I have two solid arguments for this.
First, when €6 billion was invested to revive the Lithuanian economy during the pandemic, the share of non-performing loans was a very small fraction – just 3% in Lithuania. The figures speak for themselves: the state spent €6 billion to mitigate the effects of the pandemic on the economy.
What were the returns? From 2019 to 2022, the money has been repaid, and our gross domestic product BVP (GDP) has grown by €14 billion. And our public debt has fallen from 44% of GDP in 2021 to 38% in 2023. So, what I suggest we conclude is that when we grow our GDP, the amount of money spent on defence grows proportionately.
Of course, we are now talking about a higher amount and a higher share of GDP for defence: we should spend more than 3%. But we need to think about our future, not act schematically and recklessly, because business competitiveness is the basis of the vitality of our economy and growth. It seems as simple as what some parties are suggesting – let us take the 5% corporation tax and raise it because it is supposedly higher in other countries (yes, it is higher as a percentage, but all our neighbours have a zero tax on reinvested earnings, which can adjust that percentage significantly).
Why raising corporation tax alone won’t have the desired effect?
First, an increase in corporate tax would have a negligible effect on the state budget. The 2024 budget's revenue structure foresees that the state budget will generate 10.6% of total budget revenue from corporate tax and 13% of tax revenue this year.
Moreover, as corporate tax is an essential element of cross-border competition for investment, an increase in corporate tax would hurt Lithuania's business climate and attractiveness for investment. On the other hand, it would have a marginal effect on budget revenues. By comparison, Value Added Tax PVM (VAT) will generate as much as 48% of the total tax revenue of the state budget.
Moreover, it is essential to assess the corporate income tax collection from 2022 onwards and the correlation of that collection with investment.
Since 2022, as the war in Ukraine began and our geopolitical situation became alarming, corporation tax, which used to bring an average and stable €500–700 million to the budget, has suddenly soared to unprecedented heights. In 2022, we will collect EUR 1.2 billion. Last year, almost EUR 1.7 billion. We are pleased with the increase in budget revenue, but at the same time, the share of reinvestment by us and foreign companies is shrinking drastically to just 1% of GDP. What do you think is happening here?
The explanation is straightforward: foreign businesses and, presumably, Lithuanian companies are taking their profits and paying their taxes, but they are no longer investing in Lithuania and are looking for investment opportunities elsewhere. So, if we are irresponsible and do not create an additional incentive to reinvest some of the profits in Lithuania, then our economy, which has been growing for a long time and only last year, slowed down a bit (but this was happening all over the EU, because it was just a robust growth before), will start to underperform in the long run. Then, that rising GDP will shrink, taking with it all that much-vaunted 3% or more for defence. What good is that higher percentage if it is calculated on a much smaller amount?
Of course, investment is also directly correlated with geopolitical security, so I would like to stress that we are unequivocally in favour of increasing defence funding. Let us do it in a measured and responsible way.
The Confederation of Lithuanian Industrialists consistently proposes to increase the defence industry's capacity in Lithuania so that the money spent on defence can revitalise our country's economy and, of course, come back in the form of taxes.
Therefore, we propose that the first step is to use all the opportunities that are already available to increase the amount of money spent on defence and only then to consider raising taxes, whether taxed on business, VAT or personal income tax.
