If leaders of the world’s many indebted countries want to see what austerity looks like, they might want to visit this Baltic nation of 3.3 million. Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.
And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent. The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began. But austerity has exacted its own price, in social and personal pain.
Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year. Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.
To be sure, Mr. Kubilius has many critics here and abroad. Government austerity in the midst of a recession runs counter to the Keynesian approach of increasing public expenditures to fight a downturn. That was the path most countries chose. But Mr. Kubilius and his team say that with a budget deficit of 9 percent of G.D.P., a currency fixed to the euro and international bond markets unwilling to lend to Lithuania, the government had no choice but to show the world it could impose its own internal devaluation by cutting public spending, restoring competitiveness and reclaiming the good will of the bond markets. Read full article in the New York Times…