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.

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Fiscal Restraint, Political Constraints
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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.

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Attracting Investment: A Matter of PR
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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.

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Military Spending: Work in Progress
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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.

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Bilateral Achievements and Challenges
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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.

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Bio Notes
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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

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Comment
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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