Lithuania Sees 2016 Deficit Undershoot in Rebuke of EU Criticism

  • European Commission criticism `undeserved,' Sadzius says
  • Rising government spending meant to counter falling exports

Lithuania’s government will probably undershoot its budget deficit target next year and the European Commission’s criticism of the spending plan is undeserved, Finance Minister Rimantas Sadzius said.

Almost a month after the European Commission rapped Lithuania for pushing its medium-term deficit-cutting goal into the future, Sadzius said the country needed more government spending to stimulate an economy hit by falling exports to Russia. The commission used “faulty methodology” in estimating Lithuanian growth being 1.9 percent above potential, which contrasts with the government’s assessment that the economy is running below capacity.

“This is still a bad period for the economy next year,” Sadzius, 55, said in Vilnius. “Export markets have shrunk, and we are working intensely in search of new markets. But before these new markets open, such as the U.S. and China, there’s still a gap in time, and this is where consumption becomes the key driver for growth.”

With general elections due next year, the official 2016 deficit target of 1.2 percent of gross domestic product is the first that doesn’t represent a reduction since 2011. While next year’s target was revised down from 1.3 percent before it was approved on Thursday, the commission said on Nov. 11 the goal puts Lithuania “at risk of non-compliance.” Sadzius argued that he received backing of euro-area finance ministers and that assessment “lacks merit.”

The assessment was “somewhat of a surprise,” Sadzius said. “We’re among the 10 countries that the European Commission has no complaints about. Our economy indicates no risks. These are slightly contradictory results.”

Undershooting Target

Lithuania’s medium-term goal is to reduce its structural deficit to below 1 percent of gross domestic product. The government will probably undershoot the the general government deficit target in 2016, similarly to how it expects to come in below this year’s 1.2 percent of GDP goal by cutting the gap to 0.9 percent, Sadzius said.

Still, Sadzius argued that more spending is necessary due to slowing growth since Russia banned Lithuanian food imports in retaliation to EU sanctions over the country’s support of separatists in Ukraine. The economy will probably expand less than the 1.9 percent projected by the Finance Ministry this year, he said. Growth projected at 3.2 percent next year will be below potential, so the budget’s spending increases on defense, minimum wage, public salaries and pensions, will boost consumption to make up for the export decline, Sadzius said.

“We have to sustain domestic consumption for this period,” he said. “This is why the new social measures are aimed at lowest earners, who will immediately spend the extra income.”

The budget is “realistic and contains no fantasies,” while the income plan is designed on “very conservative” assessment for next year, he said.

Before it's here, it's on the Bloomberg Terminal.