COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Lithuania, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 80 final   COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP   2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}    
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Reform priorities 

3.1.  Public finances and taxation 

3.2. 

Financial sector 

3.3. 

Labour market, education and social policies 

3.4. 

Investment 

3.5. 

Sectoral policies 

3.6.  Public administration 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial and social indicators 

Summary table of 2016 CSR assessment 

3.2.1.  Financial soundness indicators 

B.1.  Macroeconomic imbalances scoreboard 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators (A) 

C.3. 

Labour market and social indicators (B) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

Real GDP growth and contributions 

12 month average HICP inflation 

1.3.  Major labour market trends in Lithuania 

1 

4 

10 

13 

13 

16 

18 

28 

32 

37 

38 

44 

45 

50 

9 

11 

16 

44 

45 

46 

47 

48 

49 

4 

5 

5 

 
 
 
 
1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

Net international investment position 

Lending trends in Lithuania 

General government balance and gross debt 

Annual change in population, 1990 - 2040 

Share of working age population and age-dependency ratios 

3.1.1.  Annual change in age-related expenditures 

3.1.2. 

Tax wedge of different types of households earning 50% of average wage 

3.3.1.  Employment rates by age group and skill level 

3.3.2.  Employment by economic activity 

3.3.3.  Coverage of labour market policies 

3.3.4.  Net replacement rates at different lengths of unemployment duration in 2015 

3.3.5.  Poverty indicators 

3.3.6.  Median income as a share of average income, % 

3.3.7.  Share of people at risk of poverty or social exclusion by disability status, % 

3.3.8.  Employment gap of people with disabilities aged 20 to 64 

3.3.9.  S80/S20 income ratio 

3.3.10.  Real public expenditure on education per student (2010 prices) 

3.3.11.  Proportion of low achievers 

3.3.12.  Select health system performance indicators 

3.4.1.  Wage growth in comparison to benchmarks 

3.4.2. 

Lithuania's convergence of productivity 

3.5.1.  Highly-cited publications and public R&D intensity 

3.5.2.  Waste treatment by type of disposal 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in Lithuania 

3.3.1. 

The new labour code 

3.4.1. 

Investment challenges and reforms in Lithuania 

6 

7 

7 

8 

8 

14 

15 

18 

18 

19 

21 

22 

22 

22 

23 

24 

24 

25 

26 

28 

29 

33 

36 

12 

20 

31 

 
 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Lithuania’s  economy  in  light 
of  the  European  Commission’s  Annual  Growth 
Survey  published  on  16 November 2016.  In  the 
survey,  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy  –  boosting  investment,  pursuing  structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should  put  the  focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth.  

Following  several  years  of  strong  growth, 
Lithuania's economy continued to grow in 2015 
and 2016, albeit at a slower pace. Having grown 
consistently  above  3%  in  the  years  following  the 
2009 economic crisis, Lithuania's GDP growth has 
been just below 2% for the past two years. While 
private  consumption  growth  has  been  strong 
throughout,  in  2015  exports  suffered  from  the 
embargo  and  economic  deterioration  of  Russia.  
Furthermore, 
in 
temporary 
investment  weighed  considerably  on  GDP,  which 
grew 2.2%  in 2016. However, growth  is expected 
to  pick  up  in  2017  to  2.9%,  as  exports  and 
investments recover, more than offsetting slowing 
private  consumption  growth  due 
to  higher 
inflation.  

contraction 

a 

in 

age 

brought 

Strong  employment  growth  and  a  declining 
working 
the 
population 
unemployment  rate  down  in  2016.  At  the  same 
time,  labour  supply  increased  as  more  elderly 
workers  stayed 
labour  market  after 
the 
retirement  age.  Yet,  this  did  little  to  relieve  the 
pressure  on  wages,  which  continued  to  grow 
strongly  in  2016,  and  the  labour  market  is 
tightening. With wage growth set to remain strong 
over  the  coming  years,  competitiveness  might 
dampen in the future unless balanced by matching 
productivity  growth.  The  shortage  of  high-skilled 
workers is likely to generate some additional wage 
pressures, albeit to a limited extent because of the 
relatively  small  sectors  recruiting  such  workers. 
On  the  other  hand,  unemployment  is  high  among 
the disabled and the low-skilled living outside the 
capital.  In  2016,  Lithuania 
introduced  major 
revisions to its labour law, which should enter into 
force in mid-2017. These are likely to make labour 
relations  more  flexible  by  significantly  reducing 
dismissal  costs  and  expanding  the  use  of  fixed 
term  contracts.  However,  doubts  remain  as  to 

whether 
sufficient social security.   

the  new  social  model  provides  for 

Demographic  challenges  weigh  on  potential 
growth. Lithuania's population has been declining 
since  the  early  1990s  at  an  accelerating  pace.  For 
the  past  10  years,  it  declined  on  average  by  1.3% 
annually  and  the  rate  of  decline  is  projected  to 
accelerate  even  further  in  the  years  to  come.  The 
main  drivers  of  the  country's  population  decline 
are  high  net  emigration  and  negative  natural 
growth,  which  is  exacerbated  by  the  population's 
poor  health.  The  population  decline  is  negatively 
affecting  potential  output  by 
labour 
supply. Up to 2014, the impact on potential output 
has  been  somewhat  mitigated  as  the  share  of  the 
prime working-age population actually increased.      

limiting 

the  declining  growth 

Whereas  Lithuania  benefitted 
from  high 
productivity  growth  up  to  2009,  these  growth 
rates have dropped since then. This can partly be 
linked to the significant fall in private investment, 
which  has not managed  to  recover  from  the  crisis 
and  remains  well  below  historical  levels.  On  the 
rates  of 
other  hand, 
productivity  can  also  be  attributed  to  a  natural 
slowing  down  of  the  catching  up  process  as  the 
country's  productivity  level  approaches  the  EU 
unfavourable 
average. 
demographics, total factor productivity growth and 
capital growth rates are essential drivers of growth, 
which is required to improve the standard of living 
in Lithuania and help stem high emigration.  

view 

the 

In 

of 

Inequality  is  high  and  increasing.  Inequality  of 
incomes  in  Lithuania  is  one  of  the  highest  in  the 
EU, and has been increasing since 2012. It results 
from  high  employment  gaps  between  low-skilled 
and  high-skilled  workers,  strong  wage  dispersion, 
the  limited  progressivity  of  the  tax  system  and 
weak social safety nets. The tax benefit system in 
Lithuania  is  less  effective  at  reducing  inequality 
than  in  other  EU  countries.  Furthermore,  high 
income  inequality  is  considered  to  be  detrimental 
to economic growth and macro-economic stability. 
In  Lithuania,  it  could  also  be  contributing  to  high 
emigration.  Also,  the  poverty  rate  remains  high, 
especially  among  the  disabled,  pensioners,  in 
particular  older  women,  and  the  unemployed, 
primarily  due  to  weak  protection  provided  by  the 
social welfare system. 

1 

 
 
 
Executive summary 

needed  to  reduce  the  number  of  people  at  risk  of 
poverty or social exclusion and to increase private 
expenditure on research and development.  

The  main  findings  of  the  analysis  in  this  report, 
and the related policy challenges, are as follows: 

  Lithuania  has  adopted  several  measures 
aimed  at  improving  its  low  tax  compliance. 
However,  tax  collection,  in  particular  that  of 
value-added tax and labour taxes, could still be 
raised. 

  The  declining  population  and  ageing  pose  a 
challenge  to  Lithuania's  growth  prospects 
and  fiscal  balance.  A  decreasing  supply  of 
labour  and  growing  per  capita  infrastructure 
costs  will  burden  Lithuania's  growth  potential 
in  the  coming  decades.  Moreover,  the  rising 
dependency ratio, which is set to double in the 
next twenty years, will make it more difficult to 
fund  pensions,  health  care  and  education  and 
will  aggravate  the  fiscal  challenges  in  the 
medium term.  

  While  Lithuania's  GDP 
from 

strongly 

the 

and 

innovation  outcomes, 

growth  has 
recovered 
crisis, 
investment  and  productivity  growth  rates 
are  not  back  to  their  pre-crisis  levels.  Poor 
research 
the 
mediocre  quality  of  education  and  ineffective 
adult learning programmes weigh more heavily 
on Lithuania's productivity performance as the 
country  becomes  richer.  They  are  also  an 
obstacle to future growth as productivity gains 
are  expected 
increasingly  from 
knowledge-based  activities.  Improving  public 
investment  planning,  increasing  transparency 
and  competition  in  public  procurement,  better 
coordination  and  implementation  of  research 
and innovation policies, and raising the quality 
of  education  provide  opportunities  to  spur 
productivity growth. 

to  come 

  Skills shortages are high and risk becoming 
important  bottleneck  to  Lithuania's 
an 
growth. The gap between the high-skilled and 
terms  of  pay  and 
the 
employment  opportunities 
and 
is  high 
increasing in Lithuania, pointing to a widening 
skills  shortage.  Moreover,  low  coverage  of 
active labour market policies means too few of 

low-skilled 

in 

Lithuania's  public  finances  are  solid,  but  its 
structural  deficit  is  set  to  increase  in  2017  as a 
result of structural reforms.  Lithuania gradually 
reduced  its  structural  budget  deficit  from  3.5%  in 
2011  to  0.7%  in  2015.  The  deficit  increased 
somewhat  in  2016  and  is  forecast  to  increase 
further  to  1.4%  of  GDP,  due  also  to  the  costs  of 
structural  reforms.  In  the  medium  term,  fiscal 
challenges are set to become  more difficult as the 
declining  population  and  increasing  dependency 
ratios  will  drive  an  increase  in  expenditure  on 
pensions and long-term care. Public debt currently 
stands at 40% of GDP. 

Overall,  Lithuania  has  made  some  progress (1) 
in  addressing 
country-specific 
the  2016 
recommendations.  Lithuania  has  made  some 
progress  in  addressing  CSR  1(2)  as  it  has  taken 
measures to reduce the tax burden on low income 
earners  and  to  improve  tax  compliance.  However, 
the measures to compensate for revenue loss due to 
lowering  the  tax  burden  on  labour  (tax  shifting) 
were limited. Some progress has been achieved in 
addressing  CSR  2  as  Lithuania  has 
taken 
incremental steps in all areas covered except for an 
increase  in  investment  in  human  capital,  where 
only  limited  progress  has  been  achieved.  Finally, 
limited  progress  has  been  achieved  in  addressing 
CSR 3 – while Lithuania has made some progress 
in  promoting  alternative  means  of  financing, 
limited  action  has  been  taken  to  improve  the 
innovation  policies  and  no 
coordination  of 
fund 
additional  measures  besides 
programmes  have  been 
to  strengthen 
productivity growth. 

the  EU 

taken 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Lithuania  has 
already  achieved  some  of  its  objectives,  but 
concerns  remain.  It  has  reached 
its  overall 
renewable  energy  target  as  well  as  the  targets 
regarding the employment rate of the working age 
population,  reducing  greenhouse  gas  emissions, 
bringing  down  the  share  of  early  school  leavers 
and  increasing  the  share  of  the  population  having 
attained tertiary education. It is on track to meet its 
energy  efficiency  target.  However,  more  effort  is 

(1)  Information  on  the  level  of  progress  ad  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. 
(2)  This assessment does not cover the fiscal subpart of CSR1, 
which  will  have  the  final  assessment  published  in  Spring 
2017 

2 

 
 
                                                           
Executive summary 

of 

the 

supply. 

connecting 

  Lithuania,  along  with  Latvia  and  Estonia, 
has achieved good progress in improving the 
security 
The 
energy 
implementation  of  several  gas  and  electricity 
projects 
region  with 
neighbouring  energy  markets  has  diversified 
the  Baltic  countries'  energy  sources  and 
brought  overall  lower  prices.  Finishing  the 
construction  of  the  gas  connector  between 
Lithuania  and  Poland  and  the  synchronisation 
of the Baltic countries' electricity grids with the 
European  network  are  the  next  steps  in  the 
implementation  of  the  Baltic  Energy  Market 
Interconnection Plan. 

the  low-skilled  get  the  training  they  need.  As 
Lithuania's growth will increasingly depend on 
knowledge-based 
the 
supply  of  skilled  labour  will  be  crucial  to 
improve its living standard. 

activities, 

ensuring 

  Lithuania's  education  system  outcomes  are 
worsening  and  the  system  is  inefficient. 
Lithuania’s  scores 
the  Programme  for 
in 
International  Student  Assessment  are  lower 
than those of the other Baltic countries and the 
proportion  of  low  achievers  has  increased 
significantly  in  recent  years.  Despite  high 
tertiary education attainment rates, the reported 
lack  of  high-skilled  workers  is  increasing. 
Lithuania's  education  system  has  struggled  to 
adapt  to  rapidly  decreasing  numbers  of  pupils 
and students and hence its education system is 
overstaffed  and  burdened  with  maintaining 
infrastructure  that  is  too  large  for  its  needs. 
limited 
Furthermore, 
opportunities  for  professional  development 
hinder  schools  to  attract  talented  graduates  to 
replace  retiring  teachers.  Higher  education  is 
marred by poor quality standards and financial 
incentives 
and 
promote 
inefficiency. 

oversize 

salaries 

low 

that 

and 

  While  Lithuania's  per  capita  income  has 
grown  remarkably  since  the  crisis,  the 
reduction  in  poverty  has  been  meagre  and 
inequality  has  increased.  Lithuania's  social 
security  coverage  does  not  keep  pace  with 
economic 
social 
growth.  Spending 
protection  is  low  and  low  tax  revenue  as  a 
share  of  GDP  limits  the  scope  for  a  potential 
increase  in  such  expenditure.  Moreover,  the 
low  labour  share  of  national  income,  weak 
trade unions and a large skills gap in the labour 
market further contribute to the high inequality 
and precariousness of low-wage earners. 

on 

  Poor  health  outcomes  hamper  the  potential 
of the workforce and the competitiveness of 
the  Lithuanian  economy.  Stronger  disease 
prevention and health promotion policies could 
contribute 
in  health 
outcomes. The equity of the health-care system 
is negatively affected by high levels of out-of-
pocket payments and regional disparities. 

improvement 

to  an 

3 

 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

GDP  grew  2.2%  in  2016,  led  by  private 
consumption and recovering exports. Solid wage 
and  employment  growth  combined  with  subdued 
inflation  supported  household  disposable  incomes 
which in turn fuelled private consumption growth. 
Exports  are  forecast  to  have  grown  by  2.6% 
following their disappointing performance in 2015. 
However,  a  decline  in  investments  due  to  a 
temporary  slowdown  of  EU  fund  disbursements 
weighed on overall growth.  

