Viewing cable 05VILNIUS674

05VILNIUS6742005-06-28 13:43:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000674 
E.O. 12958: DECL: 06/27/2015 
     ¶B. 2004 VILNIUS 760 
Classified By: Economic Officer Scott Woodard for reasons 1.4 (b) and ( 
¶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 
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 
¶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