73.6. State governance reform through elimination of overlapping functions and reduction of controlling bodies.
\nVIII. CONSISTENCY OF LITHUANIA’S CONVERGENCE PROGRAMME FOR 2009 WITH NATIONAL LISBON STRATEGY IMPLEMENTATION PROGRAMME FOR 2008-2010 74. The assessment of the compatibility between the programmes in question is provided below following the guidelines laid down in the European Commission’s document published on 29 August 2008 regarding better consistency of stability and convergence programmes with national reform programmes:
\n74.1. Implementation of structural reforms is based on measures laid down in the Programme of the Government of the Republic of Lithuania and the National Lisbon Strategy Implementation Programme for 2008-2010. Following the EU 2020 strategy and the new Integrated Guidelines that are to be approved by the European Council in 2010, the new national structural reforms programme is planned to be drafted, which will take into account recent macroeconomic trends having an effect on the implementation of structural reforms.
\nThis Programme has been drafted following the central scenario for the economic development published by the Ministry of Finance in February 2010.
\n74.2. The reflection of the impact of the structural reforms on the budget in the Programme: the direct impact of Lisbon measures on the budget balance has been taken into account by calculating government financial indicators covered in this Programme. The impact of structural reforms on the budget is illustrated by Table 15, which shows annual developments from 2009. The amount of funds allocated for the reform is presented for the year 2008.
\nTable 15. Direct impact of major structural reforms on public sector finances (Increased spending or decreased revenues (+); decreased spending or increased revenues (-) Major structural measures Spending/ revenue category (according to ESA’95) 2008 2009 2010 2011 2012 National currency*, LTL/m GDP % National currency*, LTL/m GDP % National currency*, LTL/m GDP % National currency*, LTL/m GDP % National currency*, LTL/m GDP % 1. Education reform1 intermediate consumption and gross fixed capital formation 16.03 0.01 279.63 0.3 455.78 0.49 -21.93 -0.02 2.46 0 2. Healthcare reform2 intermediate consumption and gross fixed capital formation 0 0 3.5 0 57 0.06 14.5 0.01 -7 -0.01 3. Taxation reform3 direct tax-driven revenues 800 0.72 -91 -0.1 289 0.31 75 0.08 indirect tax-driven revenues -468 -0.42 -1407 -1.52 -686 -0.73 -461.5 -0.47 4. Environment4 intermediate consumption 120.7 0.11 644.59 0.7 -379.6 -0.4 -153.72 -0.16 19.73 0.02 5. Measures encouraging industry, commerce and innovations5 intermediate consumption and gross fixed capital formation 6.38 0.01 -2.34 0 -1.72 0 -0.98 0 -0.71 0 6. Upgrading or building new infrastructure for transport and communications6 gross fixed capital formation 433.05 0.39 561.31 0.61 344.54 0.37 -286.98 -0.29 -183.66 -0.18 7.
\nImplementation of social, youth and labour market reforms**7 intermediate consumption 629.93 0.57 -419.53 -0.45 64 0.07 -100.03 -0.1 -24.66 -0.02 8. Agriculture8 grants, intermediate consumption and gross fixed capital formation 3335.6 3 3.5 0 -725.2 -0.77 517.5 0.53 -174.8 -0.18 Overall direct impact on budget 4873.69 4.38 -427.34 -0.46 -582.19 -0.62 -418.13 -0.43 -368.64 -0.37 Pension reform: social contributions (D.61 – contributions to private pension funds) 1114.99 1 -659.7 -0.7 -121.19 -0.09 604.36 0.72 192.92 0.23 Sources: Ministry of Finance, Ministry of Social Security and Labour, Ministry of Education and Science, Ministry of Health, Ministry of Agriculture, Ministry of Environment, Ministry of Transport and Communications *State or EU funding, or state and EU funding (in case of co-financing). **State or EU funding, or state and EU funding (in case of co-financing), including social insurance funding of certain programmes.