Graph 1.1: 

Real GDP growth and contributions 

Source: European Commission 

According to the Commission's winter forecast, 
growth  is  expected  to  accelerate  to  2.9%  in 
2017.  Rising  inflation  is  expected  to  slow  private 
consumption  growth  somewhat,  while  investment 
growth  is  expected  to  be  strong  as  EU  fund 
spending gathers pace.  

Consumption 

is 

Private  consumption  growth 
the  main 
contributor  to  growth.  Driven  by  increasing 
employment,  rising  wages  and  subdued  inflation, 
private  consumption  growth  is  forecast  to  have 
accelerated 
in  2016.  Government 
consumption  rose  only  slightly  in  2016.  The 
disposable income boost provided by negative and 
then low inflation is expected to come to an end in 
2017  as  mildly  recovering  energy  prices  and 

to  5.3% 

rapidly  growing  service  prices  carry  inflation  to 
around 2%.  

Investment 

Investment  saw  a  temporary  dip  in  2016  as  a 
result  of  a  pause  in  public  investment.  Overall, 
investment is forecast to have declined by 1.2% in 
2016.  This  follows  a  4.7%  growth  in  2015.  The 
decline  is  mainly  due  to  the  slowdown  in  the 
implementation  of  EU  funds  following  the  end  of 
period.  The 
the 
disbursements  made  by  Lithuania  to  beneficiaries 
fell some 50% in 2016 compared to 2015, causing 
construction investment to shrink. The dynamic is 
fund 
expected 
disbursements  are  expected  to  return  to  the  level 
they were at in 2015. 

in  2017  as  EU 

programming 

2007-2013 

reverse 

to 

Trade 

Drags  on  export  performance  are  subsiding. 
Following  the  weak  export  performance  in  2015, 
exports somewhat recovered in 2016, with growth 
forecast  at  2.6%.  While  exports 
to  Russia 
continued to decline in 2016, exports to the rest of 
the  EU  increased  thanks  to  an  especially  strong 
increase  in  service  exports,  which  are  believed  to 
have grown by 9.0% in 2016. Imports, meanwhile, 
slowed down as a result of declining investment.  

Inflation 

Inflation  moved  to  positive  territory  and  is 
gradually picking up. In 2016, the HICP average 
annual  inflation  was  0.7%,  up  from  a  0.7% 
deflation in 2015. The substantial decline in energy 
prices has dominated the inflation dynamics for the 
past 
three  years.  This  has  been  somewhat 
countered  by  services  prices  which  have  grown 
considerably  above  the  HICP  rate  due  to  rapid 
wage  growth.  Recovering  oil  prices  and  rising 
wages are expected to drive HICP inflation further 
up  in  2017  and  2018.  Core  inflation,  which 
excludes energy prices, is also on the rise. It is set 
to reach 2% at the end of 2016 after hovering only 
slightly above 1% for much of 2014 and 2015.  

4 

-30-25-20-15-10-50510152000010203040506070809101112131415161718%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth 
 
 
1. Economic situation and outlook 

Graph 1.2: 

12 month average HICP inflation 

Source: European Commission 

Labour market 

The  Lithuanian  labour  market  continues  to 
improve.  The  activity  and  the  employment  rates 
have  been  steadily  increasing  since  the  crisis  and 
are  now  both  above  the  EU  average.  In  2016,  the 
unemployment rate was 7.9%, well below the EU 
average. These improvements are due to economic 
growth and the declining working age population. 

Graph 1.3:  Major labour market trends in Lithuania 

Source: European Commission 

While starting from a relatively low level in the 
EU  context,  wages  are  rising  strongly 
in 
Lithuania. The average gross monthly earnings in 
2016 stood at EUR 771, 7.9% up from 2015. Unit 
labour  costs  (ULC)  grew  4.8%  in  2015,  up  from 
3.2%  in  2014.  This  was  one  of  the  highest 
increases  in  the  EU  after  Estonia  and  Latvia.  In 
2016 and 2017, nominal unit labour cost growth is 
expected  to  slow  down  somewhat  as  a  result  of 
stronger productivity growth.  

The  minimum  monthly  wage  is  increasing  fast 
in Lithuania. From EUR 300 at the beginning of 
2015, it has been raised to EUR 380 in 2016. As a 
share of the average wage, the level of Lithuania's 
minimum  wage  is  relatively  high  (close  to  50%) 
when compared to other EU countries. The Labour 
Code stipulates that the minimum wage is fixed by 
Government  resolution  upon  recommendation  of 
the  Tripartite  Council,  which  comprises 
the 
government,  the  trade  unions,  and  the  employers. 
There are no specified rules on how to incorporate 
economic factors in a structured way in minimum 
wage  setting,  therefore  increasing  the  risk  that 
haphazard  minimum  wage  hikes  could  lead  to 
adverse effects on employment.  

Social developments 

In 2015, economic and employment growth did 
not translate into poverty reduction. The at-risk-
of-poverty  or  social  exclusion  rate  increased  in 
2015  to  29.3  %,  the  fifth  highest  in  the  EU,  with 
the  unemployed  and  the  elderly  mostly  affected. 
This  is  mainly  driven  by  the  fact  that  social 
protection  benefits 
(pensions,  unemployment 
benefits and minimum income) are failing to keep 
pace  with  economic  growth  (see  also  Section  3.3 
of this report). 

Income  inequality  has  risen  in  recent  years, 
making  Lithuania  one  of  the  most  unequal 
Member States in the EU. In 2015, the income of 
the richest 20 % of Lithuanian households was 7.5 
times  higher  than  that  of  the  poorest  20 %  of 
households. This is one of the highest ratios in the 
EU. The situation has worsened, with inequality (3) 
now  being  18%  higher  than  it  was  in  2012. 
Similarly,  the  richest 10 % of  households  claimed 
28.8 % of all income in 2015, up from 23.9 % for 
relatively 
tax  benefit  system 
2012.  The 

is 

(3)  Measured by GINI coefficient 

5 

-1.00.01.02.03.04.05.02010201120122013201420152016Overall indexCore inflation707274767880820510152025303540% Activity rate 20-64 (rhs)% Unemployment rate 15-74 (lhs)% Long-term unemployment rate 15-74 (lhs)% Youth unemployment rate 15-24 (lhs) 
 
 
 
 
                                                           
ineffective  at  reducing  inequalities,  especially 
given  the  flat  tax  regime  which  has  a  limited 
distributional  function.  According  to  2014  SILC 
data,  taxes  and  benefits  reduce  inequality  by  only 
32.6 %, as against an EU average of 39.2%. There 
is  also  a  significant  rural  and  urban  inequality, 
with  median  incomes  of  rural  households  only 
67.9 %  of  those  of  urban  households.  While  not 
yet apparent in the data, recent reforms to increase 
the  minimum  wage  and  to  reduce  the  tax  burden 
on low income earners are likely to counteract this 
trend to some extent (see Section 3.1). 

External position 

The  current  account 
is  expected  to  have 
returned  to  balance  after  recording  a  2.3% 
deficit  in  2015.  While  the  balance  of  goods  and 
services  improved,  large  dividend  payments  by 
several  Nordic  banks  saw  the  primary  balance 
deteriorate  somewhat  compared  to  2015.  Private 
remittances which make up the bulk of secondary 
income,  also  decreased  somewhat.  Notably,  the 
terms  of  trade  improvement  linked  to  cheaper 
energy prices over the last two years was worth the 
equivalent of some 5% of GDP.  

international 

The  net 
investment  position 
(NIIP) in 2015 stood at minus 45 % of GDP and 
it  has  been  gradually 
improving.  The 
government (including the Central Bank's position) 
and  the  private  sector  contribute  equally  to  the 
total negative net position. The NIIP had declined 
dramatically in the years leading up to the financial 
crisis,  going  from  -35%  of  GDP  in  2004  to  -58% 
of  GDP  in  2009.  Since  then,  it  has  increased 
substantially  and  now  stands  -45%  of  GDP.  The 
build-up  of  the  negative  position  came  mainly  in 
the form of government foreign borrowing and of 
local  banks'  borrowing  from  their  Nordic  parents. 
While the government's negative external position 
continued  to  grow  after  the  crisis,  the  financial 
flows of monetary financial institutions (excluding 
the Central Bank) (MFIs) reversed and account for 
the  bulk  of  the  change  in  country's  NIIP  in  the 
the  crisis.  The  government's 
years  following 
negative net position is entirely due to government 
long-term  debt,  while  private  sector  liabilities 
consist 
foreign  direct 
entirely  of 
investment.  As  a  result,  the  short  term  risks 
associated with the NIIP are low. 

almost 

1. Economic situation and outlook 

Graph 1.4:  Net international investment position 

Source: European Commission 

Financial sector 

Having  resumed  in  2015,  lending  growth  in 
2016  has  doubled  the  pace.  Loans  to  non-
financial  corporations  grew  by  9.6 %  in  2016 (4) 
compared  to  4.7%  growth  in  2015  (Graph  1.5), 
driven  by  increasing  corporate  demand  for  credit 
on  the  back  of  improving  economic  growth 
prospects.  Corporate  credit  growth,  however,  has 
not  been  uniform  across  sectors.  While  trade, 
transport,  real  estate,  and  IT  contributed  most  to 
the  overall  credit  growth,  outstanding  loans  to 
manufacturing continued to decline. Mortgage loan 
growth  accelerated  to  7.1%  in  2016,  compared  to 
3.5% growth in 2015.   

(4)  November 2016 data 

6 

-100-80-60-40-200204008Q2'09Q210Q211Q212Q213Q214Q215Q216Q2% of GDPGeneral GovernmentPrivate sectorMFI (excl central bank)Central Bank (incl reserves)Net int'l investment position (NIIP) 
 
                                                           
1. Economic situation and outlook 

Graph 1.5: 

Lending trends in Lithuania 

Graph 1.6:  General government balance and gross debt 

Source: European Central bank 

Source: European Commission 

Public finances 

Demographic developments 

Lithuania's  public  finances  are  solid,  but  its 
structural  deficit  is  set  to  increase  in  2017  as a 
result  of  structural  reforms.  Lithuania's  budget 
deficit  is  forecast  to  have  been  0.5%  of  GDP  in 
2016, up from 0.2% in 2015. In 2017, however, the 
general  government  budget  deficit  is  forecast  to 
increase  to  0.7%  of  GDP.  In  the  medium  term, 
however, fiscal challenges are set to become more 
difficult as the declining population and increasing 
dependency  ratios  will  drive  an 
in 
expenditure  on  pensions,  health  care,  long-term 
care and education.  

increase 

Demographic  challenges  are  set  to  intensify 
significantly  in  the  coming  decade.  Driven  by 
negative  net  migration  and  ageing,  Lithuania's 
population  has  declined  from  3.7  million  in  1990 
to  2.9  million  in  2015.  As  emigration  intensified 
during the past decade, the pace of decline has also 
increased  and  is  projected  to  accelerate  even 
further  in  the  coming  two  decades.  While  the 
overall  working  age  population  has  declined 
dramatically,  the  share  of  prime  working  age 
population(5)  in  the  total  population  increased  in 
the  period  from  1990  to  2014.  However,  it 
declined in 2015 and will continue to decline at an 
increasing  rate,  which  is  set  to  peak  in  the  mid-
2020s. According to current projections, the share 
of  prime  working  age  population  is  projected  to 
increase again only after 2060(6).  

(5)  Aged between 20 and 64. 
(6)  Actual  data  for  2013  -  2015,  though,  indicate  that  the 
current  population  projections  have  been  overly 
pessimistic. An update of the projections is expected to be 
published in 2017. 

