# EUR-Lex - 52013DC0365 - EN

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# 52013DC0365

**Recommendation for a COUNCIL RECOMMENDATION on Lithuania’s 2013 national reform programme and delivering a Council opinion on Lithuania’s convergence programme for 2012-2016 /* COM/2013/0365 final - 2013/ () */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Lithuania’s 2013 national reform
programme
and delivering a Council opinion on Lithuania’s convergence programme for
2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning
of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 9(2)
thereof,

Having regard to the recommendations of the
European Commission[2],

Having regard to the resolutions of the
European Parliament[3],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the Commission’s proposal to launch a new strategy
for growth and jobs, Europe 2020, based on enhanced coordination of economic
policies, which will focus on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[4],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on Lithuania’s national reform programme for
2012 and delivered its opinion on Lithuania’s updated convergence programme for
2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[5],
marking the start of the 2013 European Semester of economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[6], in which it did not identify Lithuania as one of the Member States for which an in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 9 April 2013, Lithuania submitted its updated 2013 national reform programme and, on 26 April 2013, its
convergence programme covering the period 2012-2016. In order to take account
of their interlinkages, the two programmes have been assessed at the same time.

(8)       Based on the assessment of
the 2013 convergence programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning
the budgetary projections in the programme is plausible and broadly in line
with the assessment in the Commission's spring forecast. Following an ambitious
fiscal consolidation since 2009, the general government deficit has been
brought to 3.2% of GDP in 2012, which is considered sufficient for abrogation
of the decision on the existence of an excessive deficit, taking into account
the cost of the systemic pension reform. The deficit reduction was to some
extent also based on robust economic growth and temporary expenditure freezes. The
programme has changed the medium-term objective (MTO) from +0.5% to ‑1.0%,
which is still in line with the objectives of the Stability and Growth Pact.
The budgetary strategy outlined in the programme aims to reach the MTO by 2016.
Based on the (recalculated) structural budget balance, annual progress towards
the MTO in structural terms is higher than 0.5% of GDP. The expenditure
benchmark over the programme period is met. The adjustment is slightly
front-loaded and relies mainly on expenditure restraint, but is only partially
supported by concrete measures, including one-offs that are not always
specified. According to the Commission's forecast, the structural adjustment in
2013 and 2014 is expected to be at 0.3% and 0.0% of GDP respectively and thus
below the required progress of 0.5% of GDP, which also casts doubt on the
programme's adjustment path. Further consolidation measures have yet to be specified, and structural reforms including a
shift to revenue based measures, should be considered. General government debt
remains below 60% of GDP with 40.7% in 2012 and is expected to drop slightly
over the programme period. While the convergence programme expects debt to ease
to 39.7% in 2013 and to decline further to 34.5% by 2016, the Commission's
forecast projects it to drop to 40.1% of GDP in 2013 and 39.4% in 2014.
Differences are above all the result of lower assumed deficits in the
convergence programme.

(9)       Although its deficit
position has improved over the years, Lithuania still lacks sufficient fiscal
space to react to adverse shocks. There is, however, scope for a
less-distortive taxation and further improvements in tax compliance. Lithuania continues to have the lowest tax-to-GDP ratio in the EU and consolidation has
mainly been focused on the expenditure side. There is still scope to look at
additional tax revenue sources that are least detrimental to growth, such as
environmental and recurrent immovable property taxation. While Lithuania has taken steps to increase recurrent property tax revenue, there seems to be
scope for further effort. Lithuania's revenues from environmental taxes are on
a downward trend and were the second lowest in the EU in 2011, also due to the
lowest level of transport taxes in the EU; this does not facilitate reductions
in the high energy intensity of the Lithuanian economy. At the same time,
growth-enhancing expenditure, for example on research and education, should be
prioritised in fiscal consolidation. The implementation of laws strengthening
the fiscal framework has been delayed. Lithuania’s fiscal framework has failed
to prevent pro-cyclical fiscal policy in years of high growth, and the rules
are not sufficiently binding. There is a need to improve monitoring,
accountability and execution of the budgetary process, and reinforce the
binding character of the medium-term framework.

(10)     Demographic developments are
a challenge for Lithuania’s long-term fiscal sustainability. A comprehensive
pension reform, targeting both sustainability and adequacy of pensions,
therefore remains important. Adequacy of pensions is a challenge as the older
population is at a high risk of poverty and exclusion. The
2012 reform of the pension accumulation system encourages
2nd pillar pension accumulation with financial incentives from the
state budget. It also introduces the possibility to opt out from private pension accumulation and return to the state social insurance fund
during a transitional period as well as a gradual increase
of retirement age. The reform will enter into force as
of 1 January 2014. These are important but isolated steps in the right
direction and more significant changes are needed, particularly
within the 1st pension pillar. In addition, measures that promote
the employability of older workers and age friendly working environments are
necessary.

