Recommendation for a COUNCIL RECOMMENDATION on Lithuania’s 2014 national reform programme and delivering a Council opinion on Lithuania’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Lithuania, competitiveness, economic convergence, economic growth, economic recovery, economic stabilisation, financial control, job creation, multilateral surveillance, social situation, stability programme, structural adjustment













EUR-Lex - 52014DC0416 - EN











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52014DC0416

Recommendation for a COUNCIL RECOMMENDATION on Lithuania’s 2014 national reform programme and delivering a Council opinion on Lithuania’s 2014 convergence programme /* COM/2014/0416 final  - 2014/ () */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on Lithuania’s 2014 national reform
programme
and delivering a Council opinion on Lithuania’s 2014 convergence programme

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 recommendation 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,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy 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, the Council, on the basis of
the Commission's proposals, 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, 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 9 July 2013, the Council adopted a recommendation
on Lithuania’s national reform programme for 2013 and delivered its opinion on Lithuania’s
updated convergence programme for 2012-2016.
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[4],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[5],
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 20 December 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 1 April 2014, Lithuania submitted its 2014 national
reform programme and on 22 April 2014 its 2014 convergence programme. In order
to take account of their interlinkages, the two programmes have been assessed
at the same time.
(8)                   
The objective of the budgetary strategy outlined
in the 2014 Convergence Programme is to reach the medium-term objective by 2015
and to achieve a structural surplus of 0.9% of GDP at the end of the programme
in 2017. The programme confirms the previous medium-term objective of -1% of
GDP, which reflects the requirements of the Stability and Growth Pact. Based on
the (recalculated) structural budget balance, annual progress towards the medium-term
objective is at least 0.5% of GDP in 2014 and 2015. At the same time there is a
risk of deviation from the expenditure benchmark in 2015. Overall, the
adjustment path towards the medium-term objective is broadly in line with the
requirements of the Stability and Growth Pact. The programme shows the
debt decreasing substantially over the programme period to around 35% by 2017.
The macroeconomic scenario underpinning the budgetary projections in the
programme is broadly plausible. At the same time, for the years 2015-2017,
consolidation measures have yet to be specified. According to the Commission
2014 spring forecast, the structural adjustment in 2014 and 2015 is expected to
be at 0.2% and 0.6% of GDP respectively, and thus for 2014 0.3% of GDP below
the required tightening of 0.5% of GDP. Furthermore, the expenditure benchmark
is at risk of a significant deviation in 2014, with an additional albeit more
limited deviation in 2015. Based on its assessment of the programme and the
Commission forecast, pursuant to Council Regulation (EC) No 1466/97, the
Council is of the opinion that there is a risk of a significant deviation from
the adjustment path towards the medium-term objective as of 2014. 
(9)                   
The relative importance of taxes considered less
detrimental to growth, such as property and environmental taxes, remains low. Tax
revenues rely to a large extent on indirect and labour taxation while the proportion
accounted for by environmental taxation remains low. Increased revenue from
more growth-friendly taxes could be used to alleviate the tax burden on low-
income earners, in particular the low- skilled. A partial review of the tax
system was undertaken at the beginning of 2013 and the government decided to
adjust capital taxation, raise the taxable income threshold and increase excise
duties for tobacco and alcohol. Overall, however, these measures will have a
rather negative effect on revenues. Further steps on improving the
sustainability of public finances and strengthening the revenue side therefore remain
crucial. No major measures were taken following the 2013 country-specific
recommendation on environmental taxation. There was limited progress in strengthening
the fiscal framework, as expenditure ceilings remain insufficiently binding and
legislative changes have not yet been approved. Lithuania
continues to face challenges in terms of tax compliance, in particular to tackle VAT fraud by, among others, strengthening risk management
measures. The 2013-14 tax
compliance action plan is being implemented and first estimates suggest some
positive effects. In 2013, a set of measures was taken to strengthen tax
compliance in the field of VAT and excise duties. For 2014-2015 a new targeted
strategy has been launched. 
(10)               
Unfavourable demographic developments cast doubts
on Lithuania’s long-term fiscal sustainability. Pension spending is projected
to increase substantially and is estimated over 50 years to reach almost double
the EU average. The gradual increase of the statutory retirement age that
started in 2012 is not enough to keep up with shrinkage in the labour force and
rising life expectancy. In addition, the sharp rise in poverty and severe
material deprivation among older people points to problems linked to pension adequacy.
Lithuania has made important but isolated steps in the right direction and more
significant changes are needed to implement a comprehensive reform. It has completed
the reform of the second pension pillar, but neither occupational schemes nor voluntary
pension accumulation are widely used. Alongside the increase in the statutory
retirement age, measures that ensure the employability of older workers and age-friendly
working environments are also necessary.
(11)               
Overall unemployment has gone down but
structural unemployment remains high, suggesting skills mismatches, in
particular for the low-skilled. Youth unemployment and the rates of young
people not in education employment or training are decreasing, but are still
high. The limited coverage of active labour market policies remains a challenge,
and its effectiveness and timeliness needs to be improved. Skilled labour
shortages are forecast to become even more pronounced in the future. To improve
young people's employability it is important to improve the labour-market
relevance of vocational and higher education, improve the quality of apprenticeship
schemes and work-based learning, in partnership with the private sector
including SMEs. Increased participation in lifelong learning remains
