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Friday 06.12.2019 | Name days: Niklāvs, Niks, Nikolajs

Lithuanian President Nausėda: pension raises must outpace wage growth

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Linas Jegelevičius for the BNN

Can Lithuanian pensioners turn Lithuanian economy upside down?

Upon hearing the threats of Lithuania’s commercial banks what will happen to the economy if the ruling farmers and greens (LFGU) move forward with the proposal to tax bank assets, which is part of Lithuania’s plan to rake in additional 100 million euro for welfare spending, and the pensions, too, it may seem inevitable.

Low Lithuanian pensions

The average pension in Lithuania is currently 345 euros, however around 60 percent of venerable-age Lithuanians make ends meet with less than 300 euros a month. According to the Lithuanian Statistics, over a third of people over the age of 65 live in relative poverty.

According to Eurostat, in most of the 27 EU Member States for which 2017 data are available, the proportion of pensioners at risk of poverty lies between 10 per cent and 25 per cent. The four countries with an at-risk-of-poverty rate above 30 per cent in 2017 were Estonia (46 per cent), Latvia (44 per cent), Lithuania (37 per cent) and Bulgaria (32 per cent). In contrast, the lowest rates in 2017 were in France (7 per cent), Slovakia (8 per cent), Denmark, Hungary and Luxembourg (all 9 per cent).

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President got his own plan

Having devoted much of his attention for tackling poverty and social exclusion during his presidential campaign, Nausėda is demonstrating resolve to keep the promise, but his proposed ways as to how scoop up extra 100 million euro for that have already sparked major debates.

The president suggests raising the money by postponing planned cuts to income taxes, reducing the existing diesel fuel tax exemption for farmers, and raising taxes on non-employment-related income.

With the proposals under scrutiny, the head-of-the-state and his team were compelled to stave off criticism not only from some of the MPs and many economy pundits, but from farmers, who would be most affected by the implementation of the presidential proposal on diesel fuel, too.

EAP points at Poland’s example

The proposal to tax banking assets has been tabled by the Electoral Action of Poles (EAP) in Lithuania–Christian Families Alliance, which recently became part of the Lithuanian Farmers and Greens-led ruling coalition.  Its leader, Valdemar Tomaševski, exhorted all to deal with the issue of taxing banks additionally «very urgently».

«One of the sources (of extra budget revenue) is to tax bank assets. It is a lot of money; it could bring around 100 million euros into the budget,» Tomaševski said.

Thus the Poles seek essentially to replicate the bank asset tax law passed in Poland in early 2016. Poland’s Banking Tax Act applies to selected financial institutions − domestic banks, consumer lending institutions and insurance companies, as well as the branches of foreign banks and insurance companies operating in Poland.  The tax raises additional 1,3 billion euro for the Polish budget annually.

EAP wants a 0.4-percent annual tax on commercial bank assets.

Hungary was the first to introduce banks’ tax in 2010, at 0,5 per cent yearly. But under the pressure of international capital and European institution the country is now lowering the tax rate. Beside Poland and Hungary, Romania also collects an asset tax from banks.

Lithuanian banks bristle and threaten

But the story in Lithuania, where Scandinavian, not local capital banks play the first fiddle, is different.

After hearing the proposal on bank asset taxing, Lithuania’s banks have hit back, maintaining the levy would make loans for businesses and households more expensive and dampen economic growth.

In a swiftly organised press conference on Tuesday, the Association of Lithuanian Banks (LBA) lamented that the tax would slash between 150 and 450 million euros from the projected growth.

«We do not want to scare the society, only to present calculations of the possible effects of more or less irresponsible tax proposals,» said LBA president Mantas Zalatorius.

According to him, the tax would make banks raise interest rates on mortgages from 2.4 per cent to between 2.8 and 4.6 per cent. Business loans interest would rise to 3.8 per cent, from the current level of about 3 per cent. According to LBA, a preliminary impact analysis shows that the proposed tax may drive up prices for banking services by 8 per cent, or around 60 euro cents per customer monthly.

Lithuanian Prime Minister Saulius Skvernelis has said his government would support the tax. The Lithuanian Finance Ministry estimates that enactment of bank asset tax law would bring in around 40 million euros per year, not 100 million, which is the ruling party’s estimate.

Ruling LFGU leader: «It is blackmail»

The LFGU leader, Ramūnas Karbauskis, described as «blackmail» a statement by the Association of Lithuanian Banks. According to him, the association’s claims had «nothing to do with reality» and called its estimates on a hike in bank service prices «a clear lie».  Karbauskis promised to get in touch with the owners of two Swedish banks with operations in Lithuania, SEB and Swedbank, to find out if such statements «have anything to do» with their position.

Nausėda, a former banker (the new Lithuanian President has worked for SEB Lithuania bank for quite some time), did not comment anything on the proposal to tax bank assets, but upped his demands this week to raise pensions in the country. Moreover, the head-of-state wants pension raises to outpace wage growth. Nausėda’s team urged the parliament to pass a law on faster raises of pensions.

 Lithuania lags behind most EU member states

Retirement pensions in the country have been indexed to the growth of wages since 2018 and increased 7.5 per cent this year. Nausėda’s proposal would see gradually raising the index coefficient so that pensions rise faster than wages over the coming five years. It is essential to alleviate poverty among the elderly, Nausėda is convinced.

According to the president’s adviser Simonas Krėpšta, the president’s office will draft a separate proposal for faster pension raises.

Figures from the European Commission show that Lithuania spends less on social security than most EU members states. It also has one of the highest levels of income inequality.

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