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Lithuania pins 2019 budget hopes on 200 million euros «out of shadow»

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Lithuanian Minister of Finance

Linas Jegelevičius for the BNN

Lithuania’s record, revenue-wise, budget for 2019 is hinged on two key joints: the further growth of economy and the ability of the Farmers and Greens-orchestrated Government to extract a staggering 200 million euros out of the shadow economy.

The Government says the budget with 1, 516 billion euros in revenues, a 19,7 per cent year-on-year increase, is «reasonable» and «feasible», however the rosy numbers caught many economists in surprise – they have called the budget «blown out» and «advertising presumable deeds» of the ruling majority.

«We esteem that an amount of around 200 million euros can be collected and added to the budget,» Vilius Šapoka told the parliamentary Committee on Budget and Finance on Wednesday, October 24.

According to the minister, the shadow economy is shrinking for natural reasons, including economic growth, but major progress has been achieved in this area by the State Tax Inspectorate.

«Those additional measures of fighting the shadow economy it is taking and giving the result,» the minister said.

The government’s total tax revenue in 2019 is expected to grow by 30.1 per cent next year compared with this year to 8.019 billion euros. The value-added tax (VAT), the largest single source of tax revenue, should increase by 8.8 per cent to 3.85 billion euros.

The Minister’s high expectations on the budget collection can however be dampened by signs of a looming new economic downturn, which is being mentioned by more and more economy pundits.

However, most Lithuanian experts believe that Lithuanian economy in 2019 will be performing okay «out of inertia». Yet the Cabinet’s spunk to pull out a hefty 200 million euros out of shadow raises doubts to many.

Among those who expressed concern about the Government’s determination were the front runners in the presidential race polls, Gitanas Nausėda and, to a much lesser degree, Ingrida Šimonytė, both economists.

«The target – collecting an additional 311 million euros of added value tax, VAT, of which 104 million euro would be due to the improved administration of the tax – is very ambitious but is it feasible? Do we have the reserves for the kind of improvement? It is very likely that, even with some good measures in hand, the final result can be way different from the one we expect,» Gitanas Nauseda, former chief economist at SEB Lithuania Bank and now the front runner in the presidential polls, wondered last week.

Ingrida Šimonytė, the front runner in the Lithuanian Conservatives’ internal presidential campaign, has mostly circumvented the topic perhaps being reminiscent of her futile attempt to extract 1 billion litas, or nearly 300 thousand euros, from the shadow economy during 2010-2012.

Šimonytė, the-then Finance Minister in the Conservatives-led Cabinet, was among those who approved of the Government’s measure then, but the plan failed loudly with the Conservatives being ridiculed in the press. It seems that Lithuanian politicians have been taught a lesson and, now, the new composition Cabinet is revisiting the initiative.

Lithuania’s 2019 budget aims to have a record surplus and will focus on allocations to education, health care, innovations and reduction of social inequality.

According to the budget draft, the state budget’s revenue is set to rise 19.7 per cent, or 1.516 billion euros, to 10.587 billion euros, and expenditure will increase 22.2 per cent, or 2.121 billion euros, to 11.681 billion euros. The state budget’s deficit will stand at 1.095 billion euros, up 2.2 times, or 605.369 million euros, from this year’s planned deficit of 489.171 million euros.

Minister Šapoka claims that the new budget is a reflection of «structural and strategic reforms» being carried out by the Government, but Šimonytė was among many MPs to lambast, saying she «cannot» remember «a single reform» carried out by the Cabinet.

Justas Mundeikis, economist and lecturer at Vilnius University, also doubts the Government’s plan curtailing the voluminous flows of “black» money.

«Two sources are foreseen to supplement national budget. The first is from the growth of economy and the other is from the reducing of the shadow economy. Indeed, we can, more or less, plan growth of the economy, but not reduction of shadow economy,» he told BNN. «Thence a big risk that we can stumble upon the road and fail to collect the budget as we wish,» he added.

Different surveys show that shadow economy accounts for 15-30 per cent of Lithuania’s GDP.

The shadow economy in Lithuania is contracting but it remains widespread. A third of people in Lithuania have friends or relatives who work in the shadow labour market and receive part of their wage or their entire wage «under the table» People in Lithuania tend to justify all forms of shadow economic activity. On average one in third see nothing wrong in working illegally or receiving part of the wage off the books or buying or selling smuggled cigarettes, alcohol, fuel or other underscored goods. People think that the main reason is quite simple and it is too high taxation.

These findings were produced in 2017 by representative population surveys conducted in six countries – Lithuania, Latvia, Estonia, Poland, Sweden and Belarus – by the Lithuanian Free Market Institute (LFMI) with international partner think tanks and experts.

To believe the survey, more than a quarter of the country‘s economy is believed to be in the shadow. It is the most common in the market for excisable goods: illegal alcohol constitutes 22 per cent of the strong alcohol market, illegal cigarettes – 20 per cent, and fuel – 15 per cent.

«In general, the shadow economy which still makes up around a quarter of the Lithuanian economy is shrinking largely due to economic growth and increasing income. However, there is a different tendency in the field of excise goods where illegal trade seems to be on the rise again,» said Vytautas Žukauskas, vice-president for research at LFMI.

According to polls, around 12-15 per cent of Lithuanians have purchased or consumed illegal alcohol or cigarettes from bootleg vendors.

According to a study completed by Arnis Sauka, associate professor at Latvia’s SSE Riga and researcher of the shadow markets in the Baltics, in 2017, in all three Baltic countries, under-reporting of salaries («envelope wages») was the largest component of the shadow economy, making up 45.5 per cent of the overall shadow economy in Latvia and 55 per cent and 41.7 per cent in Estonia and Lithuania, respectively. The average share of wages not reported by businesses to the state in 2017 is relatively similar in Latvia and Estonia (20.9 per cent and 18.1 per cent, respectively) and slightly less in Lithuania (15.2 per cent).


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