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The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by 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.
Budget revenues – above the plan
During the first six months of this year, national
budget revenues rose to almost LTL 10 billion –
4.6% more than during the same time a year ago
and 2.4% more than planned. State budget
revenues exceeded the plan by 1.1% over the
same time.
State budget revenues in January-June 2012, m LTL
9000
137.2
8000
138
7000
6000
128
5000
4000
118
3000
2000
1000
99.7
101.1
106.4
108
99.2
0
98
Budget (EU
supp.excl)
VAT
2012 actual
2011 actual
PIT
Excise
duties
Prof it tax
2012 plan
Plan execution, % (rs)
Source: Ministry of Finance
At the end of last year, when the Ministry of Finance
revised its GDP growth forecast for 2012 down to
2.5%, it said that budget revision and additional
consolidation measures might be needed in the
middle of this year. However, above-the-plan
revenues mean that neither tax increases nor
spending cuts are necessary. As any changes had
to be proposed before 1 June, it is now clear that
any above-the plan income will be used to decrease
the budget deficit rather than increase expenditure.
The higher-than-planned budget income was due to
the higher-than-forecast (by the Ministry of Finance)
economic growth. The Ministry of Finance forecast
2.5% GDP growth this year, whereas growth was
3.9% in the first quarter of 2012 (Swedbank
forecasts GDP to expand by 3.3% this year).
However, the higher-than-expected growth was not
the only reason behind the better income collection.
The government has introduced some rather
successful measures to fight the shadow economy.
For example, last year, the number of times to
cross the border of a third country was limited to
five a month. During any further trip, such goods as
fuel, tobacco, and alcohol are subject to valueadded tax (VAT) and excise taxes. In addition, the
state tax inspectorate inspects companies that pay
their employees lower-than-minimum wages. Earlier
this year, the State tax inspectorate announced that
about 5 thous. companies will have to explain if
about 280 thous. of their employees really do not
work all day. This addresses a quite common
practice of paying only a fraction of salary officially
and paying out the remainder in cash without
paying taxes. According to Statistics Lithuania, in
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: [email protected] 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 2012
the tax changes will go into effect on 1 January,
2013.
the first quarter of this year 18.9% out of all
employed people were part-time employees. The
introduction of cash registers in markets (on 1 May,
2011 for food products and on 1 May, 2012 for all
products) must have reduced the size of the
shadow economy as well.
General government debt will decrease
next year
The general government debt increased rapidly
during 2009-2010; however, it will peak this year.
We forecast that the general government debt will
decrease from 40% of GDP in 2012 to 39% of GDP
in 2013, while the budget deficit will narrow from 3%
to 2%. The social security fund’s deficit will make up
the most of the deficit during this and the following
year.
Even though measures to fight smuggling mainly
affect only small-scale illegal activities, the amount
of excise duties in January-June of this year was
2.4% higher than during the same months of 2011.
Revenues are still 0.8% below the plan, but
probably only temporarily. Excise tax revenues
grew at a slower pace due to slower contraction in
smuggling – a Nielsen “empty-pack” survey shows
that the percentage of smuggled cigarettes dropped
from 43.0% at the end of 2010 to 30.8% at the end
of 2011 and 29.3% in the second quarter of 2012.
General government finances, % of GDP
Personal income tax revenue is 6.4% higher than
planned and 6.4% higher than a year ago. The
underlying reasons are the growth in wages and
employment due to the recovering labour market
and the possibly slightly lower unofficial
remuneration. According to the State Social
Insurance Fund Board, the number of insured has
been rising constantly. During January-May, the
difference between the number of employed and
the number of fired workers was 31.6 thousand.
2%
56%
0%
48%
-2%
40%
-4%
32%
-6%
24%
-8%
16%
-10%
8%
-12%
0%
2003
2005
2007
2009
Central gov . (ls)
Social sec. f unds (ls)
Profit tax revenues exceeded the plan by 37.2%
during January-June of this year. This large
deviation was observed because some of the
taxpayers decided to pay taxes in June rather than
in July, as had been expected. In the first half of
2012, compared with the same time a year ago
these revenues have increased by 10.1% as
corporate profits rose by about 20% in 2010 and
2011. The profit tax income is growing slower than
corporate profits because companies are allowed to
reduce their payable profit tax (up to 50%) if they
have invested in fixed capital. Furthermore,
companies can transfer losses incurred in 2009 to
the following years and thereby reduce their
payable profit tax.