7 

-6-4-2024681012Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Loans to NFC, y-o-yLending for house purchase, y-o-y%051015202530354045-15-10-5051020062007200820092010201120122013201420152016Structural balanceNominal balanceOutput gapGross debt (rhs)% of GDP% of GDP 
 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.7:  Annual change in population, 1990 - 2040 

Graph 1.8: 

Share of working age population and age-
dependency ratios 

Source: European Commission 

Source: European Commission 

The  declining  share  of  the  population  at 
working  age  means  that  the  dependency  ratios 
will  rise.  The  old-age  dependency  ratio (7)  is 
projected to double over the next 20 years  – from 
0.3  in  2015  to  0.6  in  2035.  Moreover,  while  the 
young-age  dependency  ratio (8)  has  declined  for 
the past 25 years, it is set to rise from 0.33 to 0.39 
over the next 15 years, adding further to the burden 
carried  by  the  working  age  population.  These 
developments will have important implications for 
long term fiscal sustainability (section 3.1), labour 
supply (section 3.3) and productivity (section 3.4).  

(7)  Measured  as  the  ratio  of  those  aged  65  and  over  to  those 

aged 20-64. 

(8)  Measured  as  the  ratio  of  those  younger  than  20  to  those 

aged 20-64. 

8 

0.00.10.20.30.40.50.60.70.80.91.01.1-3.0-2.5-2.0-1.5-1.0-0.50.00.51.019901992199419961998200020022004200620082010201220142016201820202022202420262028203020322034203620382040Net migration contributionNatural change contributionNet migration proj.Natural change proj.Total changeTotal projectionAge dependency ratio (rhs)ADR projection (rhs)y-o-y%40%45%50%55%60%65%70%0.150.20.250.30.350.40.450.50.550.60.6519901993199619992002200520082011201420172020202320262029203220352038Old-age dependency ratioYoung-age dependency ratioShare of population aged 20 -64 (rhs) 
 
                                                           
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators 

(1) Sum of portfolio debt instruments, other investment and reserve assets  
(2,3) Domestic banking groups and stand-alone banks. 
(4) Domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches. 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, ECB 

9 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)7.1-14.81.66.03.83.53.51.82.22.92.8Private consumption (y-o-y)12.0-17.4-3.44.63.14.34.34.15.34.02.6Public consumption (y-o-y)2.4-1.3-3.2-0.41.20.70.30.91.12.22.1Gross fixed capital formation (y-o-y)13.0-38.91.520.1-1.88.33.74.7-1.26.03.0Exports of goods and services (y-o-y)10.8-12.818.914.912.29.63.5-0.42.63.43.7Imports of goods and services (y-o-y) 14.6-28.018.714.26.69.33.36.22.25.13.5Output gap5.0-10.5-9.0-4.3-1.9-0.41.00.71.01.61.9Potential growth (y-o-y)6.00.90.00.91.31.92.12.11.92.32.5Contribution to GDP growth:Domestic demand (y-o-y)9.7-21.7-2.76.31.84.33.43.63.34.12.6Inventories (y-o-y)0.5-5.14.5-0.4-2.0-1.1-0.13.4-1.40.00.0Net exports (y-o-y)-3.111.9-0.20.24.00.30.2-5.20.3-1.20.1Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.1-0.9-1.4-1.2-0.7-0.20.20.50.40.40.4Capital accumulation (y-o-y)2.80.50.51.00.81.01.11.11.01.11.1Total factor productivity (y-o-y)3.31.30.91.01.11.10.80.40.50.81.0Current account balance (% of GDP), balance of payments-10.82.1-0.3-3.9-1.21.53.6-2.3...Trade balance (% of GDP), balance of payments-9.8-1.7-1.9-2.60.91.31.9-0.6...Terms of trade of goods and services (y-o-y)2.3-3.80.1-1.1-0.70.10.83.20.9-0.50.0Capital account balance (% of GDP)1.54.43.83.22.93.12.73.0...Net international investment position (% of GDP)-46.4-58.4-55.9-52.5-53.4-47.0-45.8-44.7...Net marketable external debt (% of GDP) (1)-18.9-32.4-29.1-25.6-26.7-21.1-21.7-20.9...Gross marketable external debt (% of GDP) (1)53.577.576.270.768.259.960.867.1...Export performance vs. advanced countries (% change over 5 years)55.941.928.741.448.230.844.517.94...Export market share, goods and services (y-o-y)7.8-11.54.813.06.08.2-1.0-10.0...Net FDI flows (% of GDP)-3.10.6-2.2-3.2-0.7-0.60.0-1.9...Savings rate of households (net saving as percentage of net disposable income)-1.81.14.10.9-2.0-1.5-4.5-5.9...Private credit flow, consolidated (% of GDP)15.1-9.4-6.0-2.20.4-1.20.12.2...Private sector debt, consolidated (% of GDP)60.883.474.564.761.256.354.055.0...of which household debt, consolidated (% of GDP)19.632.629.625.823.722.421.522.2...of which non-financial corporate debt, consolidated (% of GDP)41.250.844.938.937.533.932.532.8...Corporations, net lending (+) or net borrowing (-) (% of GDP)-6.815.28.14.97.09.411.16.16.85.65.6Corporations, gross operating surplus (% of GDP)33.231.936.338.438.438.337.435.333.633.133.4Households, net lending (+) or net borrowing (-) (% of GDP)-1.10.42.23.5-1.9-2.2-3.9-5.0-5.0-4.3-3.7Deflated house price index (y-o-y)14.2-32.8-8.62.4-3.20.26.34.6...Residential investment (% of GDP)2.63.32.12.01.92.22.52.8...GDP deflator (y-o-y)6.9-3.32.45.22.71.41.00.21.72.12.3Harmonised index of consumer prices (HICP, y-o-y)4.94.21.24.13.21.20.2-0.70.72.11.9Nominal compensation per employee (y-o-y)15.0-9.3-0.16.44.25.44.75.35.56.16.3Labour productivity (real, person employed, y-o-y)7.0-7.77.35.52.02.11.50.5...Unit labour costs (ULC, whole economy, y-o-y)7.4-1.7-7.00.82.23.13.24.85.13.73.6Real unit labour costs (y-o-y)0.51.7-9.1-4.2-0.51.72.24.63.31.51.2Real effective exchange rate (ULC, y-o-y)4.6-2.1-8.30.2-1.93.32.61.74.52.61.6Real effective exchange rate (HICP, y-o-y)1.36.8-5.30.5-2.00.92.70.42.0-4.4.Tax rate for a single person earning the average wage (%)25.922.222.122.322.522.722.622.9...Tax rate for a single person earning 50% of the average wage (%)19.9*17.517.317.618.018.517.217.8...Total Financial sector liabilities, non-consolidated (y-o-y)30.0-4.1-0.70.50.3-0.78.810.1...Tier 1 ratio (%) (2).8.58.911.812.09.310.612.9...Return on equity (%) (3).-9.4-6.6-4.14.32.11.014.0...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).15.416.113.410.98.56.55.2...Unemployment rate7.013.817.815.413.411.810.79.18.07.57.1Long-term unemployment rate (% of active population)3.13.37.48.06.65.14.83.9...Youth unemployment rate (% of active population in the same age group)13.929.635.732.626.721.919.316.313.9..Activity rate (15-64 year-olds)68.469.670.271.471.872.473.774.1...People at risk of poverty or social exclusion (% total population)33.529.634.033.132.530.827.329.3...Persons living in households with very low work intensity (% of total population aged below 60)7.67.29.512.711.411.08.89.2...General government balance (% of GDP)-1.2-9.1-6.9-8.9-3.1-2.6-0.7-0.2-0.5-0.7-0.7Tax-to-GDP ratio (%)30.130.628.727.627.327.327.929.430.129.930.1Structural budget balance (% of GDP)..-3.2-3.5-2.4-2.1-1.5-0.6-1.0-1.4-1.5General government gross debt (% of GDP)16.829.036.237.239.838.740.542.740.843.539.6forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

as  well  as  increasing  the  labour  supply  at  a  time 
when it is becoming increasingly scarce.  

to 

Lithuania  has  struggled  to  reduce  poverty  and 
inequality  substantially.  Poverty  has  decreased 
significantly  since  2011,  but  this  has  been  mainly 
due 
increased  employment.  Lithuania  has 
generally targeted its tax cuts to the lowest earners 
and  thus  helped  reduce  their  risk  of  poverty  and 
contain  the  rise  of  inequality  somewhat.  By 
contrast,  the  measures  taken  to  aid  the  non-
working poor have been insufficient and as a result 
their  material 
improved 
significantly.  The  social  and  material  challenges 
faced  by  those  who  are  not  in  work  have  not 
diminished  substantially  as  the  funding  to  social 
assistance programmes has remained tenuous, and 
as only a small share of low-skilled have benefitted 
from programmes helping them to find work.  

situation  has  not 

Finally,  Lithuania  has  achieved  substantial 
progress in implementing a reform of state-owned 
enterprise  governance  and  improving  the  security 
of energy supply.  

Overall, Lithuania has made some progress (10) 
country-specific 
in  addressing 
the  2016 
recommendations.  Lithuania  achieved 
some 
recommendations 
progress 
regarding fiscal issues and strengthening of human 
capital. However, progress in adopting measures to 
strengthen productivity was limited.  

addressing 

the 

(10)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

the 

implementation  of 

Progress  with 
the 
recommendations  addressed  to  Lithuania  in 
2016 (9)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European  Semester  in  2011.  The  broad  policy 
areas  covered  by  the  2016  CSRs  -  fiscal  policy, 
human  capital,  and  poverty  and  inequality  -  have 
featured  in  CSRs  since  they  were  first  adopted  in 
2011.  

introduction  of 

the 

Lithuania  has  generally  maintained  sound  fiscal 
policy  –  containing  budget  deficits,  strengthening 
the fiscal rules, and realigning the tax structure to 
support  growth  and  employment.  Lithuania  has 
improved  its  budget  position  significantly  since 
2011,  reducing  its  structural  budget  deficit  from 
3.5%  of  GDP  in  2011  to  an  estimated  1.0%  in 
2016. It also revised its national fiscal framework, 
although  it  did  not  include  binding  multi-annual 
targets,  as  was  specifically  recommended  in  the 
2011  –  2014  CSRs.  On  taxes,  Lithuania  has 
considerably reduced the tax wedge on labour and 
the  low-wage  earners,  in  particular;  but  it  did  not 
adequately  compensate  the  resulting  revenue  loss 
by  tapping  other  revenue  sources  that  are  less 
detrimental to growth. In 2014, Lithuania started a 
gradual  increase  in  the  retirement  age,  thereby 
improving 
term 
the  pension  system's 
sustainability.  Though  welcome,  these  changes 
remain  insufficient  to  prevent  a  significant  rise  in 
pension expenditure in the future.  

long 

investment 

Lithuania  has  taken  some  important  steps  in 
strengthening 
in  human  capital, 
covered  by  CSRs  relating  to  the  quality  of 
teaching,  labour  market  relevance  of  education, 
improving the employability of the low-skilled and 
promoting  adult  and  work-based  learning.  While 
Lithuania  has  taken  measures  to  improve  the 
quality  of  vocational  education  and  increase  the 
use  of  apprenticeship  schemes,  other  parts  of  the 
education  system  have  seen  limited  progress  and 
continue 
to  face  challenges  of  quality  and 
efficiency.    On  the  one  hand,  Lithuania  has  taken 
steps to address the skills shortages by introducing 
the  skills  forecasting  system.  On  the  other  hand, 
improvement  has  been  lacking  in  the  coverage  of 
active  labour  market  policies,  which  are  essential 
to  improving  the  employability  of  the  low  skilled 

(9)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular section 3. 

