Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Lithuania and delivering a Council opinion on the 2016 stability programme of Lithuania
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Lithuania, budget deficit, economic policy, economic reform, education, innovation, organisation of health care, social policy, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 335 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Lithuania  and delivering a Council opinion on the 2016 stability programme of Lithuania  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Lithuania 

and delivering a Council opinion on the 2016 stability programme of Lithuania 

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 5(2) thereof, 
Having regard to the recommendation 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, 

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  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it  did 
not  identify  Lithuania  as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council recommendation on the economic policy of the euro 
area6.  Thats  recommendation  was  endorsed  by  the  European  Council  on  18-19 
February  2016  and  adopted  by  the  Council  on  8  March  2016.  As  a  country  whose 
currency is the euro and in view of the close interlinkages between the economies in 

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OJ L 209, 2.8.1997, p. 1. 
COM(2016) 335 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 

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(2) 

(3) 

(4) 

(5) 

(6) 

the  economic  and  monetary  union,  Lithuania  should  ensure  the  full  and  timely 
implementation of those recommendations. 
The  country  report  for  Lithuania7  was  published  on  26  February  2016.  The  report 
assessed  Lithuania’s  progress  in  addressing  the  country-specific  recommendations 
adopted on 14 July 2015 and Lithuania's progress towards its national Europe 2020 
targets.  

On 29 April 2016, Lithuania submitted its 2016 national reform programme and its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance8. 

in 

In  its  2016  stability  programme,  Lithuania  has  requested  a  temporary  deviation  of 
0.6% of GDP from the required adjustment path towards the medium-term objective 
in  2017,  to  take  account  of  major  structural  reforms  with  a  positive  impact  on  the 
long-term  sustainability  of  public  finances.  However,  pending  a  final  agreement, 
uncertainty on the set of reform measures  as well as their implementation  remains. 
Thus,  while  Lithuania  has  sufficient  fiscal  space  to  benefit  from  a  temporary 
deviation,  it  does  not  appear  to  fulfil  the  eligibility  criterion  related  to  the 
implementation of the reform to avail from the structural reform clause. Moreover, it 
is  currently  not  possible  to  assess  the  plausibility  of  the  impact  of  the  reform 
estimated by the government. Therefore, the impact of these reforms has not yet been 
reflected  in  the  required  adjustment  towards  the  medium-term  budgetary  objective 
for 2017. 

Lithuania is currently under the preventive arm of the Stability and Growth Pact. In 
its 2016 stability programme, the government plans an improvement of the headline 
balance from a deficit of 0.8% of GDP in 2016 to a surplus of 0.9% of GDP in 2019. 
The  structural  balance  is  set  to  deteriorate  temporarily  in  2016  before  reaching  the 
medium-term budgetary objective — a deficit of 1 % of GDP in structural terms — 
by  2017  and  staying  above  it  thereafter.  The  adjustment  path  incorporates  the 
systemic pension reform in 2016 but does not reflect the planned structural reform in 
2017.  According  to  the  stability  programme,  the  government  debt-to-GDP  ratio  is 
expected to fall from 39.9% of GDP in 2016 to 35.7% in 2019. The macroeconomic 
scenario underpinning these budgetary projections is plausible. The measures needed 
to support the planned deficit targets from 2018 onwards have not been sufficiently 
specified yet. Based on the Commission 2016 spring forecast, the structural balance 
is forecast to be at -1.2 % of GDP in 2016, which can be considered as close to the 
medium-term budgetary objective, and at -0.8% of GDP in 2017, above the medium-
term  budgetary  objective.  Based  on  its  assessment  of  the  stability  programme  and 

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SWD(2016) 83 final. 
COM(2014) 494 final. 

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(7) 

(8) 

(9) 

(10) 

taking  into  account  the  Commission  2016  spring  forecast  Lithuania  is  expected  to 
comply with the provisions of the Stability and Growth Pact. 

A  fall  in  the  working  age  population,  caused  by  ageing,  poor  health  outcomes  and 
significant net  emigration may harm  Lithuania's  growth potential and ultimately its 
future  convergence  path,  while  putting  at  risk  the  sustainability  of  its  pension  and 
long-term care systems. A cumulative loss of 35 % of the working age population is 
estimated by 2030. If that trend is not reversed, it will jeopardise the availability of 
suitable labour resources, the sustainability of long-term economic growth and social 
security systems, in particular the pension system. 

Ongoing  demographic  trends  underscore  the  need  for  a  comprehensive  pension 
reform  in  Lithuania  that  addresses  the  medium-term  sustainability  and  adequacy 
risks  of  the  current  pension  system.  The  level  of  poverty  among  the  elderly  in 
Lithuania is among the highest in the EU. However, at present there is no indexation 
mechanism in place for publicly provided pensions and spending on social insurance 
pensions is relatively low. The government has not yet adopted plans to introduce an 
indexation  mechanism,  link  the  retirement  age  to  life  expectancy  after  2026  and 
improve the way the basic part of the social insurance pension is financed. 