insufficient. A comprehensive review of the labour law, with the involvement of
social partners, is needed to find ways of alleviating the administrative
burden on employers. Primarily it will be essential to identify and eliminate
unnecessary restrictions affecting flexible contractual agreements, dismissal
provisions and working time arrangements.
(12)               
Despite recent improvement, working-age poverty
remains above the EU average. Increases in the minimum monthly wage and
non-taxable threshold have helped to address poverty. However, old-age poverty
and severe material deprivation have risen steeply in recent years. In 2012-13,
the cash social assistance reform pilot resulted in a lower number of social
beneficiaries and expenditure on cash social benefits. In 2014, the pilot was
expanded to all municipalities. There is a need to ensure monitoring and
evaluation as regards the effects of the reform on the neediest. The coverage
of activation measures for long-term unemployed social assistance beneficiaries
is insufficient. Moreover, the measures are still focused on public works
schemes, and thus provide income support, but do not help to improve the beneficiaries'
employability. The impact of the reform on those on low incomes needs to be
assessed. Lithuania adopted the 2014-20 Action Plan for Enhancing Social
Inclusion. However, there remains a need to establish the main target groups, the
budget and concrete measures, specifying how the targets will be achieved and how
the various ministries, local governments and civil society actors implementing
the Action Plan will cooperate.
(13)               
The government has been undertaking an ambitious
reform of state-owned enterprises since 2010. Final legal acts were approved in
December 2013, amending the transparency guidelines requiring all state-owned
enterprises, as of 2014, to provide separate data for commercial and
non-commercial functions in their annual reports. A first report detailing this
breakdown is envisaged for August 2014. It should allow a more detailed
assessment of the success of this change. However, the number of independent
board members in state-owned enterprises remains small, partly due to legal
constraints applying to state and municipal enterprises. Legal changes are
being proposed that would allow for independent members to be appointed to the
boards of for all state-owned enterprises. The effectiveness of separation
commercial and non-commercial functions and the professionalisation of boards
will have to be assessed once fully implemented. 
(14)               
Electricity and gas links to neighbouring Member
States remain underdeveloped, resulting in limited competition and high prices.
Competition in the domestic markets has been strengthened through the
liberalisation of the gas and electricity markets, but so far customers have
not exercised their rights to change suppliers. While the government has made
energy interconnections a priority, these have yet to be finalised. An
important gas pipeline has been commissioned and the LNG terminal in Klaipeda
is expected to become operational by December 2014. Some progress has been
achieved with regard to the interconnections of the Lithuanian energy network
with the EU energy market. Furthermore, energy efficiency needs to improve. Lithuania
has made some progress on the energy efficiency of buildings, including with
respect to investments under the JESSICA holding fund. In 2013 legislative
measures were taken to accelerate the absorption of the holding fund. At the
beginning of 2014, projects had been finalised, and initial applications have
increased considerably. Legal changes involve heating subsidies being reduced
if residents reject renovation, thus removing disincentives to renovation.
(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 the 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[6] is reflected in
particular in recommendation (1) below.
HEREBY RECOMMENDS that Lithuania take
action within the period 2014-2015 to:
1.                      
Reinforce the budgetary measures for 2014 in the
light of expenditure growth exceeding the benchmark and the emerging gap of
0.3% of GDP in terms of structural effort based on
the Commission 2014 spring forecast, pointing to a risk of significant
deviation relative to the Stability and Growth Pact requirements. In 2015,
strengthen the budgetary strategy to ensure the required adjustment of 0.5% of
GDP towards the medium-term objective. Thereafter ensure that the medium-term
objective is adhered to. Complement the budgetary strategy with a further
strengthened fiscal framework, in particular by ensuring binding expenditure
ceilings when setting the medium-term budgetary framework. Further review the
tax system and consider increasing those taxes that are least detrimental to
growth, such as recurrent property and environmental taxation, while continuing
to improve tax compliance. 
2.                      
Adopt and implement legislation on a
comprehensive pension system reform. In particular, 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. Underpin pension reform with measures that
promote the employability of older workers.  
3.                      
Better target active labour market policy
measures to the low-skilled and long-term unemployed. . Improve coverage and
adequacy of unemployment benefits and link them to activation. Address
persistent skills mismatches by improving the labour-market relevance of education
and promote life-long learning. In order to increase employability of young
people, prioritise offering quality apprenticeships and strengthen partnership
with the private sector. Review the appropriateness of labour legislation, in
particular with regard to the framework for labour contracts and for
working-time arrangements, in consultation with social partners. 
4.                      
Ensure adequate coverage of those most in need and
continue to strengthen the links between cash social assistance and activation
measures.
5.                      
Complete the implementation of the reform of
state-owned enterprises as planned; in particular by finalising the separation
of commercial and non-commercial activities, further professionalising
executive boards and closely monitoring compliance with the requirements of the
reform.   
6.                      
Step up measures to improve the energy
efficiency of buildings, through a rapid implementation of the holding fund. Continue
the development of cross-border connections to neighbouring Member States for
both electricity and gas to diversify energy sources and promote competition
through improved integration of the Baltic energy markets.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               COM(2014) 416 final.
[3]               P7_TA(2014)0128 and P7_TA(2014)0129.
[4]               COM(2013) 800 final.
[5]               COM(2013) 790 final.
[6]               Under Article 9(2) of Council Regulation (EC) No
1466/97.