10 

 
 
                                                           
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table of 2016 CSR assessment 

Source: European Commission 
(1) This overall assessment of CSR 1 does not include an assessment of compliance with the Stability and Growth Pact 

11 

 Lithuania Overall assessment of progress with 2016 CSRs:  Some progress CSR 1: 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.   Some progress(1):   It has made substantial progress in reducing the tax burden on low income earners   It has made some progress in compensating the revenue losses by shifting the taxation to other sources    It has made some progress in improving the tax collection CSR 2: Strengthen investment in human capital and address skills shortages, by improving the labour market relevance of education, raising the quality of teaching and adult learning. Reinforce the coverage and effectiveness of active labour market policies. Strengthen the role of social dialogue mechanisms. Improve the performance of the healthcare system by strengthening outpatient care, disease prevention and health promotion. Improve the coverage and adequacy of unemployment benefits and social assistance.  Some progress   It has made limited progress in strengthening the investment in human capital   It has made some progress in reinforcing the effectiveness and coverage of active labour market policies   It has made some progress in strengthening the role of social dialogue   It has made some progress in improving the performance of healthcare system   It has made some progress in improving the coverage and adequacy of unemployment benefits and social assistance CSR 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. Limited progress   It has made limited progress in taking measures to strengthen productivity   It has made limited progress in improving the coordination of innovation policies   It has made some progress in developing alternative means of financing  
 
 
 
 
2. Progress with country-specific recommendations 

12 

Box 2.1: Contribution of the EU budget to structural change in Lithuania Lithuania is a major beneficiary of the European Structural and Investment Funds (ESIF) with an allocation of up to EUR 8.4 billion for the period 2014-2020. This is equivalent to 3% of GDP annually (over 2014-2017). Out of EU financing EUR 726 million is planned to be delivered via financial instruments, which is 50% increase compared to the 2007-2013 period. By 31 December 2016, an estimated EUR 2.4 billion, which represents about 29 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Lithuania has signed agreements for nearly EUR 369 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 289 million, which is expected to trigger EUR 581 million in total investments (as of end 2016). ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionality and targeted investment. Examples include RD&I, healthcare, education, energy and transport infrastructures, making active labour market policies more targeted and more efficient and enhancing institutional capacity of public authorities and stakeholders. The implemented structural reforms are generating benefits going beyond the very realm of cohesion policy in that they have prepared the ground for successful and smooth public investments in general, including from national sources and other EU instruments mentioned above. All necessary reforms and strategies as required by the ex-ante conditionality have been met. In addition to that, administrative reforms support is available through targeted financing under European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance.     The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes. These include reinforcing active labour market policies targeting older workers, low-skilled and long-term unemployed, modernising the education system and making it more relevant to labour market needs, reinforcing institutional capacity of public services and of social partners, taking measures to strengthen productivity and improve the adoption and absorption of new technology across the economy. Structural changes in the design, coordination and implementation of the Youth policy are being implemented in addressing specific challenge of the youth unemployment and are supported mainly via Youth Employment Initiative (YEI). The programming of the Funds also seeks to improve the coordination of innovation policies and encourage private investment, inter alia by developing alternative means of financing. The Commission has assessed the 2016 CSRs addressed to Lithuania and concluded, based on the above, that there is no need to re-programme ESIF OPs at the current stage. In addition to the challenges specifically identified in past CSRs, ESI Funds address wider structural obstacles to growth and competitiveness. These include improving the energy performance in houses (for additional 30 000 households), public buildings and businesses; addressing bottlenecks in infrastructure via improving accessibility through reconstructed or modernised roads and railway lines; incentivising innovation and supporting 4 400 enterprises.   https://cohesiondata.ec.europa.eu/countries/LT  
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  FISCAL POLICY 

Lithuania  over-achieved  its  fiscal  targets  for 
several  years  in  a  row  and  stabilised  its  debt 
level,  helped  by  revenue  gains  from  strong 
domestic  demand  growth.  In  2015,  the  general 
government deficit stood at 0.2% of GDP. It is set 
to increase to 0.5% of GDP in 2016, partially due 
to  fading  one-off  revenues  from  the  deposit 
insurance  scheme’s  surpluses.  In  2017,  the  deficit 
is expected to widen to 0.7% of GDP, mostly due 
to  an  additional  cost  of  0.5%  of  GDP  for  labour 
market  and  pension  reforms.  The  additional 
revenues  from  a  set  of  small  tax  increases  and 
efforts  to  improve  tax  compliance  are  set  to  be 
offset  by  the  lost  revenues  from  the  increase  in 
non-taxable  incomes.  The  government  also  plans 
higher  spending  on  public  wages  and  pensions. 
The  general  government  debt  is  set  to  stay  well 
below the 60% of GDP threshold over the forecast 
horizon  as  it  is  expected  to  decline  to  39.6%  of 
GDP in 2018.  

3.1.2.  FISCAL FRAMEWORK 

to 

the 

rule 

Lithuania's 
budgetary 
medium-term 
framework  extends  over  a  three-year  horizon 
for  fiscal  policy-making,  but  the  substance  of 
the  multiannual  targets  is weak.  Lithuania  went 
through the second cycle of budget planning since 
it  joined  the  euro  area  in  2015  and  raised  the 
level  of  a 
structural  balance 
constitutional  law  following  its  ratification  of  the 
Treaty on Stability, Coordination and Governance. 
Lithuania 
its  national 
procedures  and  strengthened  their  implementation 
targets, 
capacities.  However, 
specifically the consolidated indicators of the State 
budget  and  municipal  budgets  for  the  following 
three budgetary years, only provides an indicative 
base  for  multi-year  planning.  This  weakens  the 
credibility  of  such  targets  and  increases  the 
likelihood of deviation from them. 

in  general  adhered 

the  multiannual 

to 

Budgetary reporting does not yet allow for fully 
effective  and  complete  assessment  of  general 
government  budgets  vis-à-vis  national  fiscal 
rules.    The  national  audit  office  has  been  tasked 
with  assessing  the  compliance  of  the  general 
government  budgets  with  national  fiscal  rules. 
Although  the  national  fiscal  rules  have  been  in 
cycles 
place 
already, 
the  assessment 
implementing  provisions 
process  are  lacking.  Notably,  the  absence  of 
adequate  reporting  standards  and  designation  of 
reporting  responsibilities  make  the  assessment 
process cumbersome and inefficient. Furthermore, 
at the level of municipalities, the reports come too 
late for an ex ante assessment. 

two  budgetary 
for 

for 

3.1.3.  MEDIUM AND LONG TERM FISCAL 

CHALLENGES 

total 

rapidly 

age-related 

expenditures 

increasing  years  spent 

As  a  result  of  population  ageing,  expenditures 
on  education,  health  care,  long-term  care  and 
pensions are set to increase as a share of GDP. 
Overall, 
are 
projected to increase from 16% of GDP in 2015 to 
20.7% of GDP by the end of the 2030s, declining 
thereafter.  Rising  dependency  ratios  (see  Section 
2.1)  and 
in 
retirement  are  the  main  drivers  of  the  increase  in 
age-related  costs.  The  bulk  of  this  increase  is  due 
to  pension  expenditures  which  account  for  about 
2.7  pps  of  GDP  in  spending  increase.  While  the 
legislated  increase  in  retirement  age(11)  does 
mitigate  the  fiscal  impact  somewhat,  it  fails  to 
account  for  the  increasing  life  expectancy  beyond 
2020.  Consequently,  pension  expenditure 
is 
projected to increase to 9.5% of GDP by the end of 
the 2030s (from 6.7% in 2015).  

(11)  Lithuania’s retirement age will increase by 2 months a year 
for men and 4 months a year for women to reach 65 years 
by 2026. 

13 

 
 
 
                                                           
3.1. Public finances and taxation 

electronic  invoicing  system  and  an  electronic 
waybill system. Having shown promising results in 
their pilot phase in 2015, these systems are hoped 
to  improve  tax  collection  considerably  in  the 
coming years. In addition to the above, Lithuania’s 
State  Tax  Inspectorate 
in 
developing  a  new  IT  system  that  would  greatly 
enhance  its  analytical  capabilities.  The  actual 
effect  of  these  measures  will  only  be  seen  in  the 
coming years but their introduction can be viewed 
as good progress in raising the efficiency of the tax 
administration.  

investing 

is  also 

Better  tax  compliance  could  contribute  to  the 
overall  fairness  of  the  tax  system  and  improve 
the  competitiveness  of  Lithuania’s  economy. 
Overall, Lithuania’s shadow economy is estimated 
to  be  between  15%  -  26%  (Putnins  and  Sauka, 
2016; Schneider F., 2015). Besides the large VAT 
gap,  underreporting  of  wages  is  pervasive  and 
in  Lithuania. 
affects  many  economic  sectors 
Construction and services are reported to have the 
highest  share  of  shadow  activity.  This  distorts 
incentives and leads to resource misallocation and 
therefore  can  have  negative  repercussions  for  the 
overall competiveness of the economy. Moreover, 
the high wedge between effective and statutory tax 
rates  undermines  the  effectiveness  of  the  tax 
policy.  The  revenue  lost  due  to  non-compliance 
exacerbates  the  income  inequality  problem  by 
limiting  the  level  of  redistribution  that  Lithuania 
can afford.  

Broadening the tax base might help raise more 
revenue in ways less detrimental to growth and 
address  the  high  levels  of  inequality  and  social 
exclusion. Lithuania has one of the lowest overall 
tax  burdens  in  the  EU  (13).This  is  partially  due  to 
the  high  share  of  the  shadow  economy  and 
partially  due  to  relatively  low  environmental  and 
capital  taxes.  Revenues  from  environmental  taxes 
and  recurrent  property  taxes  are  considerably 
lower than the EU average. In 2014, revenues from 
recurrent  property  taxes  represented  0.3 %  of 
GDP,  (EU  average  was  1.6 %),  while  revenue 
from  environmental  taxes  amounted  to  1.7%  of 
GDP (EU average 2.5%). These untapped sources, 
together  with  improved  tax  collection,  offer  an 
opportunity  to  rebalance  the  tax  system  in  a  way 
income 
that  supports  employment,  promotes 

Graph 3.1.1:  Annual change in age-related expenditures 

Source: 2015 Ageing report 

Graph  3.1.1  shows  the  annual  change  of  pension 
and other age-related expenditure, in terms of pps. 
of  GDP.  The  amount  of  additional  funding  that 
pensions and age-related services will require each 
year is expected to reach 0.36% of GDP (12) in the 
late 2020s.  

The contributions to the public pension scheme are 
also projected to fall - from 6.3% of GDP in 2015 
to  5.8%  in  2020.  A  one-off  drop  in  contributions 
worth  some  0.3%  of  GDP  is  expected  in  2020  as 
the  share  of  pension  contributions  to  the  funded 
scheme  (second  pension  pillar)  is  set  to  increase 
from  2%  to  3.5%  of  the  gross  wage.  Without 
addressing  the  parameters  of  the  pension  system, 
the decrease in contributions to the public pension 
scheme  will  add  to  the  fiscal  challenge  posed  by 
increasing expenditure. 

3.1.4.  TAXATION 

Despite some progress made in recent years, tax 
compliance  remains  a  concern  in  Lithuania. 
According  to  the  latest calculation  (CASE, 2016), 
the  VAT  gap  in  Lithuania  was  36.8%  in  2014. 
Although it had decreased by 1.8 pp. compared to 
2013, it was still the one of the highest VAT gaps 
in  EU.  In  2016,  the  State  Tax  Inspectorate 
its  Tax  Compliance 
continued 
introduction  of  an 
Strategy,  which  saw 

implement 

the 

to 

(12)  EUR 140 million in 2015 prices 

(13)  In 2015 tax revenue was 29.2% of GDP 

14 

-0.10.00.10.10.20.20.30.3Percent of GDPAnnual change in pension expendituresAnnual change in other age-related expenditures 
 
                                                           
                                                           
3.1. Public finances and taxation 

Graph 3.1.2:  Tax wedge of different types of households 
earning 50% of average wage 

Source: European Commission 

equality  and  improves  the  resilience  of  the  tax 
system to shocks. 

In  recent  years,  Lithuania  has  lowered  the  tax 
wedge  on 
low-income  earners  significantly. 
Lithuania  has  raised  the  upper  threshold  of  the 
non-taxable  income  allowance  from  EUR  166  to 
EUR 200 in 2016, and to EUR 310 in 2017. This is 
estimated  to  lower  the  tax  burden  on  low-income 
earners (earning 50% of average wages) to 33.5% 
in  2017,  in  line  with  the  EU  average  (see  Graph 
3.1.2). The measure targets low income earners as 
the  upper  threshold  applies  to  revenues  below  or 
equal  to  EUR  380  per  month,  starting  from 
January  2017.  It  is  proportionally  reduced  for 
higher 
tax 
exemptions  for  dependent  children  and  disabled 
persons have been raised as well. The increases in 
the  tax  allowance  imply  that  single  persons  with 
two children earning 67% of the average wage do 
not  pay  personal  income  tax  anymore  in  2017. 
However,  these  measures  fail  to  lower  the  tax 
burden for the most vulnerable households because 
their  income  tax  liability  is  insufficient  to  benefit 
non-taxable 
increases 
from 
allowance.  Their  tax  wedge  nevertheless  remains 
substantial due to the relatively high rate of social 
contributions. 

incomes.  The  personal 

additional 

income 

in 

Other measures do not fully compensate for the 
reduced revenue due to labour tax cuts. In 2015, 
Lithuania  broadened  the  base  for  property  taxes. 
However, the additional revenue generated by this 
measure was meagre. The tax on land-filled waste 
was introduced in 2016 and will increase annually 
from  2017  until  2020,  but  the  tax  rate  is  low  and 
significantly  less  ambitious  than  initially  planned. 
Lithuania  also  remains  among  the  few  European 
countries that do not have any type of car taxation 
or  road-use  tax  for  private  passenger  vehicles. 
Although the introduction of car taxation has been 
publicly  discussed,  there  are  no  concrete  plans  to 
introduce  it  at  the  moment.  Increases  in  excise 
duties on tobacco products and alcohol in 2016 and 
2017 are the most important sources of additional 
revenue. Overall, while the total revenue loss from 
the  increases  in  the  non-taxable  allowances  in 
2017 is estimated at around EUR 140 million, the 
adopted tax increases are expected to cover around 
half of this. 