In  Lithuania,  health  outcomes  are  among  the  poorest  in  the  European  Union.  In 
particular, the mortality rate of the population aged between 20 to 64 years of age is 
the  highest  in  the  EU,  having  an  important  impact  on  the  potential  available 
workforce  and  labour  productivity.  Weaknesses  in  the  health  system  include  too 
much  reliance  on  in-patient  care  and  low  expenditure  on  prevention  and  public 
health. There is a need to address the negative demographic trend. 

It is important that Lithuania strengthens investment in human capital to counteract 
some  of  the  negative  effects  of  its  shrinking  working  age  population  and  support 
Lithuania's transition towards a higher value-added economy. Although educational 
attainment  has  increased,  the  proportion  of  pupils  with  insufficient  basic  skills  is 
high. Efforts  should be pursued to  ensure high quality teaching, which is  crucial to 
tackling  underachievement  and  educational  shortcomings.  Furthermore,  there  are 
weaknesses  in  the  quality  of  teaching  in  higher  education  and  its  ability  to  foster 
innovation.  The  persistently  low  level  of  participation  in  adult  learning  is 
undermining  efforts  to  improve  the  quality  of  human  capital  and  increase 
productivity.  There  are  signs  of  emerging  skills  shortages  in  certain  sectors  of  the 
economy.  Those  skills  shortages  are  expected  to  become  more  acute  in  the  future. 
Strong  wage  growth  and  a  slowdown  in  productivity  growth  may  weaken  cost-
competitiveness. It is therefore important to improve the labour market relevance of 
education,  streamline  the  structure  and  funding  of  the  educational  system,  develop 
life-long learning and improve the targeting and effectiveness of active labour market 
policies. Lithuania has taken steps to improve its active labour market measures and 
other services to support job seekers, but there is still scope to improve targeting for 
specific  groups,  in  particular  the  very  long-term  unemployed  and  those  lacking 
necessary  skills.  Spending  on  effective  labour  market  policy  measures  remains 
limited  and  social  safety  nets  in  Lithuania  are  weak.  Around  27%  of  Lithuania's 
population is at risk of poverty or social exclusion and income inequality is among 
the highest in the EU. The Lithuanian government plans to improve the coverage and 
adequacy of unemployment and social assistance benefits, but the relevant legislation 
has still not been adopted.  

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(11) 

(12) 

(13) 

A  comprehensive  revision  of  the  Labour  Code  and  the  social  model  is  under 
discussion  in  the  parliament.  The  intention  is  to  increase  the  flexibility  of  labour 
market relations and provide more security, but the relevant legislation still needs to 
be adopted. The involvement of social partners in the implementation of the reform 
and more extensive social dialogue are important.  

Investment  has recovered slowly since the onset of the economic crisis  and will be 
supported by EU structural and investment funds in the coming years. Nevertheless, 
the  adoption  and  absorption  of  new  technology  has  not  spread  across  the  economy 
and innovation is low, hampering productivity growth. Private investment in research 
and innovation has also been low, perhaps due to the insufficiency of incentives for 
business  research  and  innovation  and  public-private  cooperation.  Strengthening 
private investment could mitigate the risks relating to the dependency of Lithuania's 
public investment in research and innovation on EU structural and investment funds. 
The tertiary education system shows weaknesses in quality and innovation outcomes, 
with limited levels of cooperation with foreign universities and research centres. The 
research  and  innovation  system  is  fragmented  and  characterised  by  overlaps  and 
duplication. This  prevents  Lithuania  from  reaching the  critical  mass of  reseach  and 
development  capacity  needed  to  increase  innovative  knowledge.  Incentives  for 
innovation  and  cooperation  between  academia  and  business  need  to  be  increased, 
inter  alia  by  developing  and  investing  in  human  capital,  which  could  increase  the 
level of technology transfers to the real economy. Improving the limited capacity of 
Lithuanian companies to absorb external knowledge and apply it to commercial ends 
would raise the level of innovation. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Lithuania’s economic policy and published it in the 2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Lithuania 
in  previous  years.  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  strengthen  the  the  EU's  overall  economic 
governance  by  providing  EU  level  input  into  future  national  decisions.  The 
recommendations under the European Semester are reflected in recommendations 1 
to 3 below. 

(14) 

In the light of this assessment, the Council has examined the stability programme and 
its opinion9 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Lithuania take action in 2016 and 2017 to: 

1. 

2. 

Ensure that the deviation from the medium-term budgetary objective is limited to the 
allowance linked to the systemic pension reform in 2016 and in 2017. Reduce the tax 
burden  on  low-income  earners  by  shifting  the  tax  burden  to  other  sources  less 
detrimental to growth and improve tax compliance, in particular in the area of VAT. 

Strengthen  investment  in  human  capital  and  address  skills  shortages,  by  improving 
the labour market relevance of education, raising the quality of teaching and pursuing 
more active labour market policies and adult learning. Strengthen the role of social 
dialogue  mechanisms.  Improve  the  performance  of  the  healthcare  system  by 

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Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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strengthening outpatient care, disease prevention and health promotion. Improve the 
coverage and adequacy of unemployment benefits and social assistance. 

3. 

Take measures  to  strengthen productivity and improve the adoption  and  absorption 
of  new  technology  across  the  economy.  Improve  the  coordination  of  innovation 
policies and encourage private investment, inter alia by developing alternative means 
of financing. 

Done at Brussels, 

For the Council 
The President 

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