Mačiulis: increasing only the corporate tax would not be enough to finance defence needs sustainably

„Nerijus Mačiulis, Chief Economist at Swedbank, argues that an increase in corporate tax alone would not create a sustainable funding source for defence needs. According to him, the revenue from this tax is unstable and could fall sharply.

Nerijus Mačiulis.<br>V.Skaraičio nuotr.
Nerijus Mačiulis.<br>V.Skaraičio nuotr.
Daugiau nuotraukų (1)

Apr 12, 2024, 8:20 AM, atnaujinta Apr 12, 2024, 8:23 AM

„Some political parties are proposing to increase corporation tax more, which is popular among some voters. However, corporate tax revenues are very volatile. Especially when there is a tougher cycle for business, there may be no profit left, not to mention the fact that some companies may optimise their taxes and pay them outside Lithuania,“ Mačiulis told Žinių Radijas on Monday.

The economist believes that abolishing tax breaks is the easiest way to create sustainable funding for defence. However, last year's discussions on tax reform showed that such solutions are unpopular.

„The right way to go is to abolish tax breaks. But we have seen how unsuccessful this was last year. One of the reasons why tax reform did not gain support was because there was no interest in making it happen. Perhaps if we were to say that we could increase defence funding to 3% or 4% of GDP thanks to this reform, it would be harder to argue in favour of abolishing the tax breaks“, he explained.

However, Mačiulis mentions that the easiest way to finance defence is to increase the value-added and corporate tax (VAT) by 1%.

„The business communities and associations agree that this would be the case with a 1% increase in VAT and a 1% increase in corporate tax. This is probably the simplest way without finding a compromise on why to abolish these tax breaks,“ said Mačiulis.

The government should be bold in borrowing for defence

With Lithuania having the lowest debt in the EU, the government should not be afraid of borrowing to finance defence, Mačiulis said.

„If we are talking about the fact that we need here and now, once it is agreed that there are some measures that could greatly increase Lithuania's security, then borrowing is probably one of the best instruments“, the economist said.

„Just last week, the government's public finances were published, the budget deficit was significantly lower than forecast and planned, and the public debt was 38% of gross domestic product, double the European Union average,“ explained Mačiulis.

According to him, Lithuania would not have to comply with the EU's soon-to-be-enacted fiscal discipline rules, which do not allow a budget deficit exceeding 3% of GDP, if there was a clear decision on where exactly these additional funds were needed in the national defence system.

„The European Commission might say that it is not good to have a higher budget deficit, but here, the worst thing that could happen is that there would be no negative financial consequences,“ the economist underlined.

„Why should we tighten our belts here and pretend to be some kind of sacred cow when we have one of the lowest debts and a clear objective of where to spend it,“ the economist stressed.

According to Mačiulis, Germany is making a mistake with its fiscal consolidation policy, and Estonia is making a mistake with its new taxes.

„We are in the third year of an economic recession, we have the lowest debt in the European Union (...) There is a religious approach to public debt that is costing the entire Estonian population, and it should be abandoned,“ he added.

The economist said that with Europe currently in stagnation and a „semi-recession,“ a „strong counter-cyclical fiscal policy“ is needed, which would not only increase the country's physical security but also attract more investment.

ELTA recalls that in March, at the second meeting on defence funding initiated by Prime Minister Ingrida Šimonytė, four options were presented for raising the 400 million euros needed for the additional financing of Lithuania's national defence next year.

According to the first one, the amount could be raised by revising progressive tax rates, taxing individual activities, abolishing some exemptions, and increasing the corporate income tax to 16%.

Under the second, €420 million could be raised through a 1%-point increase in both value-added and corporate tax.

The third proposal, which would generate around €400 million, would increase the corporate tax rate by two percentage points, abolish the preferential rate for small businesses, and abolish the exemptions for heating and business licenses.

Meanwhile, the fourth proposal, which would generate €400 million, would consist of a two-percentage point increase in corporate tax and allocating part of the personal income tax to municipalities for defence.

For their part, the opposition groups that were not present at Šimonytė's meeting propose to find funds for defence by introducing a bank wealth tax, issuing defence bonds and reducing the shadow economy.

The opposition groups in the Seimas presented their proposals for additional funding for defence. These include proposals to introduce a bank wealth tax, defence bonds, an increase in corporation tax, and a reduction in the shadow economy.

Defence funding in Lithuania will amount to 2.75% of GDP this year, but the aim is to reach at least 3% in the coming years.

To unite society and encourage politicians to reach an early agreement on allocating 4% of GDP to defence, civic-minded Lithuanian businesses and organisations are joining the 4 Percent initiative.

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