15 

0510152025303540Single personSingle with 1 childSingle with 2children201520162017 
 
 
 
 
 
3.2.  FINANCIAL SECTOR 

3.2.1.  FINANCIAL STABILITY 

Lithuania’s  banking  sector  is  relatively  stable 
and  profitable.  Moderate  risks  stem  from  the 
high  dependence  on  Nordic  parent  banks’ 
financing. The banking sector has fully recovered 
from  the  financial  crisis  and  currently  shows  no 
signs  of  stress  (table  3.2.1).  The  sector  is  well 
capitalised  on  average  with  the  Tier  1  capital (14) 
adequacy  ratio  at  24.3%  being  among  the  highest 
in  the  EU  in  2015.  The  quality  of  bank  assets 
continues  to  improve.  The  average  ratio  of  non-
performing  loans  (NPL)  stands  at  5.2 %  in  2015 
compared to the peak of 16 % in 2010. At the same 
time,  the  coverage  ratio  was  somewhat  below  the 
euro  area  average  at  35  %  of  outstanding  NPLs 
in  Lithuania’s  Baltic 
and  below 
peers (15).  With  7.5%  return  on  equity  and  0.9% 
return  on  assets,  the  sector’s  profitability  is  well 
above  EU  average  (4.4%  and  0.3%  return  on 
equity and assets, respectively). 

levels 

the 

Table 3.2.1: 

Financial soundness indicators 

(1) ECB aggregated balance sheet: loans excl. to gov. and 
MFI / deposits excl. from gov. and MFI 
Source: European Central Bank 

In  response  to  accelerating  credit  growth,  the 
Bank of Lithuania has put in place a number of 
measures  aimed  at  keeping  associated  risks  in 
check.  They  were  based  on  the  macro-prudential 
strategy  adopted  in  March  2015.  They  include  a 
capital  add-on  for  concentrated  exposures,  a 
capital  buffer  for  four  systemically  important 
banks (16),  a  85%  loan-to-value  cap,  a  40%  debt-
service-to-income limit, a 30-year maturity limit, a 
stress  tests  with  a  5%  interest  rate  and  the 
liquidity 
frontloaded  application  of  a  100% 
coverage ratio. 

The  funding  gap  is  increasing  as  local  deposit 
growth lags behind credit growth. While during 

(14)  Tier 1 capital includes equity and reserves, it is the 'highest 

grade' capital  

(15)  This results from particularly low level of provisions in one 
large  Swedish  subsidiary,  which  was  compensated  by 
particularly high capital buffers. 

(16)  SEB,  Swedbank  and  DNB  –  each  2%  of  risk  weighted 
assets; Šiaulių Bankas – 0.5% of risk weighted assets. 

reduce 

2010  to  2015,  deposit  growth  exceeded  credit 
growth,  allowing  the  banks  to  strengthen  their 
funding  structure  and 
their  external 
liabilities, in 2016 the trend reversed and the loan-
to-deposit  ratio  increased  again  to  reach  106%  at 
the end of 2016. Looking ahead, domestic deposits 
may  not  be  sufficient  to  finance  expanding  credit 
amidst  the  growing  economy.  This  funding  gap 
will need to be closed by either the Nordic parent 
banks or borrowing from the bond markets.  

The  dominance  of  Nordic  banks  in  Lithuania's 
banking sector poses an inward spillover risk. A 
possible  emergence  of  financial  stress  in  the 
Nordic banking system, e.g. caused by a correction 
in  housing  prices  in  Sweden,  could  have  adverse 
impact  on  Lithuania's  banking  sector.  In  case 
foreign  parent  banks'  balance  sheets  were  to 
deteriorate, they might become less able to provide 
further  credit (17).  In  such  a  scenario,  the  funding 
gap created by a divergence in credit and deposits 
growth would create and additional vulnerability to 
Lithuania’s economy.  

3.2.2.  ACCESS TO FINANCE 

The  Lithuanian 
capital  market  has  a 
substantial  development  potential.  Banks  play 
the  primary  role  in  funding  of  non-financial 
corporations  in  Lithuania  (total  bank  loans  to 
NFCs  equal  21%  of  GDP).  Funds  raised  by 
companies  on  the  stock  market  (9%  of  GDP) 
account  for  the  second  largest  external  source  of 
financing. While the local equity market is shallow 
compared with the EU average, access to the much 
more  developed  Nordic  OMX  and  Warsaw  stock 
exchanges  is  relatively  easy  and  offers  scope  to 
raise  more  financing  on  the  equity  markets  in  the 
future.  On  the  other  hand,  the  annual  gross 
operating  surplus  of  Lithuanian  companies  is 
higher  than on  average  in  the  EU,  suggesting  that 
companies have the potential to finance investment 
from their retained profits. 

(17)  For  a  more  detailed  analysis  of  potential  financial  spill-
overs  in  the  Baltic-Nordic  region  see  the  Country  Report 
Sweden 2016. 

16 

(%)2010201120122013201420152016Q2Non-performing loans16.113.410.98.56.55.24.7Coverage ratio45.545.844.140.636.235.337.5Loan to deposit ratio*144.9133.2125.4115.799.397.1105.7Tier 1 ratio10.812.014.617.020.924.319.1Return on equity-3.815.57.88.67.77.5-Return on assets-0.31.50.91.00.90.9- 
 
 
 
 
                                                           
 
 
                                                           
3.2. Financial sector 

2016.  Additionally, 

amendments to the Law on Companies that would 
make it easier for private companies to offer their 
bonds publicly. Both legal acts came into force on 
further 
1  November 
amendments  to  the  Law  on  Companies  are  under 
consideration,  including  a  revision  of  rules  on 
private  placement 
for 
and 
employees.  Finally,  the  Ministry  of  Finance,  in 
for 
partnership  with 
Reconstruction  and  Development, 
initiated  a 
review  of  Lithuania's  national  legal  system  to 
facilitate securitisation and covered bond issuance. 

the  European  Bank 

stock  options 

during 

dramatically 

Lithuania  faces  a  shortage of  sustainable,  well-
functioning 
financing  sources  for  business 
development.  The  presence  of  seed  and  venture 
capital is meagre and funding opportunities are not 
well  known  to  businesses,  despite  the  fact  that 
to  venture  capital  markets 
business  access 
increased 
2011-2014 
(Paliokaitė,  Krūminas  and  Stamenov,  2016  (18). 
The  shortage  of  alternative  financing  sources 
partly  accounts  for  the  high  dependence  on  bank 
loans - Lithuanian SMEs tend to refer to banks for 
loans  more  often  than  the  EU  average,  and  at  the 
same  time  they  are  denied  funding  most  often  in 
the EU. The percentage of Lithuanian SMEs which 
received  the  full  amount  of  the  bank  loan  they 
applied  for  is  among  the  lowest  in  the  EU  (46% 
compared to 67% EU average) according to the EC 
SAFE  survey  (European  Commission/European 
Central Bank, 2016).  

Lithuania  has  made  strong  efforts  to  increase 
venture  capital  investment  in  recent  years.  
Among  EU  countries,  Lithuania  ranks  8th  in 
venture  capital  financing  as  a  share  of  GDP 
(European Commission, 2016a). Lithuania had the 
fastest  growth  in  venture  capital  financing  among 
the  Member  States  and  now  ranks  above  the  EU 
average.  Developing  the  venture  capital  market  is 
important,  since  Lithuanian  firms  facing  financial 
constraints  are  often  those  with  higher  levels  of 
labour  productivity.  Lithuania  contributed  to  the 
Baltic  Innovation  Fund,  which  is  jointly  financed 
by  each  of  the  Baltic  countries  and  which  invests 
in existing private equity and venture capital funds 
that then finance high potential firms in the Baltic 
countries. The government promotes new forms of 
financing  –  a  law  on  crowd-investing  is  enforced 
as of 1 December, 2016. Venture capital financing 
is  expected  to  pick  up  further  in  2017.  However, 
the  financial  portfolio  of  alternative  financing 
sources  still  mostly  relies  on  European  Structural 
and Investment Funds, raising concerns about their 
longer-term sustainability. 

The  government  also  took  other  initiatives  to 
improve  companies'  access  to  finance  beyond 
bank loans. These include reforms to facilitate the 
issuance of corporate bonds (by ensuring a higher 
level  of  protection  of  bondholders'  interests)  and 

(18)  EUR 179.6 million were secured for loans, guarantees and 
venture  capital  in  a  new  "Business  Financing  Fund" 
(managed by INVEGA). 

17 

 
                                                           
   
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET: SKILLS 

are 

below 

Labour market outcomes in Lithuania are more 
levels 
strongly  differentiated  by  education 
compared  with 
countries.  While 
other 
employment rates of highly skilled workers are at 
about  the  EU  average,  employment  rates  of  low- 
average. 
and  medium-skilled 
Employment  rates  are  particularly  low  for  low-
skilled  elderly  workers  (aged  50-64)  (see  Graph 
3.3.1).  The  large  disparity  in  labour  market 
outcomes across skills groups points to a potential 
shortage  of  high-skilled  workers  in  Lithuania (19). 
While  the  skills  gap  has  motivated  an  increase  in 
tertiary  attainment,  there  are  concerns  about  the 
quality and labour market relevance of Lithuania's 
education system (see Section 3.3.5).  

Graph 3.3.1:  Employment rates by age group and skill level 

worker  in  the  ICT  sector  receives  twice  the  mean 
hourly  compensation  in  Lithuania (21),  and  wage 
growth  has  been  strong  in  recent  years.  Average 
compensation  is  also  relatively  high  in  financial 
and  insurance  activities.  Nevertheless,  both  of 
these  sectors 
relatively  small,  each 
representing less than 2 % of total employment.  

remain 

in 

lower-paying 

jobs  such  as 

The  sectoral  composition  of  employment  is 
shifting  gradually  away  from  agriculture  and 
industry  towards  tradable  and  non-tradable 
service  sectors.  From  a  broad  perspective, 
Lithuania is converging to the EU average sectoral 
composition,  although  it  remains  somewhat  more 
specialised 
in 
wholesale  and  retail,  transport  and  storage,  and 
agriculture;  and  the  share  of  employment  in 
higher-paying 
information  and 
communication,  finance  and  insurance  is  still 
relatively low compared to the EU average and to 
(see  Graph  3.3.2).  However, 
other  Baltics 
assuming  Lithuania’s  structural 
transformation 
continues  along  the  same  path,  the  demand  for 
highly  skilled  professionals  will  increase  in  the 
future.  

jobs  such  as 

Graph 3.3.2:  Employment by economic activity 

Source: European Commission 
Note: LS - low skill, MS - medium skill, HS - high skill 

The shortage of high-skilled workers is likely to 
generate  some  wage  pressure 
in  sectors 
recruiting  this  type  of  workers.  They  are 
remunerated  significantly  better  than  low-  and 
medium-skilled  workers.  High  wage  growth  is 
already  observed  in  the  IT  and  communication 
sector, possibly related to the high inflow of FDI in 
financial  services 
ICT  and 
shared  services, 
outsourcing  (Skills  Panorama,  2016)  and  the 
scarce  supply  of  digital  skills (20).  The  average 

(19)  In 2015, the unemployment rate (15-74) for high-skilled in 
Lithuania stood at 3.7%, as compared to an EU-average of 
5.6%. 2016 sees a further decline. 

(20)  Lithuania  is  below  the  EU  average  in  advanced  and  basic 

digital skills (European Commission, 2016b). 

Source: European Commission 

Employment  is  shifting  increasingly  towards 
more  high-skilled  occupations  (from  34%  of 
employment in 2005 to 42% in 2015, as compared 

(21)  This is one of the highest levels in the EU, whose average 

is 1.5 times the mean wage. 

18 

0102030405060708090100LSMSHSLSMSHS25-4950-64LTEU2818%9%9%4%4%8%21%18%17%17%21%16%6%7%8%7%10%8%23%27%27%24%25%28%4%11%12%16%14%14%24%24%23%25%22%22%0%10%20%30%40%50%60%70%80%90%100%LT 2000LT 2010LT 2015EU282015EE 2015LV 2015Public sectorProfessional servicesTrade, transport and tourismConstructionIndustry without constructionAgriculture 
 
 
                                                           
 
                                                           
to  the  EU  average  of  41%)  (ILO,  2007)(22). 
Especially  the  share  of  the  professional  services 
sector  has  increased,  and  now  exceeds  the  EU 
average.  The  share  of  skilled  agricultural  workers 
and of craft and related trade workers has declined 
over time, but remains above the EU average.  

Investment  in  human  capital  is  crucial  to 
support  economic  growth  and  further  labour 
market improvements. The high impact of skills 
on 
the 
labour  market  outcomes  underscores 
importance of both the initial education as well as 
reskilling  of  adults.  A 
the  upskilling  and 
substantial  share  of  active  labour  market  policy 
(ALMP) resources in Lithuania is already targeted 
towards  training  and  upskilling  of  low-  and 
medium-skilled unemployed. However, the general 
level  of  expenditures,  and  the  coverage  of  active 
measures remains limited in Lithuania compared to 
other EU countries (Graph 3.3.3) (23).  

Graph 3.3.3:  Coverage of labour market policies 

3.3. Labour market, education and social policies 

low 

levels  of  problem-solving  skills 

adults  have  low  computer  familiarity  and  skills, 
and 
in 
technology-rich  environments,  compared  with 
other  countries.  A  number  of  policy  actions  and 
planning  documents  were  adopted  during  recent 
years to develop Lithuania's adult learning system, 
including  the  establishment  of  a  network  of  adult 
learning coordinators in all municipalities. As yet, 
the policy measures taken are at an initial stage of 
implementation and participation in adult learning 
remains low.  

the  Labour  Code 
The  2016  revision  of 
underscores the importance of raising skills and 
workforce  adaptability.  The  reforms  of  the 
Labour Code, and more broadly of other aspects of 
the  social  model,  aim  at  making  labour  markets 
more  flexible  (see  Box  3.3.1)  while  increasing 
security.  This  implies  that  careers  will  become 
more  dynamic  and  workers  would  need  to  adjust 
flexibly  across  occupations  and  sectors.  Therefore 
it  is  important  that  they  can  reskill  and  upskill 
according  to  the  economy's  needs.  In  2016, 
Lithuania  adopted  a  new  law  on  Employment (24) 
risk  of 
that 
unemployment,  in  particular  by  expanding  the 
range  of  ALMP  measures,  and  integrating  them 
the  Public 
with  other  services  provided  by 
limited 
Employment  Service.  So 
additional  funds  have  been  allocated  to  support 
these measures. 

is  expected 

to  mitigate 

far,  only 

the 

(24)  Entry  into  force  has  been  postponed  from  1  January  2017 

to 1 July 2017. 

