Lithuania’s proposed 2027 budget will further widen the government deficit and increase public debt, while ambitious revenue targets could prove difficult to meet, economists warned Friday after the government approved the draft budget.
The spending plan reflects continued fiscal expansion, with expenditure growing faster than nominal gross domestic product, even when the impact of European Union structural funding is excluded, said Indrė Genytė-Pikčienė, an economist at Artea Bank.
“Next year will be another year of generous fiscal expansion,” she told BNS, adding that declining EU structural support and fewer one-off economic tailwinds would make the outlook more challenging.
Tadas Povilauskas, an economist at SEB Bank, said fiscal policy would again stimulate the economy through borrowing. But rising deficits and public acceptance of persistent overspending could make it more difficult to consolidate public finances in the future without slowing economic growth.
The budget deficit is set to grow mainly because of higher social benefits and public-sector wages, much of which is linked to automatic indexation of pensions, benefits and salaries, Povilauskas said.
He questioned the need for an additional 150 million euros earmarked for a proposed family support package, arguing that some spending increases went beyond what indexation required. He also criticised the lack of emphasis on improving public administration efficiency.
However, he said higher social spending could support domestic businesses by boosting consumption among lower-income households.
Revenue targets under scrutiny
Genytė-Pikčienė questioned whether the government would collect all the revenue projected in the budget. Lithuania’s economy benefited this year from increased consumption following a reform of the second-pillar pension system, but that boost is expected to fade next year.
Povilauskas also described several revenue forecasts as ambitious.
Excise tax revenue is projected to rise by 11%, while value-added tax revenue is expected to increase by about 7.2%. He questioned whether the VAT target was realistic, particularly because 158 million euros of the expected increase is attributed to improved tax administration.
Household consumption is expected to grow more slowly next year as the effect of withdrawals from second-pillar pension funds fades, he said.
He also urged caution over the plan to collect 2.1 billion euros in corporate income tax, noting that the target for this year is expected to be missed.
Debt costs and EU deficit rules
Genytė-Pikčienė said the projected deficit was significant enough to raise the possibility of an infringement procedure by the European Commission because it would exceed the EU’s Maastricht deficit limit of 3% of GDP. She noted, however, that Lithuania was not the only country exceeding the threshold.
She warned that relying on borrowing to finance public spending could create serious long-term problems as debt servicing costs rise and leave less room for future policy decisions.
Povilauskas said interest payments would increase by 370 million euros next year, adding the equivalent of 0.3 percentage points of GDP to budget expenditure.
Public debt is expected to rise by another 6.5 billion euros in 2027, following an increase of 6.8 billion euros this year, reaching 48.2% of GDP by the end of next year.
The government is financing much of the increase in defence spending – from 2% to 5% of GDP over several years – through borrowing, while also increasing other expenditure, Povilauskas said. The Finance Ministry has acknowledged the risk that public debt could approach 60% of GDP by the end of the medium-term planning period.
Genytė-Pikčienė said lawmakers should carefully scrutinise any additional spending proposals during the budget process to prevent the deficit from growing further. She stressed that national defence and security must remain priorities because they are essential to economic prosperity, attracting foreign investment and supporting business stability.
Social spending and inflation
The draft budget maintains a strong focus on social spending and raising incomes, Genytė-Pikčienė said.
The average old-age pension is set to increase at a double-digit rate, while pensions for people with the required length of service are expected to rise by 11%. Salaries for teachers, statutory officers and cultural workers are planned to increase by 7.5%, with pay for judicial assistants rising by nearly 6%.
The government is seeking to offset pressure on household purchasing power from imported inflation, including higher fuel prices and heating costs, by increasing incomes, she said.
Lithuania has refrained from introducing broad measures to counter energy price increases, unlike some neighbouring countries, instead relying more heavily on income growth to cushion the impact on households.
Economist Romas Lazutka criticised the proposed 150 million-euro family package, saying its measures were universal rather than specifically targeted at people in the greatest need.
He said much of the budget deficit was effectively predetermined by legislation and existing commitments, including social benefits, education spending and public-sector collective agreements.
Reducing the deficit would likely require cuts to social spending, a politically unpopular step that would be difficult to implement, he said.
Lazutka also pointed to what he described as a structural imbalance between the state budget and the Sodra social insurance fund. Sodra regularly records a surplus and builds up reserves, while the central government runs a large deficit and borrows at interest rates higher than the returns earned on those reserves.
The arrangement means the government is paying more to borrow than it earns by investing money accumulated in the social insurance system, he said.
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