Council opinion of 8 March 2005 on the updated convergence programme of Lithuania, 2004-2007
Date: 2005-03-08
Institutions: Council of the European Union
Subjects: Lithuania, stability programme

C 177/10

EN

Official Journal of the European Union

19.7.2005

COUNCIL OPINION

of 8 March 2005

on the updated convergence programme of Lithuania, 2004-2007

(2005/C 177/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 8 March 2005 the Council examined the updated convergence programme of Lithuania, which
covers the period 2004 to 2007. The programme broadly complies with the data requirements of
the revised ‘code of conduct on the content and format of stability and convergence programmes’.
Some required data related to external assumptions are not available and also some optional data
are not provided, although this does not make more difficult the programme's evaluation. Accord-
ingly, Lithuania is invited to achieve compliance with the data requirements of the code of conduct.

The macroeconomic scenario underlying the programme envisages real GDP growth to decelerate
from 6,5 % in 2004 to 6,2 % on average over the rest of the programme period. On the basis of
currently available information, this scenario seems to reflect plausible growth assumptions. The
programme's projections for inflation also appear realistic, although the projection for 2006 appears
on the low side.

The key objective of the medium-term fiscal strategy defined in the programme is the approximation
to a cyclically balanced general government budget. The programme foresees the general govern-
ment deficit to remain at 2,5 % of GDP in 2005 and to decline gradually thereafter to 1,5 % in
2007. The primary deficit is expected to improve marginally from 1,5 % of GDP in 2004 to 1,4 %
in 2005, decreasing gradually afterwards to 0,5 % in 2007. Consolidation is planned to be mainly
achieved by an increase in the revenue ratio from a low base, with the expenditure side also contri-
buting from 2005. Revenues are expected to increase from 33 % of GDP in 2004 to 34,5 % in
2007, after peaking in 2006. Expenditure is foreseen to initially increase from 35,5 % of GDP in
2004 to 36,9 % in 2005, decreasing gradually to 36 % in 2007. A significant programme of public
investment is being implemented, which lifts public investment from 3,4 % of GDP in 2004 to 5 %
in 2007, resulting in an average public investment ratio over the programme period of about 4,6 %
of GDP, against an EU-average of 2,4 % of GDP in 2004. When compared to the May 2004
programme, the deficit outcome for 2004 is estimated to have been lower than budgeted. The
targets for 2005-2007 are maintained, despite a considerable downward revision of GDP growth.

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

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(4)

(5)

(6)

(7)

(8)

The risks to the budgetary projections in the programme appear broadly balanced. On the one
hand, the government has shown a good track record in meeting the fiscal targets in recent years.
The new growth assumptions are cautious and downside macroeconomic risks seem limited. The
main risk to the fiscal projections stems from the uncertainty about the application of budgetary
measures announced in the programme. In particular, the tax revenue target for 2005 might be
difficult to achieve if compensatory measures for the abolition of the turnover tax were not intro-
duced. A failure to execute foreseen measures constraining expenditure overruns could threaten the
budgetary targets over the programme's period. Other risks stem from the relatively uncertain costs
of the pension reform, the high outstanding contingent liabilities, budget arrears, outstanding liabil-
ities related to the savings and real estate restitution obligations and spending related to the decom-
missioning of the Ignalina nuclear power plant.

In the light of this risk assessment, the budgetary stance in the programme does not seem to
provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal
macroeconomic fluctuations throughout the programme period, particularly in 2005. It is also insuf-
ficient to ensure that the Stability and Growth Pact's medium-term objective of a budgetary position
of close to balance is achieved. Against the background of the strong economic performance and
the large current account deficit, a prudent budgetary policy is needed, also in view of preventing
potential risks of overheating.

The debt ratio is estimated to have reached 20,1 % of GDP in 2004, well below the 60 % of GDP
Treaty reference value. The programme projects the debt ratio to remain at the same level in 2007,
after peaking at 20,9 % in 2005.

Lithuania appears to be in a relatively favourable position with regard to long-term sustainability of
the public finances, of which the projected budgetary costs of an ageing population is an important
element. The relatively low debt ratio, the pension reform measures enacted, including the introduc-
tion of the funded pillars will contribute to limit the budgetary impact of ageing. The strategy
outlined in the programme is based on a contained budgetary deficit over the medium term and the
long-term budgetary impact of the pension reform. Nevertheless, risks related to the costs of the
pension reform should be monitored. In addition, reform measures in the field of health-care could
involve higher expenditures. However, Lithuania has a relatively low tax ratio: the sustainability gap
that arises in the long-run could be addressed by raising it.

Overall, the economic policies outlined in the update are broadly consistent with the country-
specific broad economic policy guidelines in the area of public finances. There are measures to use
better-than-projected revenues and savings in budgeted EU co-financing for deficit reduction and
limit expenditure overruns. The announced measures are not extended to savings made in items
unrelated to EU co-financing.

In view of the above assessment, the Council is of the opinion that Lithuania should:

i)

timely implement the tax measures announced by the Government in the convergence program (real
estate tax, vehicle tax) to make further progress towards a close to balance budgetary position. This is
necessary particularly in order to manage domestic demand pressures, which are currently fuelled by
strong credit growth, and thereby prevent a deterioration of the current account deficit and acceleration
of underlying inflation.

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ii)

implement strictly the budget for 2005 in order to reduce the risk of breaching the 3 % reference
value; and

iii) use better-than-projected or additional revenues and unused expenditure items for deficit reduction.

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

Real GDP
(% change)

HICP (1) inflation
(%)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Government gross debt
(% of GDP)

CP January 2005

COM October 2004

CP May 2004

CP January 2005

COM October 2004

CP May 2004

CP January 2005

COM October 2004

CP May 2004

CP January 2005

COM October 2004

CP May 2004

CP January 2005

COM October 2004

CP May 2004

6,5

7,1

7,0

1,2

1,2

0,9

– 2,5

– 2,6

– 2,7

– 1,5

– 1,4

– 1,3

20,1

21,1

22,4

6,5

6,4

7,3

2,9

2,9

2,0

– 2,5

– 2,5

– 2,5

– 1,4

– 1,4

– 1,2

20,9

21,7

22,2

6,2

5,9

6,6

2,5

2,8

2,1

– 1,8

– 1,9

– 1,8

– 0,8

– 0,9

– 0,6

20,3

21,3

21,4

6,0

n.a.

6,3

2,9

n.a.

2,5

– 1,5

n.a.

– 1,5

– 0,5

– 0,5

– 0,4

20,1

n.a.

21,0

Note:
(1) CPI inflation for convergence programme data

Sources:
Convergence programme (CP); Commission services economic forecasts (COM)