Lithuania: Struggling to control the budget deficit
Overview:
When the global economic downturn first started to hit the Lithuanian economy the government’s response was to try and implement a fiscal adjustment that would keep the budget deficit below the 3% of GDP Maastricht criteria. While fast EMU entry remains a key strategic goal, the savage nature of the economic downturn has made this deficit target unreachable. Despite the implementation of a significant fiscal package the budget deficit is likely to be at least 8% of GDP this year. Indeed, further cuts are being enacted just in order to prevent the deficit deteriorating further next year. Euro adoption is some way off then. In the meantime, the fixed exchange rate regime leaves little option but to try and regain competitiveness through a painful “internal devaluation” i.e. through cuts in nominal wages.