Defects of the Current Budget System

The principles and rules of compiling the state budget, laid out in the Law on the Budget Structure, fail to ensure expedient, orderly, transparent and efficient public spending. The principles and procedures were developed at the time when the main target was a budget independent of the Soviet Union. It was installed with scant regard being paid to what principles should be pursued on the revenue and expenditure sides. The questions about what functions the state should perform and what financing mechanism should be employed remain unaddressed.

The approaches to compiling the state budget in Lithuania are twofold. One of them consists of allocating funds according to functions assigned. The other approach involves expenditure assignment according to the administrators of funds. Neither of the methods is used consistently.

The functions outlined in individual expenditure categories are far from uniform. Some of the functions comprise outlays that have nothing to do with their execution. Certain expenditure groups lack an explicit identification of their administrators. The classification of administrators varies in different expenditure categories.

The analysis of the budget structure points to two complementary conclusions. First, the unsystematic approach serves to obscure the actual structure of budget expenditures. Second, it triggers an imprudent and inexpedient allocation of public resources.

The Purpose of the Reform

The purpose of a pro-liberal budget reform is to redesign the state budget so as to create conditions conducive to lifting the tax burden and curtailing redistribution.

The Principles of a Pro-Liberal Budget System

A declining tax burden and redistribution. Reductions in both the absolute and relative size of the state budget should be combined with privatisation of government functions. Earmarked, or trust-fund, taxes that are charged on the services rendered by the state should be used only to finance said services.

Public resources should be distributed by the highest representative institution-the Seimas. The Seimas should lay out the functions of the state in a single constitutional law. Ministries and other government agencies should be allotted as much money as is needed to finance their operational activities (salaries, premises, etc.) according to the estimates drawn. The expediency of financing any government body should be determined, not by the ministry concerned, but by the Seimas in relevant budget legislation.

Expedient financing. Funding should be extended, not for the areas "traditionally" financed by the state, but for the tasks needed to accomplish the objectives specified by law.

Integrity. All public revenues and expenditures-including special funds and borrowing as long as such exist-should be projected in the state budget.

A balanced budget. To terminate the disbursement of redistribution over generations, the state should expend to the extent of revenues raised, that is, expenditures should not exceed revenues, and government borrowing should be outlawed.

Transparency. Budget legislation should be accurate, explicit and exhaustive. It should outline all the objectives and tasks assigned to the state as well as the administrators of funds.

Limited investment activity. Investments should be made, not from the state budget, but with funds of private individuals and enterprises. Government investments are tolerable as long as they facilitate the pursuit of the objectives set.

Public funds should not be used for business activity. Public funds should be used neither for supporting enterprises nor for capital formation. The assets remaining under state control should be privatised.

An explicitness execution of the budget. The distribution of public spending should be subject to exhaustive, detailed regulations and appropriate organisation. If revenues raised fall short of, or exceed, the projected level, the assignment of expenditures should be reduced or increased accordingly, based on the established procedure, that is, proportionally to all recipients or in order prescribed by law.

Reform Steps

The Law on Budget Structure should establish a coherent, effective system of government spending with explicit expenditure objectives. Each year the annual budget should formulate tasks needed to accomplish the said objectives.

The law should specify:

The law should:

It is essential to enact amendments to the Constitution, replacing the provisions that are incompatible with the changes adopted.

(From LFMI's tax and budget reform proposal)