicians willing to please their electorate. This positive impact as well, increasing the demand foradherence should decrease the political cycles and government securities.could be a good sign for the markets. Together with Compared with the peak at the end of 2011, thethe stable debt level and falling budget deficit this CDS rate has fallen the most for Lithuania as well. Itshould have a positive effect on the borrowing has decreased by 109 points from its peak incosts. Lithuania, by 77 in Estonia, and by 73 in Latvia.Fastest decrease in interest rates amongthe Baltic countries Credit default swaps (CDS), USD, 10 yearsAt the end of June, the 10-year bond rate in 400Lithuania fell to its lowest level this year. Since the 350beginning of June, it has decreased more than inLatvia and on 28 June it was 4.78% - 34 basis 300points lower than in Latvia. 25010-year bond yield, USD 200 6.5 150 6.3 6.1 100 5.9 50 5.7 2011.01 2011.04 2011.07 2011.10 2012.01 2012.04 5.5 Lithuania Latv ia Estonia Source: Bloomberg 5.3 5.1 During the rest of the year, income from personal 4.9 income taxes will be increasing because of increase 4.7 in employment and wages. Meanwhile, revenue 4.5 from VAT and excise duties will depend on 2012.01 2012.02 2012.03 2012.04 2012.05 2012.06 consumption. The scope of this will be determined Lithuania Latv ia by the situation in export markets and, Source: Bloomberg subsequently, household confidence and income. In May, the growth of both retail trade, except forMeanwhile, shorter-term borrowing costs have motor vehicles, and manufacturing, except fordropped below the pre-crisis level. At the end of refined petroleum products, accelerated, andJune, they were 1.13% for 6-month, 1.42% for 12- confidence kept increasing in June as well. In themonth, and 2.35% for 2-year treasury bills. future, household consumption will be supported byDuring the latest emissions of the savings notes at cheaper commodities and lower inflation, as well asthe end of May and June, Lithuania also borrowed a by the European Central Bank’s decision to cut therecord amount - LTL 140 million for 2- and 1- year. base interest rate to historical lows.Since May 2011, the borrowed sum has exceededLTL 10 million only a few times. The main reason Vaiva Šečkutėfor this was the Ministry of Finances distribution of Nerijus Mačiulissavings notes through the locally operating banks.The higher savings rate and flight to safety after thebankruptcy of Bank Snoras must have had someSwedbankEconomic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720. monthly newsletter The Lithuanian Economy.Nerijus Mačiulis, +370 5 2582237.Lina Vrubliauskienė, +370 5 258 2275.Vaiva Šečkutė, +370 5 258 2156. 3 (3)