\n1 Measures 15, 16, 17, 18, 19, 21, 22, 30, 94.1, 96.1, 96.2, 111, 112, 113, 114, 115, 117, 118 of the National Lisbon Strategy Implementation Programme for 2008-2010 approved by Resolution No 1047 of 1 October 2008 (Valstybės žinios (Official Gazette) No124-4718, 2008).
\n2 Measure 6 of the National Lisbon Strategy Implementation Programme for 2008-2010.
\n3 Updates covered in the Programme on the amendments to laws of the Republic of Lithuania (Law on Value Added Tax, Law on Excise Duty, Law on Lottery and Gaming Tax, Law on Personal Income Tax, Law on Corporate Income Tax).
\n4 Measures 67, 68, 69, and 73 of the National Lisbon Strategy Implementation Programme for 2008-2010.
\n5 Measures 24, 25, 26, 31, 32, 33, 34, 35, 38, 39, 40, 41, 42, 44, 45, 50, 51, 53, 54, 55, 56, 57, 58, 60, 65, 66 of the National Lisbon Strategy Implementation Programme for 2008-2010 6 Measures 74, 85, 87, 88, 89, 90, 91, 92 of the National Lisbon Strategy Implementation Programme for 2008-2010.
\n7 Measures 14, 95, 96.5, 97.1, 97.2, 98.1, 100.1, 100.3, 103.1, 103.6, 106.1, 106.3, 107.1, 119 of the National Lisbon Strategy Implementation Programme for 2008-2010.
\n8 The reform has not been covered in the National Lisbon Strategy Implementation Programme for 2008-2010 (it includes the following measures: measures implementing common agricultural policy; restructuring of agriculture and fisheries; land management and administration; building institutional and administrative capacities; structural support and rural development measures). –––––––––––––––––––– Annex to the Convergence Programme of Lithuania of 2009 CONCEPTUAL SOLUTIONS of the REFORM of BUDGET planning and execution framework to INCREASE BUDGET POLICY TRANSPARENCY AND PREVENT CRISES Vision: development of such a budget deficit planning, approval, performance monitoring and result evaluation system which would make the prudent budget policy rules a publicly supported moral value of civic society. The key goal of the reform is to create necessary conditions for the establishment of civil society which would control and guarantee that the prudent budget policy rules are properly respected. The reform aims at accommodating the interests of active citizens to avoid additional taxes, which will increase if no measure is taken to prevent repetition of an imprudent budget policy that resulted in higher debt servicing expenses of the public sector. The implementation of the reform would facilitate active citizens to support responsible politicians, who take care of the financial sustainability of the public sector and stability of economic growth: mass media would regularly receive clear information on the public budget funds allocated for the maintenance of economic stability, the implementation of those plans during the year and allocation prospects for the medium term.
\nThe reform aims at providing concise and generalised information on the prospects for stabile financing of the state functions and the long-term impact on the future taxation level against current large quantity of public information on the general government sector finances. Therefore the budget indicators, measuring the impact of the budget on inflation and employment, should be clearly defined; information thereof should be public, renewed on a regular basis and consistently evaluated by the professionals independent of executive authority. The continuity of the system should be assured by the responsibility of politicians and the civil servants of political trust in control of the budget preparation and implementation.
\nThe vision builds on the effective international experiences.
\nThe Mission: to meet the provisions of the Constitution of the Republic of Lithuania: the provision of Article 5 that “state institutions shall serve the people” and the provision of section 1 of Article 94 that “the Government of the Republic of Lithuania ... shall protect the inviolability of the territory of the Republic of Lithuania, guarantee State security and public order”. To secure stability of economic growth that was lost due to failure to allocate the state budget funds for demand management of aggregate demand in the period 2004-2008 and subsequently causing the crisis that brings about the social exclusion of the citizens of the Republic of Lithuania, increases in tax rates, cutbacks in funding – ignoring strategic planning principles – for national defence, social care, public order and other areas strengthening national security. In compliance with a new legislation regulating budgeting rules, to provide systematic allocation of funds with the aim of implement the following guiding principles of the Treaty on the Functioning of the European Union (OL 2008 C 115, p. 1): stable prices, sound public finances and monetary conditions and a sustainable balance of payments.