Source: European Commission 

learning 

in  adult 

remains 
Participation 
stagnant  at  a  low  level  (5.8%)  compared  with 
the  EU  average  (10.7%  in  2015).  According  to 
PIAAC  results,  adults  in  Lithuania  show  above-
average  proficiency  in  numeracy  and  average 
proficiency in literacy skills compared with adults 
in  the  OECD  countries.  However,  Lithuanian 

(22)  High-skilled  occupations  are  defined  as  those  classified 
under  ISCO08  1-digit  levels  1,  2  and  3,  according  to  a 
definition by ILO.  

(23)  For  more  detailed  analysis,  see  Country  Report  Lithuania 

2016. 

19 

0.000.501.001.502.002.503.003.500.020.040.060.080.0100.0120.0140.0160.0180.0ELROBGEEHRCYLVSILTSKITMTPLCZATPTESIENLFIDEHUFRSEDKBELUCoverage of active measures (lhs)Coverage of passive measures (lhs)Total spending (% GDP)%GDPNr of participants per 100 persons wanting to work 
 
                                                           
                                                           
3.3. Labour market, education and social policies 

20 

 Box 3.3.1: The new labour codeIn 2016, Lithuania adopted a new comprehensive legislative package establishing new regulations in labour relations, social security provision and the pension system. Referred to as the "social model" reform, the aim of this reform package is to make labour market more flexible, while providing at the same time more security through the unemployment insurance system, and, eventually, improved collective bargaining. The social partners were involved in preparation of the package, but some agreements reached in the Tripartite Councile were not included in the final version of the legislation. In response to widespread criticism, in December 2016 the newly elected Lithuanian government decided to postpone the entry into force of the package until 1 July 2017 and announced further amendments.  Labour relations have been made more flexible. While Lithuania's labour market showed a high degree of flexibility over the crisis period, it has been argued that this was to some extent the result of circumvention of formal regulations, and that a more flexible labour code with better enforcement can increase labour market efficiency and support investment. The conclusion, amendment, and termination of employment contracts have been made simpler and new types of employment contracts have been introduced. The dismissal from work is liberalised through shorter notice periods (from 2 down to 1 month in most cases) and lower severance payments (from 6 down to 2 months in most cases). In addition, new grounds for dismissal are established, in return for higher severance pay. Certain aspects of the organisation of working time have been deregulated as well, so that more opportunities for flexible working time regimes arise. On the one hand, working time can be increased in peak production periods, on the other hand, this flexibility may facilitate the reconciliation of work and family life. The new Code allows for a very flexible use of fixed-term contracts (with a maximum cumulative duration of 2 years) and the use of short-time working schemes. The regulation of labour disputes changes as well.   To support income security, the unemployment benefits system was expanded, but parallel changes in the severance payment system imply that the net income effect for unemployed may still be neutral or even negative. The required contribution period is reduced from 18 out of the previous 36 months to 12 out of 24 months, which keeps the ratio of the qualification over the reference period stable. Theoretically, it is not clear ex ante whether this should increase coverage or reduce it (increasing the reference period usually increases coverage, increasing the qualification period usually reduces coverage). However, simulations based on EU SILC data suggest that this change would raise coverage. Currently being at a very low level, the replacement rates are increased: the fixed part is set at 30% of the minimum wage, and the variable part is raised to 50% of the employee's average salary for the first 2 months, 40% for the next 2 months, and 30% during the last 2 months – as compared to the previous rate of 40% during the first 3 months and 20% during the last 3 months. The ceiling for unemployment benefits is also raised to 75% of the average wage. On the other hand, the duration of unemployment benefits is capped at 6 months instead of being raised to 9 months as initially planned. For those with long tenure, an additional severance payment, paid from a collective fund, applies upon dismissal in the amount of 1-3 monthly wages. However, the positive income effects of the higher replacement rates are mitigated by a broad reduction of severance payments and the introduction of personal income tax on unemployment insurance benefits. As a result, for those unemployed who already qualified for unemployment insurance under the previous scheme, the income effects of the reform are not expected to be substantial, casting some doubts on the balance between flexibility and security of this new social model.   
 
 
 
 
 
3.3. Labour market, education and social policies 

3.3.2.  LABOUR MARKET: COLLECTIVE 

BARGAINING 

Graph 3.3.4:  Net replacement rates at different lengths of 
unemployment duration in 2015 

that 

Commission, 

The  new  Labour  Code  aims  to  encourage 
labour  union  membership  and  strengthens 
work councils. The social dialogue in Lithuania is 
weak,  evidenced  by  low  union  and  employer 
organisation  density  and  bargaining  coverage 
2016)(25). 
(European 
The 
government  anticipates 
the  reforms  will 
support  the  development  of  a  stronger  social 
collective 
in 
changes 
Important 
dialogue. 
representation. 
bargaining  concern  collective 
Trade  unions  will  no 
represent  all 
longer 
employees, but rather only their members, with the 
aim  to  encourage  trade  union  membership  and 
representativeness.  In  addition,  a  stronger  role  for 
works  councils  is  established.  Both  the  trade 
unions  and 
the  employer  organisations  have 
expressed their reservations over this reform, as it 
represents a major overhaul of the social dialogue 
at  the  firm  level,  and  it  is  not  clear  whether  there 
will  be  sufficient  capacity  on  the  ground  for 
successful  and  effective  implementation  of  the 
reform.  The  government  has  planned  measures  to 
support capacity building of the social partners, but 
more  active  involvement  of  the  social  partners 
themselves  in  designing  these  measures  would 
benefit the effectiveness of the reform.  

(25)  Union  density  is  calculated  as  net  union  membership  as  a 
proportion  of  wage  and  salary  earners  in  employment. 
Employer  organisation  density 
the 
proportion of wage and salary earners in firms organised in 
employers'  organisations.  Bargaining  coverage  measures 
the % of employees covered by collective wage bargaining 
agreements as a proportion of all employees with the right 
to bargaining. 

is  calculated  as 

Source: European Commission 

3.3.3.  SOCIAL POLICIES: POVERTY 

The  decline  of  at-risk-of-poverty-or-social-
exclusion  (AROPE)  rate  stalled  in  2015  and 
there are some signs of reversal. Despite positive 
developments  in  previous  years  and  steady  GDP 
and  employment  growth,  the  AROPE  increased 
from 27.3% in 2014 to 29.3 % in 2015, mostly on 
account  of  the  at-risk-of-poverty  rate,  but  there 
was  also  a  slight  uptick  in  the  severe  material 
deprivation rate and in the population share in low 
work  intensity  households  (Graph  3.3.5).  Poverty 
increased more for children and for elderly than for 
the  working  age  population.  It  is  high  especially 
among  unemployed  and  retired  persons,  mainly 
low  adequacy  of  unemployment 
due 
insurance  benefits  and  pensions.  The  AROPE  for 
unemployed  persons  stood  at  74.5%,  among  the 
highest in the EU. The AROPE for retired persons 
aged  65+  amounts  to  37.7%,  also  among  the 
highest  in  the  EU,  and  has  increased  since  2010. 
There  is  also  a  significant  gender  gap  in  poverty 
for  the  population  aged  65+:  AROPE  reaches 
41.0 %  for  women,  while  for  men  it  is  at  26.2 % 
(2015).  These  trends  suggest  that  Lithuania's 
welfare  system  is  failing  to  keep  pace  with 
economic growth.  

the 

to 

21 

01020304050607080902 m7 m13 m25 m60 mEU28EELVLT 
                                                           
 
3.3. Labour market, education and social policies 

Graph 3.3.5:  Poverty indicators 

Graph 3.3.6:  Median income as a share of average 

income, % 

Source: OECD data, European Commission calculations 

The  share  of  people  with  disabilities  at  risk  of 
poverty or social exclusion is among the highest 
in  the  EU.  Moreover,  the  gap  between  persons 
with  and  without  disabilities  (at  18.5  pps)  is  the 
largest  in  the  EU  (Graph  3.3.7).  The  at-risk-of-
poverty-or-social-exclusion  rate 
is  particularly 
high for persons with a severe disability at working 
age (65.7%, one of the highest in the EU).  

Graph 3.3.7:  Share of people at risk of poverty or social 

exclusion by disability status, % 

Source: European Commission 

Lithuania's  social  safety  net  offers  weak 
protection  against  poverty.  The  relative  income 
level of Cash Social Assistance recipients (as a % 
of full time workers) is low compared to other EU 
countries.  The  amount  of  state  supported  income 
(EUR  102),  which  is  the  base  for  the  cash  social 
assistance, remains at the level of 2008 in spite of 
the  strong  average  income  growth  observed  since 
then.  To  promote  better  coverage,  Lithuania 
adopted  a  set of  amendments  to  the  Law on  Cash 
Social  Assistance  for  Poor  Residents  (No  XII-
2611) which expands eligibility for receiving cash 
social  assistance  (e.g.  grants  for  unemployed  who 
take part in vocational training are not included in 
the  means-test)  and  establishes  a 
list  of 
circumstances  under  which  cash  social  assistance 
cannot be reduced (e.g. if the Public Employment 
Service  did  not  offer  any  activation  measures).  It 
also expands the eligibility for in-work benefits to 
those  who  are  in  unemployment  for  6  months 
(rather than the previous 12).  

Source: European Commission 
Note: Graph includes 14 EU countries with the highest gap 

22 

05101520253035404520052006200720082009201020112012201320142015At-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households05101520253035404550ROPTLTHR*LVSKBEDECZNLFISEDK201420100.010.020.030.040.050.060.0DEHRCZCYNLMTSEUKIEBGEEBELVLTPersons with limitationsPersons without limitationsGap (Percent of persons with disabilities –Percent of persons without disabilities) 
 
 
 
 
3.3. Labour market, education and social policies 

High  poverty  among  disabled  people  relates  to 
their  weak  labour  market  integration  and  low 
adequacy of social safety nets. In 2014 only 23 % 
of  all  disabled  persons  were  employed (ANED, 
2016a).  Lithuania  has  one  of 
the  highest 
employment  gaps  (40  ppt)  between  people  with 
and  without  disabilities  (Graph  3.3.8).  While  the 
legal  environment  and  national  level  strategies 
programmes  for 
in  place, 
Lithuania  lacks  comprehensive  measures  for  the 
effective  integration  of  disabled  persons  into  the 
labour  market,  which  is  the  most  efficient  way  to 
protect  them  against  poverty.  In  this  respect,  the 
functioning and effectiveness of current system of 
social  enterprises 
is  reportedly  weak (ANED, 
2016b).  

the  disabled  are 

Graph 3.3.8:  Employment gap of people with disabilities 

aged 20 to 64 

result  of  high  employment  gaps  between  low-
skilled  and  high-skilled  workers,  the  strong  wage 
dispersion,  the  limited  progressivity  of  the  tax 
system, and weak social safety nets, including for 
the  elderly  (IMF,  2016).  Besides  the  fact  that 
excessive  income  inequality  is  considered  to  be 
detrimental 
to  economic  growth  and  macro-
economic  stability,  in  Lithuania  it  could  also  be 
one of the causes of emigration. 

The  tax-benefit  system  seems  insufficient  to 
correct  for  inequality  of  market  incomes  in 
Lithuania. Lithuania has one of the lowest tax-to-
GDP  ratios  in  the  EU.  Total  tax  revenues  were 
27.7 %  of  GDP  in  2015  as  compared  to  the  EU 
average  of  40 %.  Combined  with  weak  social 
safety  nets,  the  system  is  less  able  to  correct 
market  income  inequalities  than  in  other  Member 
States.  Lithuania  has  one  of  the  highest  Gini 
coefficients  for  household  income  after  tax  and 
benefits in 2015(27).  

(27)  The  Gini-coefficient  is  an  indicator  of  income  inequality 
with a value between 0 and 1. Lower values indicate higher 
equality and high values higher inequality. A value equal to 
0  indicates  that  everybody  has  the  same  income,.  A  value 
equal to 1 indicates that one person has all the income in a 
country. 

Source: European Commission 
Note: Employment gap is the difference of employment rate 
of people without disabilities and of those with disabilities 

3.3.4.  SOCIAL POLICIES: INEQUALITY OF 

INCOME 

The inequality of incomes in Lithuania is one of 
the  highest  in  the  EU,  and  has  been  increasing 
since  2012.  In  2015,  the  income  quintile  share 
ratio (S20/S80) (26) stood at 7.5, one of the highest 
levels  in  the  EU  (Graph  3.3.9).  Inequality  is  the 

(26)  The  ratio  of  total  income  received  by  the  20  %  of  the 
population  with  the  highest  income  (top  quintile)  to  that 
received  by  the  20  %  of  the  population  with  the  lowest 
income  (lowest  quintile).  Income  must  be  understood  as 
equivalised disposable income. 