2011
2013f
Local gov . (ls)
Debt (rs)
Source: Lithuanian MoF, Swedbank f orecasts
According to two different estimates made by the
European Commission (EC) last year, when the
general government deficit was 5.5%, the structural
deficit amounted to 4.6% or 4.3%.1 Based on the
production function approach, the EC forecasts that
the structural deficit should decrease to 2.6% in
both 2012 and 2013 (another EC estimate suggests
1.9% and 1.7% deficits in those years). As our
actual budget deficit forecast is lower than the EC's,
it is thus likely that the structural deficit should be
narrowing faster than projected by the EC and
reach structural balance in 2014.
At the end of June, the Lithuanian parliament
lowered VAT taxes for press; technical assistance
means for disabled and their repair; and public
transport tickets. According to estimates this would
cost the budget more than LTL 100 million, with the
largest losses coming from the smaller VAT
receipts from the sale of public transport tickets.
President Dalia Grybauskaitė vetoed the law
because of this loss in revenue from public
transport tickets. According to the President, it is
too big a burden for the budget and the effect on
prices is doubtful. The parliament decided to
disregard the President’s veto and passed the law –
The Lithuanian parliament has ratified the Fiscal
Pact, which is supposed to ensure greater fiscal
discipline. The main rule says that the national
budget has to be balanced or in surplus. This would
be achieved if the structural deficit2 did not exceed
0.5% of nominal GDP. Adherence to this will curb
any irresponsible increase in budget expenditure by
1
Based on the production function approach, the cyclical
component of GDP was -0.9%; based on the HodrickPrescott filter method, it was -1.2% in 2011
2
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 2012
positive impact as well, increasing the demand for
government securities.
politicians willing to please their electorate. This
adherence should decrease the political cycles and
could be a good sign for the markets. Together with
the stable debt level and falling budget deficit this
should have a positive effect on the borrowing
costs.
Compared with the peak at the end of 2011, the
CDS rate has fallen the most for Lithuania as well. It
has decreased by 109 points from its peak in
Lithuania, by 77 in Estonia, and by 73 in Latvia.
Fastest decrease in interest rates among
the Baltic countries
Credit default swaps (CDS), USD, 10 years
At the end of June, the 10-year bond rate in
Lithuania fell to its lowest level this year. Since the
beginning of June, it has decreased more than in
Latvia and on 28 June it was 4.78% - 34 basis
points lower than in Latvia.
400
350
300
250
10-year bond yield, USD
200
6.5
150
6.3
6.1
100
5.9
50
5.7
2011.01
5.5
2011.04
Source: Bloomberg
2011.07
2011.10
Lithuania
2012.01
2012.04
Latv ia
Estonia
5.3
5.1
During the rest of the year, income from personal
income taxes will be increasing because of increase
in employment and wages. Meanwhile, revenue
from VAT and excise duties will depend on
consumption. The scope of this will be determined
by the situation in export markets and,
subsequently, household confidence and income. In
May, the growth of both retail trade, except for
motor vehicles, and manufacturing, except for
refined petroleum products, accelerated, and
confidence kept increasing in June as well. In the
future, household consumption will be supported by
cheaper commodities and lower inflation, as well as
by the European Central Bank’s decision to cut the
base interest rate to historical lows.
4.9
4.7
4.5
2012.01
2012.02
2012.03
Source: Bloomberg
2012.04
Lithuania
2012.05
2012.06
Latv ia
Meanwhile, shorter-term borrowing costs have
dropped below the pre-crisis level. At the end of
June, they were 1.13% for 6-month, 1.42% for 12month, and 2.35% for 2-year treasury bills.
During the latest emissions of the savings notes at
the end of May and June, Lithuania also borrowed a
record amount - LTL 140 million for 2- and 1- year.
Since May 2011, the borrowed sum has exceeded
LTL 10 million only a few times. The main reason
for this was the Ministry of Finance's distribution of
savings notes through the locally operating banks.
The higher savings rate and flight to safety after the
bankruptcy of Bank Snoras must have had some
Swedbank
Economic Research Department
SE-105 34 Stockholm
Phone +46-8-5859 1028
[email protected]
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.
Vaiva Šečkutė
Nerijus Mačiulis
Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
completeness of the report and cannot be held responsible for any error or omission in the
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 for
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
monthly newsletter The Lithuanian Economy.
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