\nCONCEPTUAL SOLUTIONS TO THE CHALLENGES OF BUDGET PREPARATION AND IMPLEMENTATION SYSTEM No.
\nShortcomings Preventing Macroeconomic Stability Conceptual Solutions Comments 1.
\nAt present, the budget planning procedure does not foresee indicators controlling its macroeconomic impact on inflation, employment, external balance, risk premium, structural condition of public sector finances and the future taxation level. The state budget does not foresee an option to plan allocations for the maintenance of economic stability and thereby guarantee efficient, stable and strategic funding of all other state functions, irrespective of the fluctuations of economic indicators. The guarantee of macroeconomic stability and stable funding of state functions impervious to the fluctuations of economic indicators in the medium term has never been set as the goal of the budget project, though it is the sole instrument under the arrangement of the Currency Board. For the last decade, the responsibility to secure macroeconomic stability and economic development lay with the Ministry of Finance, but it had no opportunity for the planning of such allocations: allocations for the anti-inflationary demand management policy cannot be transparently planned and effectively implemented under the provisions of the current Organic Budge Law of the Republic of Lithuania.
\nDefine new indicators: fiscal stance (budget policy stance), fiscal impulse (impulse to budget policy stance). The surplus in the balance of the general government sector during the economic upturn and positive fiscal impulses should ensure the flow of funds into fiscal reserves that could be used to stimulate national economy, to increase employment and to finance stable national defence, social care, public order and other areas strengthening national security during the time of economic recession.
\nWhile planning a state budget, introduce an obligatory rule to submit information on the tax increase risk indicator, showing how a state budget provides for the long-term welfare of citizens and secures stability of tax rates each year.
\nSuch indicators are used by the Finance Ministry of New Zealand and the International Monetary Fund as it exerts financial surveillance.
\nFuture tax increase indicator is used in EU fiscal surveillance.
\n2.
\nAt the moment, there is no automatic binding obligation to implement an anti-inflationary budget policy ensuring the stability of economic growth and meeting the convergence criteria, despite Lithuania's participation in the second Exchange Rate Mechanism (ERM II) for 5 years and the 15 year-long functioning monetary policy system based on a fixed national currency rate vis-à-vis the basic currency.
\nThe output gap indicator is defined, it automatically leads to a legislative obligation to plan and implement a plausible anti-inflationary budget policy.
\nIntroduction of public discussions of non-governmental independent institutions on the evaluation of other inflationary factors and the procedure of coordination of possible and flexible political actions.
\nThe instrument is a novelty as it validates a prudent approach to varying indicators. A part of analysis shows that budget discipline rules are reliable only if they are responsibly flexible.
\n3.
\nAbsence of public and independent monitoring of the general government sector balance indicator, fiscal stance and fiscal impulse. It is not foreseen that the accountable civil servant of the highest political trust of the Ministry of Finance should regularly submit to the Seimas of the Republic of Lithuania the report on the budget policy continuity and the implementation of targeted general government sector balance indicators. The Treaty on the Functioning of the European Union specifies international commitments of Lithuania regarding the compliance with the reference values of the general government sector balance indicator; however, the current Organic Budget Law of the Republic of Lithuania does not provide for planning of funding to meet those commitments and the national control of the implementation of funding thereof. Lithuania has spent a good amount of funds to build its reputation as a country that adheres to a very strict budget discipline, plans and maintains stable finances; in order to maintain the reputation, it was possible to save by borrowing money at a low interest rate, but Lithuania's reputation is not considered as the equivalent to public property and is not treasured, though a good name is an asset in the company accounting practice.