23 

0.05.010.015.020.025.030.035.040.045.0LTIEMTBGCZBEPLUKHUNLHRROELDKSEEUEEESDEFRCYSKPTFILVATSILUIT 
 
                                                           
                                                           
3.3. Labour market, education and social policies 

Graph 3.3.9:  S80/S20 income ratio 

Graph 3.3.10: Real public expenditure on education per 

student (2010 prices) 

Source: European Commission 
Note: S80/S20 shows the ratio of the total income of the 20% 
of the highest earners divided by the total income of 20% of 
the lowest earners 

Source: European Commission, Statistics Lithuania 

3.3.5.  EDUCATION 

Lithuania's  education  system  has  struggled  to 
adapt  to  the  decreasing  number  of  pupils  and 
students. In 2015, Lithuania spent 5.4 % of GDP 
on education, down from 6.4 % in 2010 and in line 
with a target reduction for educational expenditure 
to  4.8  %  of  GDP  by  2020.  Yet,  the  public 
expenditure on education per student has increased 
(see  Graph  3.3.10).  Increasing  expenditure  per 
student and stagnant education quality suggest the 
system  is  struggling  to  maintain  efficiency  in  the 
face  of  the  need  to  downsize.  The  declining 
number  of  pupils  for  the  past  decade,  with  39  % 
fewer students in 2015 than in 2005, meant that the 
student-teacher  ratio  has  been  constantly  falling. 
Consequently,  Lithuania  has  one  of  the  highest 
concentrations of teachers in the active population 
in  Europe  (OECD,  2016)  and  a  comparably  large 
support  staff  (LFMI,  2016a).  The  steady  and 
continuing  decline  in  average  class  size  in  the 
same period left many schools with buildings that 
are  too  big  for  their  needs  and  thus  requiring  an 
ever  increasing  share  of  resources  to  be  spent  on 
heating and maintenance (LFMI, 2016b). 

School  education  outcomes  in  terms  of  basic 
skills  proficiency  are  below  EU  average  and 
have  deteriorated  in  recent  years.  In  the  2015 
OECD  Programme 
International  Student 
for 
Assessment 
(PISA),  Lithuanian  15-year-olds 
perform  below  the  EU  average  in  basic  skills  and 
the proportion of low achievers is high in all three 
fields (science, reading and maths) tested, at 25 %. 
Compared to 2012, the proportion of low achievers 
has  increased  significantly  in  reading  and  science 
and  has  only  slightly  decreased  in  mathematics. 
Girls  continue  to  strongly  outperform  boys  in 
reading,  although 
the  gender  gap  decreased 
between  2012  and  2015.  40  %  of  students  in  the 
bottom  socio-economic  quarter  are  low  achievers 
in  science (OECD,  2016a;  European  Commission, 
2016e). The  difference  in  performance  in  science 
between children studying in rural and urban areas 
is  among  the  highest  in  the  EU  (56  points).  The 
2015 results of the Assessment of Achievement of 
the  Lower-Secondary  Education  Programme 
(NTCL, 2015) confirm that almost one fifth of 16-
year-olds 
lack  basic 
knowledge  and  skills.  Weaknesses  in  reading  and 
writing  are  already  evident  for  10-year-olds  (4th 
grade  students);  those  in  mathematics  become 
evident at the age of 14 (8th grade students). New 
language  were 
the  Lithuanian 
curricula 
approved  in  January  2016  to  improve  pupils’ 
Standardised 
writing 

(10th  grade 

students) 

reading 

skills. 

and 

for 

24 

4.04.55.05.56.06.57.07.58.0200520072009201120132015EU27EELVLT020000400006000080000100000120000140000051015202520002002200420062008201020122014thousand EUR/yearReal expenditure on education per student (2010prices)Number of students (rhs) 
 
 
 
3.3. Labour market, education and social policies 

instruments  were  created 
to  enable  detailed 
analyses  at  the  level  of  the  individual  child.  In 
2017,  a  national  system  for  evaluating  school 
children's  learning  outcomes  in  general  education 
will be fully rolled out. 

Graph 3.3.11: Proportion of low achievers 

(European 
compared  with  GDP  per  capita 
Commission/EACEA/Eurydice, 
2016).  New 
recruits  to  teaching  are  likely  to  earn  close  to  the 
minimum salary. Low wages are aggravated by the 
practice  of  setting  salaries  on  the  basis  of  the 
actual workload, thus reducing the young teachers' 
earnings  as  they  usually  have  less  teaching  hours 
than  their  experienced  colleagues.  Obligatory  in-
school  practice  during  teachers'  initial  training  is 
limited  and  innovative  teaching  methods  remain 
underutilized. There are also large discrepancies in 
the  funding  of  teacher  qualification  development 
with  some  municipalities  receiving  three  times  as 
much as others (Shewbridge, C. et al., 2016). 

funding 

for  early 

teachers.  Developing 

The  government  has  taken  some  steps  to 
improve  the  attractiveness  of  the  teaching 
profession.  It  raised  salaries  for  novice  teachers, 
and  allocated 
retirement 
compensation  in  order  to  create  more  vacancies 
and  provide  more  employment  opportunities  for 
strategies 
young 
for 
redeploying  and 
teachers  currently 
retiring 
employed  in  schools  is  a  positive  step,  but  it 
requires  careful  planning  to  avoid  future  teacher 
shortages  and  a  loss  of  accumulated  knowledge.   
Also,  scholarships  for  teaching  degrees  and  a 
mentoring  programme  supporting  young  teachers 
have  been  set  up.  However,  these  steps  are 
relatively  minor  and  a  larger  scale  rationalisation 
of  education  system  would  be  needed  to  free  up 
resources 
for  higher  pay  and  professional 
development programmes.  

Higher education is grappling with maintaining 
the quality and efficiency of funding in the face 
of  large  drops in  student  numbers. The number 
of  young  people  entering  higher  education  has 
decreased  by  9  %  since  2015  and  by  21%  since 
2012  for  demographic  reasons  (MOSTA,  2016a). 
Due to the allocation of public funding for higher 
education  on  the  basis  of  input  rather  than  output 
indicators,  the  competition  to  attract  students  has 
resulted  in  a  mushrooming  of  overlapping  study 
programmes 
entry 
requirements (28). There has, however, been a light 
redistribution of students across study fields and an 
increase  in  the  number  of  entrants  into  natural 

lowering 

and 

of 

a 

(28)  For example,   management  studies  are  offered  by  23 
study 
(HEIs) 
institutions 
business  studies  are  offered  by  20  HEIs 

higher  education 
programmes;  
in 32 study programmes. (MOSTA, 2016b)   

in  40 

Source: OECD, PISA 2015 

to 

Teacher  quality  is  key  to  tackling  the  low 
performance of the education system, but there 
are  concerns  related 
the  supply  and 
demography of teachers. The teaching workforce 
is  ageing.  44  %  of  lower  secondary  education 
teachers  were  aged  50  years  or  older  in  2014. 
There  is  evidence  that  the  teaching  profession  is 
not  attractive  to  young  talented  people  (MOSTA, 
2015;  Lithuanian  Education  Council,  2015a).  The 
number  of  applicants 
training 
programme  has  halved  over  the  past  5  years  and, 
for example, no students were admitted to physics 
and  chemistry  teacher  training  programmes  in  the 
last  3  years  (Lithuanian  Education  Council, 
2015a).  A  significant  proportion  of  entrants  into 
initial  teacher  education,  as  high  as  85  %,  end  up 
not entering the teaching profession. This suggests 
that, despite the current oversupply of teachers, in 
the  medium  to  long  term  schools  may  encounter 
teacher shortages. 

teacher 

to  a 

Teachers'  wages  are  low  and  funding  for 
continuous  professional  development  is  scarce.  
Wage  growth  in  education  has  failed  to  keep  up 
with  the  overall  pay  increase  and  is  now  below 
national  average.  Moreover,  basic 
statutory 
teacher’s  salaries  are  the  lowest  in  the  EU  when 

25 

051015202530ScienceReadingMaths%LithuaniaEU averageLatviaEstonia 
 
                                                           
3.3. Labour market, education and social policies 

policies  -  alcohol  consumption 
continues to be among the highest in the EU.  

in  Lithuania 

Graph 3.3.12: Select health system performance indicators 

in  2016,  one 

the  class  sizes  have 
sciences.  Consequently, 
dropped  - 
third  of  all  study 
programmes  in  Lithuania  had  no  more  than  10 
enrolled students. The reform of tertiary education 
is  high  on  the  political  agenda  –  in  December 
2016,  the  parliament  adopted  a  resolution  urging 
the  government  to  work  out  a  restructuring  plan. 
Setting up the institutions' financial incentives in a 
way  that  promotes  quality  and  efficiency  of  the 
higher  education will  be  the key  challenge of  this 
reform.  

for 

the  new 

admission 

requirements 

Lithuania has taken steps to improve the labour 
market relevance of education. On 29 June 2016 
parliament  adopted 
law  on  higher 
education  and  research.  The  law  lays  down 
all 
minimum 
universities  and  compulsory  pre-entry  career 
guidance.  Furthermore, 
it  provides  for  more 
cooperation  on  curriculum  development  with 
social  partners  and  the  expansion  of  work-based 
learning  opportunities  in  tertiary  education.  New 
professionally-oriented 
pathways 
programmes 
traditional  academic  master’s 
programmes  will  be  opened  up.  Moreover,  a 
national  human  resources  monitoring  framework 
plan  came  into  force  on  1  June  2016.  The 
monitoring  system  covers  all  levels  of  education, 
including  the  observation  of  the  labour  market 
outcomes  of  graduates  and  forecasting  of  future 
skills  needs.  Successful  implementation  of  this 
framework  should  improve  the  planning  process 
and policy design in education. 

from 

to 

3.3.6.  HEALTH 

Poor  health  outcomes  exacerbate  the  problem 
of  the  declining  working  age  population  by 
further reducing the country’s workforce. Male 
life  expectancy  continues  to  increase  but  is  still 
amongst the lowest in the EU. High mortality rates 
hamper  the  potential  of  the  Lithuanian  workforce 
and  economy  (OECD,  2016).  Amenable  mortality 
in  Lithuania  is  among  the  highest  in  the  EU, 
indicating  a  poor  performance  of  the  health 
system.  The  main  challenges 
in  health  care 
provision  are  high  regional  inequalities  in  access 
(people  in  rural  areas  make  fewer  visits  to 
physicians and their life expectancy is three years 
lower),  too  high  reliance  on  inpatient  care  (631 
hospital beds per 100 000 inhabitants in Lithuania; 
ineffective  health  promotion 
EU:  396),  and 

Source: European Commission 
Note: most data from 2014 

Financial  barriers  to  health  care  access  and 
corruption  affect  the  equity  of  the  health 
system.  Out-of-pocket  payments  are  very  high, 
representing  almost  one  third  of  current  health 
expenditure  as  compared  to  an  EU  average  15 % 
and reduce equity in access to health care (Health 
at  a  Glance:  Europe  2016).  Out-of-pocket 
payments  are  particularly  high  for  medicines. 
There  is  a  potential  for  the  further  promotion  of 
generic  medicines  (IMF,  2015).  Corruption  in  the 
health sector, in particular the frequent practice of 
informal  payments  (Stepurko  et  al,  2014),  further 
reduce equity in access to health care.  

informal  payments 

Health  care  remains  among  the  sectors  most 
vulnerable  to  corruption  in  Lithuania.  Social 
acceptance  of 
is  slowly 
diminishing,  especially  among  younger  patients, 
but the preponderance of informal relations in the 
sector  continues  to  jeopardise  equal  access  to 
treatment 
appointment  of 
managers  (European  Commission,  2017a).  The 
government is prioritising the health care sector in 
programme.  Supervisory 
its 
councils  of  Vilnius  municipal  hospitals  were 
opened  to  civil  society  representatives.    State  and 
municipal  doctors  are  required  to  report  any 

and  merit-based 

anti-corruption 

26 

0102030405060708090100Selected indicators on health system challenges (most data for 2014)LithuaniaEU28 avgEU28 best 
 
3.3. Labour market, education and social policies 

conferences they attend funded by pharmaceutical 
companies.  Rules  also  oblige  clinical  staff  to 
inform  patients  about  anti-corruption  matters, 
complaints. 
details 
including 
Advertisers  are  banned  from  offering  gifts  to 
health care professionals.  Continued monitoring is 
necessary 
these 
policies. 

implementation  of 

to  ensure 

contact 

for 

27 

 
3.4. INVESTMENT 

3.4.1.  INVESTMENT SITUATION 

the 

The investment level is considerably lower than 
last  5  years, 
before  the  crisis.  During 
investment  in  Lithuania  has  remained  stable  at 
around 18% of GDP. This follows a period where 
it increased steadily from around 19.1% of GDP in 
2000  to  28.6%  of  GDP  in  2007.  Lithuania's 
investment  rates  were  consistently  above  EU 
average  during  the  period  from  2000  to  2008. 
However,  since  the  crisis,  Lithuania's  investment 
rate has lagged both the EU average and the other 
Baltic  countries.  Non-residential  construction  has 
seen  the  largest  drop  in  investment,  followed  by 
investment  in  equipment.  Residential  investment 
has  held  up  the  best  and  is  the  only  investment 
type  that  has  seen  sizeable  increase,  in  terms  of 
percent  of  GDP, 
in  recent  years  (European 
Commission, 2016d). 

