Lithuania Votes as Austerity Upshot Points to Cabinet Ouster

Lithuanians went to the polls today in an election that’s set to oust the government after austerity measures intensified the Baltic nation’s deepest recession, triggering record-high unemployment and an exodus of workers.

Voting began at 7 a.m. in the capital, Vilnius, with the opposition Social Democrats likely to lead a new coalition, a survey by Baltijos Tyrimai shows. A Cabinet will be formed after a second round of balloting on Oct. 28 in the single-mandate districts that comprise half of the 141-seat parliament. Prime Minister Andrius Kubilius’s Homeland Union-Christian Democrats poll third. Voting stations close at 8 p.m., with exit polls due right after.

“We expect to win this election and get the opportunity to form a new coalition government,” Social Democrat leader Algirdas Butkevicius said while waiting to vote today in Vilnius. Potential coalition partners could include any other parties that get strong voter support, Butkevicius said.

Kubilius cut wages and raised taxes equivalent to 12 percent of economic output in 2009 and 2010 amid the European Union’s second-worst recession.

While voters may be lured by pledges to boost wages and trim sales levies, the state of public finances and the breadth of the new coalition will block deviation from Kubilius’s fiscal discipline, according to Oxford University’s Ainius Lasas.

Austerity Backlash

“The left-of-center parties won’t go through with their rather populist promises, for objective reasons and because they won’t have enough power to make it happen,” Lasas, a senior research fellow focusing on media and democracy in central and eastern Europe, said Oct. 10 by phone. “It will all be blamed on the coalition.”

Kubilius is trying to avoid the fate of European leaders who lost power in a wave of protests against austerity measures that contributed to recessions in economies from Romania to Spain instead of tackling the euro area’s debt crisis as envisaged.

His government is seeking to narrow this year’s budget deficit to close to the EU’s cap of 3 percent of gross domestic product from 9.4 percent in 2009, plans that have helped push borrowing costs to record lows.

The yield on Lithuania’s dollar bond due 2022 was 3.552 percent Oct. 12, near the lowest since it was sold in January. The cost of insuring state debt against non-payment for five years using credit-default swaps was 152 basis points, compared with 845 points in February 2009, according to data compiled by Bloomberg.

‘Fantasy’ Promises

“Promises by the left-leaning parties to raise pensions and so on are from the realm of fantasy and may just be forgotten,” Violeta Klyviene, an economist with Danske Bank A/S (DANSKE) in Vilnius, said Oct. 10 by phone. “Rising borrowing costs would serve as a cold shower for these politicians, simply forcing them to stick to discipline.”

The Social Democrats have 24 percent support, compared with 18 percent for Russian-born entrepreneur Viktor Uspaskich’s Labor Party, 12 percent for Homeland Union, 8 percent for the Liberal Movement, part of the current coalition, and 7 percent for impeached ex-President Rolandas Paksas’s Order & Justice, according to a Sept. 16-28 poll by Baltijos Tyrimai for the ELTA news service.

Two more parties, the Lithuanian Polish Election Action and the Way of Courage, have 4.7 percent and 4.5 percent backing, just below the 5 percent parliamentary threshold, according to the survey of 585 people, whose margin of error was 4.1 percentage points.

Nuclear Referendum

Twenty-three percent of registered voters, who will also participate in a non-binding referendum on building a nuclear- power plant backed by Kubilius, were undecided.

While Lithuania’s GDP will advance 2.5 percent this year and 3 percent in 2013, according to the Finance Ministry, output plunged almost a quarter as Kubilius implemented austerity during the recession.

As the $43 billion economy has expanded, unemployment has fallen from a peak of 18.3 percent in the second quarter of 2010. Still, it remains above 13 percent, driving emigration to countries such as Norway and the U.K.

As a result, Lithuania’s population dropped below 3 million for the first time in April, compared with 3.7 million in 1990. About 53,900 Lithuanians left the country in 2011, while 15,700 returned, the statistics office said in March.

Jobs Pledge

“As a result of the huge emigration, we even face labor shortages,” the Social Democrats’ Butkevicius said today. “If we head the new government, one of our priorities will be initiatives that we hope will bring people back to Lithuania.”

Spending cuts and tax increases since 2008 have also pushed inequality to the highest level in the EU, with the proportion of people at risk of poverty surging to the biggest among the bloc’s 27 members, according to Eurostat.

The Social Democrats, who have advocated euro adoption a year later than Kubilius’s 2014 goal, have pledged to create jobs and adjust income-tax rates to benefit those who earn least. The Labor Party says it will raise the minimum wage to 1,509 litai ($563) a month from 800 litai and reduce the value- added tax on basic food stuffs.

These plans contradict promises by both parties to maintain control of fiscal affairs, Kubilius has said. President Dalia Grybauskaite, a former EU Budget Commissioner who must name Lithuania’s new premier after the elections, has criticized some parties’ spending pledges, urging fiscal responsibility.

For Lithuania

“I hope they’ll think about Lithuania and not just about themselves,” Grybauskaite told reporters after voting today in Vilnius, asked about her expectations for the next government.

Investors would only fret if the elections yield a government that differs from those seen since independence from the Soviet Union in 1990, according to Tomas Andrejauskas, head of Swedbank AB (SWEDA)’s markets unit in Lithuania.

“Everyone expects stability, a coalition like we have now, no big changes,” he said Oct. 8 by phone from Vilnius. “If somehow the traditional parties lose in a big way -- the conservatives who are in power now, the Social Democrats -- then the markets might be uneasy.”

The new coalition will probably have to include Homeland Union or the Liberal Movement, which engineered the austerity policies of the last four years, according to Oxford University’s Lasas.

Seeking Continuity

Prime Minister Andrius Kubilius was optimistic after voting today in Vilnius that his party might perform better than polls have suggested, and remain in power

“I hope that continuity, in terms of both policy and people, will be guaranteed,” Kubilius told reporters. “This four-year period was complicated. We had to guarantee responsible financial policy and, as the president has noted, carry out important measures in the energy sector. I hope that such responsible policy will continue.”

Algirdas Butkevicius, leader of the Social Democrats, has vowed to maintain fiscal discipline as Lithuania gears up to assume the EU’s rotating presidency for the first time in July.

“There will be no revolutions in the budget,” Butkevicius said in a Sept. 18 interview in Vilnius. “Lithuania won’t follow the same path Greece, Italy or Portugal did.”

To contact the reporter on this story: Bryan Bradley in Vilnius at bbradley13@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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