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 
Date: 2013-05-29
Institutions: European Commission
Subjects: Lithuania, budgetary equilibrium, building insulation, poverty, public sector, retirement conditions, social integration, tax reform, trans-European network, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 365 final 

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

{SWD(2013) 365 final} 

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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 
policies1, and in particular Article 9(2) thereof, 
Having regard to the recommendations of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

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) 

(2) 

(3) 

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. 

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  States4,  which  together  form 
the  ‘integrated  guidelines’.  Member  States  were  invited  to  take  the  integrated 
guidelines into account in their national economic and employment policies. 

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. 

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OJ L 209, 2.8.1997, p. 1. 
COM(2013) 365 final. 
P7_TA(2013)0052 and P7_TA(2013)0053. 
2013/208/EU of 22 April 2013 

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(4) 

(5) 

(6) 

(7) 

(8) 

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. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey5, 
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  Report6,  in  which  it  did  not  identify 
Lithuania as one of the Member States for which an in-depth review would be carried 
out. 

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. 

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. 

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. 

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COM(2012) 750 final. 
COM(2012) 751 final. 

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(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 

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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 opinion7 is reflected in particular in recommendation (1) below, 

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

1. 

2. 

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. 

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. 

7 

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

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3. 

4. 

5. 

6. 

Underpin  pension  reform  with  measures  that  promote  the  employability  of  older 
workers. 

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. 

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

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. 

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 

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