With Lithuania's authorities planning to increase spending on national defence and to compensate for pension cuts, the economy might not grow fast enough to support increases in public spending and the government next year may have to broaden the revenue base and cut back on some expenses, the International Monetary Fund (IMF) said on Tuesday.
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The government's goal of reducing structural deficit by 0.5 percentage points to 1.2 percent of the GDP in 2015 "appropriately balances consolidation needs with the considerable uncertainty in the economic outlook," but achieving this goal will not be easy, Christoph Klingen, head of a recent IMF mission to Lithuania, said in a statement at the conclusion of the visit.

"New demands on public finances, including for national security and compensation payments for crisis-induced pension and wage cuts, are complicating the task. Based on the mission's more cautious macroeconomic assumptions, the 2015 draft budget would require additional efforts to achieve this objective," Klingen said.

"With the additional allocation for national security, growth in other spending becomes narrowly circumscribed. The finalization of the budget should therefore focus on broadening the revenue base and targeting savings in non-priority areas," he said.

The IMF mission chief also underlined the importance of efficiency of public spending and EU structural funds for the country's future economic prospects.

He said that the labour market "would benefit from an overhaul of the Labour Code, although tackling still high unemployment is a broader task, also encompassing education reform and a reduction of the high labour tax wedge, which should be carefully considered".

The IMF staff praised Lithuania for the situation in the financial sector and for energy sector reforms and said that euro adoption next January "will further cement Lithuania's firm place in Europe".

In the statement, the IMF mission forecasts that Lithuania's GDP will grow 3.1 percent next year. Lithuania's draft budget for 2015, which the government approved last week, is based on the assumption that the economy will expand by 3.4 percent.

The IMF mission visited Vilnius last week to discuss economic developments and government policies with Lithuania's authorities.

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