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Lithuania to push military spending above NATO target

LONDON (Reuters) - Lithuania will keep increasing military spending after hitting NATO’s recommended level of 2 percent of economic output in the next two years, its finance minister said, as Russia builds up capabilities on the borders of its Baltic neighbors.

Relations with the West were damaged by Russia’s 2014 annexation of Crimea and deteriorated even further last week after a gas attack in Russia-backed Syria.

“We are a NATO member but we are also responsible for our security ourselves,” Vilius Sapoka told Reuters on Tuesday in his first interview with international media since Lithuania’s coalition government took office last year.

“Next year we will already reach 2 percent of GDP (in terms of military spending) ... and I think we will keep gradually increasing that number.”

That rise in spending, alongside an improving European economy, is expected to nudge Lithuania’s growth rate up to 3 percent this year.

Sapoka’s government, a “catch all” of the Peasants, Greens Union and Social Democrats that came to power in November, faces broad challenges though.

Income inequality is among the highest in the European Union and has been increasing, driving younger people abroad for work.

Sapoka said the government wants to raise tax revenues to 40 percent of gross domestic product (GDP) in the next five years from 30 percent, to help improve education and healthcare.

It will stick to its predecessor’s “fiscal discipline” path, he said, but is embarking on an aggressive drive to attract high tech finance and bio-medicine firms with tax breaks.

It already allows firms to offset three times what they spend on research and development but is about to go further.

“If you invest in new technologies, at the moment you can deduct 50 percent (from tax) and we will increase that up to 100 percent.”

Lithuania also has a stake in Britain’s negotiations to leave the European Union. Brexit has made the future uncertain for the roughly 200,000 Lithuanians living in the United Kingdom.

“Here we are very clear that all the rights that were acquired by Lithuanian people are preserved,” Sapoka said.

A “mirror arrangement” should be given to EU-based Britons, he said.

Echoing the standard EU line, he also said that “all parties should respect their financial obligations,” referring to the 60 billion euros ($64 billion) that countries such as Austria have said the UK should pay as it leaves.

While Lithuania wants a show of unity in the EU, two years after joining the euro, it also leans on the side of fiscal discipline for Greece, as the Baltic nation takes part in its second batch of bailout talks.

“We talk about solidarity but we should not forget the principle of responsibility as well,” Sapoka said.

Editing by Louise Ireland