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Lithuania moves forward with tax and pension reform

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU

Linas Jegelevičius for the BNN

The heavily amended bills on taxes and pensions will have a significant impact on the Lithuanian citizens’ lives if Seimas, the country’s legislature, approves for them in their current form.

The drafts envision increase of the tax-exempt personal income threshold, merging social insurance contributions by employees with those by employers, reducing social insurance contribution rates and introducing a ceiling on payments to the state social insurance fund Sodra, as well as to use state budget funds, rather than the social security system funds, to pay basic pensions.

The government also wants to change the way second-pillar pension savings are funded.

Employees will be able divert 2 per cent of their compulsory social insurance contributions to private second-pillar pension funds. Employees may also opt to additionally contribute 2 per cent of their salary, which is then matched by a state contribution based on the country’s average salary.

Plans calls for shifting to a «4+2» formula, stopping transfers from the social security system and doubling salary contributions to 4 per cent.

Government says, with bill in force, the average pension will grow approximately 23 euro during 2018 and 2020 and will be close to 400 euros by 2020.

Disappointingly to many home owners, the legislation imposes duty to pay real estate tax for secondary, tertiary and so on real estate.

«We expect that in June Seimas will get the amendments approved in their entirety, so the President can sign them into effect,» Saulius Skvernelis, Lithuania’s Prime Minister said.

If Dalia Grybauskaitė, the head-of-state, inks them, they proposals be enacted from January 1, 2019.

The ruling Farmers and Greens and the Social Democratic Labour fractions have seemingly enough votes to adopt the amendments, however Skvernelis hoped that the opposition Conservatives – Homeland Union and Christian Democrats, officially – will vote for the bills too.

Amid the apprehensions of some political observers that the far-reaching legislative initiatives can wedge a splinter in unity of the Peasants and Greens, PM downplayed the fear, yet admitted that there is «a wide garden variety» of opinions on the issues of taxes and pensions in the legislature.

According to Stasys Jakeliūnas, an influential «farmer» MP and chairman of the parliamentary Budget and Finance Committee, «part of the MPs» will not support the tax and pension drafts «for surely.»

Linas Kukuraitis, Minister of Social Security, defended staunchly the bills, claiming that they work in favour of ordinary Lithuanians.

Although the legislation received warm reception in general, Vitas Vasiliauskas, chairman of the Board of Bank of Lithuania, regretted that the Cabinet did not heed the central Bank’s proposal on tax reforming.

«The direction is right but we believe it’s insufficient as we believe mid- and long-term decisions should be made during economic upturn for us to be ready when bad times come. This is why we say the proposed package is insufficient,» Vasiliauskas said. «We see this a procyclical fiscal policy which is usually not rational during the time of economic upturn.»

Finance Minister Vilius Šapoka, however, disagrees with the central banker.

«Regarding procyclicality, I would like to pay your attention to the fact that opinions vary. The International Monetary Fund, as we just met with its representatives, does not see procyclicality in the existing situation… Speaking about increasing redistribution, it’s important to note that the redistribution level in Lithuania has been growing at the fastest rate among EU member states over the last couple of years,» the minister told the Cabinet sitting, adding that the Bank of Lithuania’s certain proposals might be taken into account.

Vasiliauskas said in April, after a review of the Cabinet’s plans, that the Bank of Lithuania proposed to abolish business licenses and harmonise taxes for employees and self-employed. The central bank also proposed introducing the universal progressive real estate tax.

The trade unions also doubt the progressiveness of the proposed tax and pension reforms and warned that only higher-income residents will benefit from them.

«We believe that the reform will not achieve its main goal – reduce income inequality and social exclusion,» Inga Ruginienė, chairwoman of Lithuania’s Confederation of Trade Unions, accentuated.

Yet the measures by the Lithuanian Government have to be music to the ears of the European Commission that has long exhorted Lithuania to improve tax collection and social security system.

The Commission released on Wednesday, May 23 its recommendations based on a detailed analysis of the Lithuanian economy and on the country’s national reform and stability programs.

«In order to improve the ability of the Lithuanian budget to adopt a more effective social policy and increase public investment, the European Commission recommends improving tax compliance and broadening the tax base to sources less detrimental to growth,» the European Commission Representation in Lithuania said in a press release.

The Commission especially recommends that Lithuania tackle the problem of pension adequacy, which is among the lowest in the EU.

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