SUBJECT: LITHUANIA'S NEW FINANCE MINISTER

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000674 SIPDIS STATE FOR EUR/NB AND EB/CBA E.O. 12958: DECL: 06/27/2015 TAGS: EFIN PGOV PREL PINR AFIN ECON MARR LH SUBJECT: SUBJECT: LITHUANIA'S NEW FINANCE MINISTER REF: A. VILNIUS 144 ¶B. 2004 VILNIUS 760 Classified By: Economic Officer Scott Woodard for reasons 1.4 (b) and ( d) ¶1. (C) Summary. Lithuania's new Finance Minister Zigmantas Balcytis told the Ambassador that his principal challenge will be to keep the fiscal deficit and inflation in check so that Lithuania can enter the euro zone as planned in 2007. During the Ambassador's June 23 call on Balcytis, the FinMin noted that the European Union's failure to reach agreement on the EU budget will require Lithuania to reevaluate its own priorities and come to consensus -- no easy task in the current ruling coalition. On improving Lithuania's investment climate and attracting foreign investors, Balcytis offered only that Lithuania needed a better public relations campaign. End Summary. -------------- Fiscal Restraint, Political Constraints -------------- ¶2. (C) Balcytis confirmed that delivering Lithuania to Euroland is both his biggest challenge and his ministry's most important goal, and he said that achieving this goal will require discipline. Balcytis acknowledged that it has been difficult for the ruling coalition to reach consensus and produce an economic plan that will enable Lithuania to meet the Maastricht criteria for adopting the euro in 2007. Balcytis noted that the strict limits on borrowing will further constrain the budget process, but added that such difficulties will pass once Lithuania is in the euro zone. He also acknowledged that the current lack of agreement on the EU budget makes financial planning and identifying priorities more difficult. -------------- Attracting Investment: A Matter of PR -------------- ¶3. (C) The Ambassador noted the importance of attracting foreign investment to Lithuania's economic growth. He expressed concern that the recent temporary increase in Lithuania's corporate profit tax, hitherto among the lowest in Europe, might harm the country's investment climate. Balcytis responded that the parliament had approved a reduction of personal income tax along with the corporate tax hike and insisted that Lithuania's taxes were not excessive. "You get what you pay for," he said, and advised that potential investors consider the benefits that the taxes afford them, specifically citing Lithuanian's highly skilled and well-educated workforce. The problem, the FinMin said, was that Lithuania did a poor job advertising its advantages. ¶4. (C) The FinMin similarly dismissed concerns the Ambassador raised that Lithuania's high personnel and payroll-related taxes might be investment disincentives. Observing that the Government had recently capped Social Security (SODRA) payments to high-income earners, the Ambassador asked whether the Government would cap contributions to the system as well. Balcytis admitted that average payments into the system were high, but said that there is "no way out," and did not opine on capping SODRA contributions. He noted that the Government was currently experimenting with pension innovations, however, referring to the introduction of private pension programs, and said that reforms might be possible in the future, but only if the country's standard of living improves significantly. -------------- Military Spending: Work in Progress -------------- ¶5. (C) The Ambassador, recognizing Lithuania's important contributions to NATO and the participation of the Lithuanian military in Iraq and Afghanistan, asked about the Minister's plans for increasing defense spending to two percent of GDP, in accordance with new NATO accounting guidelines. Balcytis said that this was a difficult issue, and offered that he will meet with Defense Minister Gediminas Kirkilas during the last week of June to discuss it. -------------- Bilateral Achievements and Challenges -------------- ¶6. (C) The Ambassador thanked the FinMin for his ministry's assistance in resolving some longstanding issues, including Social Security payments for American International School of Vilnius foreign hires and taxation of Fulbright scholarships to Lithuanians (refs A and B). He also thanked Balcytis for the ministry's constructive role in developing a mechanism to refund taxes on U.S. assistance programs, thereby paving the way for renewal of the bilateral agreement on science and technology cooperation. ¶7. (C) The Ambassador expressed appreciation to the Ministry of Finance staff for expediting refund of taxes associated with the construction of the new Ambassador's residence. He raised the need, however, to reduce the bureaucratic burden of the GOL's current VAT refund system for embassy employees and the hope that Lithuania would implement a point-of-sale exemption in the near future. -------------- Bio Notes -------------- ¶8. (U) Balcytis has a degree in finance from Vilnius University. He first won election to the Seimas in October 2000 on the Lithuanian Social Democratic Party list and served on the Seimas Budget and Finance Committee. In mid-2001, Balcytis became the Minister of Communications and Transportation in a coalition Cabinet of PM Algirdas Brazauskas. In the October 2004 parliamentary elections, Balcytis won a seat in a single mandate district, and continued to serve as Minister of Transportation. He became Finance Minister upon the resignation of Algirdas Butkevicius. Balcytis is one of the richest members of the Social Democratic Party and the Seimas. Before joining the Seimas, he was a director in the Lithuanian-Hungarian construction company &Lithun.8 -------------- Comment -------------- ¶9. (C) The new FinMin is friendly to the United States and grateful for the assistance the USG provided to him in his previous post. In his new role, Balcytis has little choice but to continue in the remorseless tradition of his predecessors who enforced fiscal discipline to keep Lithuania on track to launch the euro in 2007. Although the economy continues to grow, he faces the challenge of budget uncertainty in Brussels and growing intercoalition competition for resources at home. ¶10. (C) Balcytis at first blush appears less technically adept than his predecessors. We doubt that significant policy innovation will occur on his watch. His appointment reflects the Social Democrats' focus on controlling the government's purse strings at a time when EU funds are slated to grow substantially. At the same time, however, he will need to balance competing spending priorities within the multiparty coalition without undermining Lithuania's Euro prospects. Mull