\nThe Seimas of the Republic of Lithuania is delegated to initiate the procedure of a quarterly control of implementation of targeted state budget balance indicator, fiscal stance indicator and fiscal impulse: institutions independent of executive authority forward independent conclusions regarding the expected results of implementation of the policy and planned indicator targets. The same principle guides the arrangement and evaluation of yearly results as well as additionally reports on the implementation and prospect of the targeted performance of the Ministry of Finance.
\nLithuania’s reputation, as the country’s that adheres to a very strict budget discipline, plans and maintains stable finances, is treated as an asset. Reputation maintenance indicators are low-rate risk premiums and credit worthiness rated by credit-rating agencies.
\nQuarterly monitoring system is applied in Australia, while the yearly monitoring system is in use in the United Kingdom (top official submits a budget balance vision for the medium term and explains why the tasks were not carried out). Brazil applies a pay freeze for civil servants and the Penal Code.
\nIn Estonia, the State Audit Office is responsible for fiscal monitoring.
\n4.
\nAbsence of sanctions for the violations of the rules of the budgetary disciple.
\nAbsence of regulations for automatic measures to reduce the losses in case the Seimas of the Republic of Lithuania rejects to approve the draft budget in time.
\nFinding of responsibility for failure in performance regarding the planned general government sector balance indicators and anti-inflationary policy indicators.
\nDevelopment of Best Alternative To Negotiated Agreement. It would strengthen the negotiating powers of the Ministry of Finance in the process of budget preparation: appropriation managers are obliged to stand ready for the implementation of the provisions of the Constitution of the Republic of Lithuania to freeze expenditure at the last year’s level.
\nSanctions in developed countries are applied though moral pressure on top civil servants. Developing countries also resort to financial pressure by cutting salaries for civil servants.
\n5.
\nAbsence of legislative provisions to give a clear definition of the targeted general government sector balance indicators, though the implementation of the provisions of EU treaties and stability of the long-term financing of general government functions is dependent on allocation of funds for the achievement of this indicator.
\nThe targeted general government sector balance indicator in ESA95 and accounting reclassifications, which show a relation between national accounting and ESA95 and clearly demonstrate that the budget allocates enough funds to implement the provisions of international treaties and secure the long-term financing of state functions.
\nMember States, which are using ESA95, are most accurate in meeting the general government sector balance indicators, thereby assuring stable economic growth and financing of state functions.
\n6.
\nNon-regulated planning of budget revenues and development of the central scenario of economic indicator projections. Absence of the validation of positive impact of unexpected revenue windfall on the automatic implementation of an anti-inflationary policy.
\nValidation of planning of revenue windfall raised due to inflation and its use for temporary financial investments, thus implementing an automatic anti-inflationary policy.
\nEconometric analysis shows that allocation of the unexpected revenue windfall, which was raised due to the economy cycle, for deficit reduction is an efficient instrument to maintain price stability.
\n7.
\nAbsence of legislative provisions for the binding consideration procedures of the European Commission recommendations to take them into account while approving a state budget; therefore during a budget approval there was no option to allocate funds for the implementation of those international commitments and thereby avoid foreseen sanctions.
\nLegislation stipulates that the Draft Law on the Financial Indicators of the State Budget and Municipal Budgets of the Republic of Lithuania is submitted to the Seimas together with the conclusions of the Government of the Republic of Lithuania on purposefulness in the implementation of the recommendations or invitations outlined in the latest opinion of the Council of the European Union.
\nImplementation of the budget policy recommendations of the Council of the European Union that are submitted to Lithuania according the Treaty on the Functioning of the European Union.
\n8.
\nAt the moment, the use of the unique national terminology of financial accounting prevents public from receiving brief and clear information on the fiscal stance and allocation of funds to meet international commitments.
\nLogical separation between financing and expenditure is secured. Net borrowing is not to be confused with an increase in debt.
\nSimplicity of the system and conformity with international standards enhance its transparency. ––––––––––––––––––––