(11)     Tackling unemployment and
low labour force participation remains a key challenge. Young and unskilled
workers in particular suffer from high unemployment rates. Skill mismatches
became especially evident during the crisis and represent a growing problem,
hinting at structural shortcomings in education and labour market policies.
Ensuing shortages of skilled labour are compounded by high emigration rates. Hence,
additional measures to improve labour market flexibility and to boost
participation in the labour market, especially for young people, unskilled
persons and older workers are necessary. The overall coverage of active labour
market measures and the financial allocation per individual measure remain
insufficient and measures are poorly targeted for low skilled and long term
unemployed. A comprehensive review of labour law, with the involvement of
social partners, could identify unnecessary restrictions and administrative
hurdles affecting flexible contractual agreements, dismissal provisions and
flexible working time arrangements. To ensure a better transfer from education
to the labour market, apprenticeships and internships could be made more
attractive.

(12)     Poverty and social
exclusion are still worryingly high. In particular, the increase in child
poverty is of concern. Cash social assistance reform measures designed to
increase work incentives (in-work benefits for the long-term unemployed,
gradual reduction of social benefits for people of working age who are inactive)
and reduce poverty were launched in 2012. A pilot project in five
municipalities delivered impressive results on saving expenditure and better
targeting beneficiaries. It is now necessary to put in place a monitoring
system to assess its efficiency and impact on tackling poverty and exclusion.
The reform should also be linked with activation measures that enhance
participation, in particular for long-term social beneficiaries. Measures taken
to reduce poverty include increased coverage of social benefits and a new
method for calculating the benefit amounts. Moreover, on 1 January 2013 the
minimum wage increased by 18 %, which might help reduce the inactivity
trap and in-work poverty. However, these measures appear insufficient given the
size of the challenge and a comprehensive strategy or action plan to fight
poverty is lacking.

(13)     The government has been
undertaking an ambitious reform of state-owned enterprises (SOEs) since 2010.
The reform is relevant and credible, involving legislative as well as
organisational changes. The regulatory aspects of the reform have been put in
place and broad compliance with reporting requirements has been achieved. The
challenge now is to avoid conflicts of interest, with respect to regulatory and
non-regulatory functions, and to distinguish between commercial and
non-commercial activities of SOEs. Once fully implemented, the reform could
help to boost competitiveness and growth. Monitoring of compliance will
therefore be key.

(14)     Electricity and gas links to neighbours remain underdeveloped. As a
result, competition in the energy sector is very limited and energy prices are
high. Furthermore, energy efficiency continues to be an issue. Progress has been
sluggish as regards the renovation of buildings, including with respect to
investments under the JESSICA holding fund, and major challenges in the
renovation of private housing remain.

(15)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy. It has assessed the convergence programme and national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Lithuania but also their compliance with EU
rules and guidance, given the need to reinforce the overall economic governance
of the European Union by providing EU-level input into future national
decisions. Its recommendations under the European Semester are reflected in
recommendations (1) to (6) below.

(16)     In the light of this
assessment, the Council has examined Lithuania’s convergence programme, and its
opinion[7]
is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Lithuania should take action within the period 2013-2014 to:

1.           Ensure growth friendly
fiscal consolidation and implement the budgetary strategy as planned, pursuing
a structural adjustment effort that will enable Lithuania to reach the
medium-term objective. Prioritise growth-enhancing expenditure. Strengthen the
fiscal framework, in particular by introducing enforceable and binding
expenditure ceilings in the medium-term budgetary framework. Review the tax
system and consider increasing those taxes that are least detrimental to growth,
such as recurrent property and environmental taxation, including introducing
car taxation, while continuing to reinforce tax compliance.

2.           Adopt and implement
legislation on a comprehensive pension system reform. Align the statutory
retirement age with life expectancy, restrict access to early retirement, establish
clear rules for the indexation of pensions, and promote the use of complementary
savings schemes while ensuring implementation of ongoing reforms. Underpin
pension reform with measures that promote the employability of older workers.

3.           Tackle high unemployment amongst
low-skilled and long-term by refocusing resources on active labour market
policies while improving their coverage and efficiency. Improve the
employability of young people, for example through a Youth Guarantee, enhance
the implementation and effectiveness of apprenticeship schemes, and address
persistent skill mismatches. Review the appropriateness of labour legislation
with regard to flexible contract agreements, dismissal provisions and flexible
working time arrangements, in consultation with social partners.

4.           Implement concrete
targeted measures to reduce poverty and social exclusion. Strengthen the links
between the cash social assistance reform and activation measures.

5.           Complete the
implementation of the reform of the State-Owned Enterprises, in particular to
ensure separation of ownership and regulatory functions, and closely monitor
compliance with the requirements of the reform.

6.           Step up measures to
improve the energy efficiency of buildings, including through removing
disincentives and rapid implementation of the holding fund. Promote competition
in energy networks by improving interconnectivity with other Member States for
both electricity and gas.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               COM(2013) 365 final.

[3]               P7_TA(2013)0052 and P7_TA(2013)0053.

[4]               2013/208/EU of 22 April 2013

[5]               COM(2012) 750 final.

[6]               COM(2012) 751 final.

[7]               Under Article 9(2) of Council Regulation (EC) No
1466/97.