Non-EU funded public investments are low and 
suffer  from  poor  planning.  Lithuania  crucially 
relies  on  EU  funds  for  its  public  investments,  as 
only around one third of all public investments are 
(see  Box  2.1). 
financed  by  own-resources 
Moreover,  the  investment  programmes  that  are 
financed  from  own  resources  suffer  from  poor 
planning and coordination (see Section 3.6).  

3.4.2.  PRICE COMPETITIVENESS 

Unit  labour  costs  (ULC)  have  been  increasing 
since  2012. Following  a  rapid  increase during  the 
years leading up to the 2009 crisis, ULC declined 
substantially  in  2009  and  2010.  Since  then,  the 
growth  has  resumed  and  reached  4.8%  in  2015. 
The growth in ULC is a clear sign of the tightening 
of  the  labour  market,  leading  to  strong  wage 
growth,  while  productivity  growth  has  been 
lagging  behind  since  2012.  At  the  same  time,  at 
46%,  the  labour  share  of  income  is  one  of  the 
lowest  in  EU  and  also  below  that  in  the  other 
Baltic  countries,  implying  a  possible  space  for 
increase in labour income share.  

Other  indicators  of  external  competitiveness 
give  a  mixed  message.  While  the  real  effective 
exchange  rate  appreciated  by  4%  from  2012  to 
2015,  the  export  market  shares  in  the  meantime 
grew by 15%. Nevertheless, they declined by 10% 
in  2015,  mainly  as  a  result  of  a  drastic  fall  of 
exports to Russia. At the same time, exports to the 

EU  have  continued  to  grow,  albeit  more  slowly. 
The  current  account  has  returned  close  to  balance 
in  2016.  This  indicates  that,  unlike  in  the  years 
leading  up  to  the  2009  crisis,  the  risk  of  external 
financial  inflows  fuelling  unsustainable  growth  in 
domestic consumption and wages is low. 

In  recent  years,  wage  growth  has  exceeded  the 
benchmark  wage  growth  rates.  As  Graph  3.4.1 
shows, nominal wage growth in Lithuania has been 
higher  than  both  what  would  be  consistent  with 
productivity growth, and what would be consistent 
with  a  constant  real  effective  exchange  rate  since 
2013. While the wage growth divergence from the 
benchmarks  is  not  nearly  to  the  scale  it  had  been 
before the 2009 economic crisis, it may negatively 
affect  Lithuania's  competitiveness  if  this  trend 
continues. 

Graph 3.4.1:  Wage growth in comparison to benchmarks 

Source: Update of Arpaia and Kiss 

3.4.3.  PRODUCTIVITY GROWTH 

The imminent decline of the population share in 
prime  working  age  means  that  growth  will 
increasingly  depend  on  labour  productivity. 
Over the period 2000-2015, Lithuania has had one 
of  the  highest  labour  productivity  growth  rates 
among EU Member States, reflecting a catching up 
process. From 32.8% of EU15 average in 2000, its 
productivity per hour worked had grown to 56.6% 
in  2015.  However,  as  the  country's  productivity 
level approached the EU average, the growth rates 

28 

-0.15-0.10-0.050.000.050.100.150.200.2519971998199920002001200220032004200520062007200820092010201120122013201420152016%Actual nominal wage growthBenchmark 1: Predicted nominal wage growth rateBenchmark 2: Wage growth consistent withconstant ULC-based REER 
 
 
3.4. Investment 

2010  and  2015.  This  may  largely  explain  the 
corresponding  slowdown  in  productivity  growth  - 
the  relatively  easy  gains  from  the  catching  up 
process  had  been  exhausted  by  2010  and  any 
further  growth  was  much  harder  to  achieve.  The 
parallel  slowdown  in  investment  growth,  notably 
following the economic crisis of 2009, aggravated 
the  diminishing  growth  potential.  Adjusting  to  a 
more  knowledge-intensive  growth  model  is  the 
major  challenge  Lithuania 
to  ensure 
productivity  growth  drives  further  living  standard 
convergence with the EU average.  

faces 

The  change  in  external  financial  flows  may  be 
another  reason behind  the  productivity growth 
slowdown. While during 2004  – 2010  Lithuania's 
net liabilities to the rest of the world increased on 
average by 3.4% of GDP annually, during 2010 – 
2015  they  have  decreased  on  average  by  2.2%  of 
GDP  per  year.  This  constitutes  a  reversal  in  the 
flow of funds of 5.6% of GDP annually. Some of 
this  reversal  reflects  lower  investment  demand, 
although  a  part  of  the  pre-crisis  financial  inflows 
was  fuelling  an  unsustainable  growth  in  domestic 
consumption,  which  inflated  both  the  GDP  and 
productivity  growth  rates.  Hence,  while  current 
financial  outflows  may  suppress  the  productivity 
growth somewhat, at the same time this means that 
the  risk  of  an  unsustainable  growth  path  is  much 
lower than during the pre-crisis years. 

3.4.4.  PRODUCTIVITY ENHANCING POLICIES 

sectors 

importance 

Knowledge-based  activities  are  expanding,  but 
the  high-tech  sector  remains  small.  There  are 
few  firms  in  medium-high  and  high-technology 
sectors.  Chemicals,  refined  petroleum  products, 
apparel, 
the  most 
textiles  and  furniture  are 
important 
within  manufacturing. 
Knowledge-based  activities  within  manufacturing 
and  services  are  expanding  and  they  are  of 
particular 
and 
productivity  growth.  These  include  for  example 
laser  manufacturing, 
biotechnology 
technology. 
mechatronics 
Innovation  and  firm  productivity  growth  would 
benefit from greater international knowledge spill-
overs  and  improvements  in  firms'  absorptive 
capacity,  which  would  make  Lithuania  more 
attractive  for  foreign  direct  investment  and  boost 
the  participation  of  Lithuanian  firms  in  global 
value chains.  

industries, 
and 

information 

innovation 

for 

slowed down and so has the catching up rate with 
the western European countries.   

Graph 3.4.2:  Lithuania's convergence of productivity 

Source: European Commission 

Manufacturing  was  the  biggest  contributor  to 
productivity  growth  during  the  past  15  years 
and also the main reason behind the post-crisis 
slowdown. Over the period 2000 to 2010, average 
productivity  growth  in  manufacturing  was  8.6%, 
well  above  the  economy  average  of  5.6%.  While 
productivity  growth  has  slowed  down  across  all 
activity 
2015, 
during 
manufacturing  slowed  down  the  most  and,  at  an 
average  2.9%,  its  productivity  growth  was  barely 
above  the  economy-wide  productivity  growth  of 
2.5%.  

branches 

2010 

– 

The  recent  productivity  slowdown  coincides 
with  a  slowdown  in  structural  change  of  the 
economy.  As  discussed  in  section  3.3.1,  since 
transforming to a market economy in early 1990s, 
Lithuania  underwent  a  structural  change  in  the 
economy  –  the  employment  in  agriculture  and 
industry  sectors  decreased  as  they  caught  up  with 
modern  technologies  and  become  much  more 
productive.  At  the  same  time,  the  employment 
the  modern  services  sectors  grew 
share  of 
largely 
transformation  was 
substantially.  This 
behind  the  rapid  productivity  growth  up  to  2010. 
The potential productivity gains from the structural 
adjustment  diminished  as  Lithuania's  sectoral 
the  EU  average. 
composition  converged 
Notably,  as  Graph  3.3.2  shows,  no  significant 
structural  change  took  place in  Lithuania between 

to 

29 

-4.00-2.000.002.004.006.008.0010.0012.000.0010.0020.0030.0040.0050.0060.0070.0020012003200520072009201120132015Productivity,  % of EU15Rate of convergence (rhs), pps of EU 15 
 
3.4. Investment 

investment 

Lithuania  is  supporting  the  uptake  of  new 
technologies  and  business  models.  A  number  of 
grant  schemes  support  SME 
into 
innovative  manufacturing  or  service  ventures. 
They  also  promote 
introduction  of  modern 
technologies,  adapting  and  developing  new 
production  capacities,  and  new  products  and 
services.  Lithuania  is  the  first  Member  State  to 
have passed a peer-to-peer ridesharing law. It sets 
out  light  registration  procedures  for  drivers  of 
"passenger  carriage  for  a  fee"  who  can  be  either 
businesses or individuals.  

is  well  above 

Lithuania  is  increasingly  benefitting  from  the 
digital economy. There is a steady increase in the 
number  of  enterprises  that  make  use  of  specific 
applications  of  digital  technology  in  business 
activities  (European  Commission,  2016f).  The 
number  of  households  that  subscribe  to  fixed 
broadband is still below the EU average. However, 
the  percentage  of  subscriptions  to  fast  broadband 
networks 
the  EU  average. 
Concerning  e-commerce,  Lithuania  has  further 
improved and is performing above the EU average. 
The  share  of  SMEs  selling  online,  including  to 
other EU countries, is also above the EU average. 
The Digital  Agenda (Government  of  the  Republic 
of  Lithuania,  2014)  has  set  ambitious  targets  to 
increase  number  of  internet  subscriptions  and  the 
volume  of  online  sales  by  2020.  The  measures  to 
support  digital  businesses  include  the  recently 
introduced scheme ‘e-Business LT’ (e-Verslas LT), 
which supports investment in e-business solutions. 
It  may  also  support  innovative  information  and 
communication technologies solutions which align 
several business processes.  

Lack  of  national  rules  for  directly  transferring 
companies'  registered  offices  into  and  out  of 
Lithuania  makes  it  more  difficult  and  costly  for 
companies  to  take  advantage  of  cross-border 
business opportunities. 

30 

 
3.4. Investment 

31 

 Box 3.4.1: Investment challenges and reforms in Lithuania Section 1. Macroeconomic perspective Investment has been stable for the past 5 years at around 18% of GDP. This is; however, considerably below the average investment levels before the economic crisis. Lately, investment has been driven by residential construction and transport equipment, while investment in other types of equipment and infrastructure in 2016 were subdued due to a temporary disruption in EU fund disbursements. For more information on the investment trends in Lithuania, please see sections 1.1 and 3.4 Section 2. Assessment of barriers to investment and ongoing reforms    Barriers to private investment in Lithuania are overall moderate (European Commission, 2015a). In 2016, Lithuania adopted major revisions to its labour law making it more flexible by expanding the use of fixed term contracts (see Box 3.3.1). Also, Lithuania has made substantial progress in promoting alternative sources of financing, as the share of venture capital financing has markedly increased in recent years (see Section 3.2.2). Main barriers to investment and priority actions underway 1. While public investment in R&D has been solid, both the scientific and innovation output of publicly funded research institutions has been poor. Moreover, public investment has failed to leverage with matching private investment into R&D which has been low with meagre upward trend. Improving the competitive aspect of public funding allocation, creating incentives for public actors to engage with the private sector and improving the overall policy planning and coordination are the priority areas to work on in order to increase the country's innovation output. 2. Efficiency of public investment in Lithuania could be improved by better planning and coordination among the line ministries and private sector stakeholders. Making public procurement more competitive and transparent could also benefit the overall investment environment. Revising the excessively detailed public procurement laws and increasing the reach of tender publications have the potential to make the process leaner and more competitive.  Regulatory/ administrative burdenTaxationPublic administrationAccess to financeCSRPublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
3.5. SECTORAL POLICIES 

3.5.1.  RESEARCH AND DEVELOPMENT AND 

INNOVATION 

for 

basis 
innovation was created in 2015. 

pre-commercial 

procurement 

of 

use 

Investment 

only  modestly 

The  cooperation  between  businesses  and  the 
public R&D sector is weak. There were only 1.7 
public-private  co-publications  per  million  of 
population (32)  in  2014  (ranking  27th  in  the  EU).  
research 
Businesses 
infrastructures available in open access centres and 
scientific  valleys  financed  by  European  Structural 
These 
and 
Funds 
infrastructures  are  expected 
incur  heavy 
upgrading  and  maintenance  costs  for  the  national 
budget by 2020(33) (Technopolis group; Ernst and 
Young,  2014).  There  is  a  need  for  a  systemic 
approach  to  improve  knowledge  transfer,  for 
university  intellectual  property  rights  policies  that 
favour  collaboration  with  businesses,  and  for 
incentives  for  researchers  to  take  part  in  firms' 
R&D  activities.  Available  R&D  infrastructures 
need  to  open  up  to  the  business  sector  and  the 
regional economic systems in which they operate. 

(ESIF). 
to 

Return  on  public  R&D  investment  is  low. 
Although  public  R&D  intensity  is  at  around  the 
EU  average,  the  volume  of  highly  cited  scientific 
publications (34)  fell  during  recent  years  to  pre-
crisis  levels,  placing  Lithuania  second  last  in  the 
EU.  On  a  value-for-money  comparison,  Lithuania 
is  also  one  of  the  worst  performers  in  EU  (Graph 
3.5.1). The majority of R&D output is produced by 
public research institutions, with weak capacity to 
for  economic  benefits.  The 
exploit 
dependence  of  public  funding  on  ESIF  raise 
sustainability concerns for the future. 

results 

(32)  As  compared  with  the  EU  average  of  34  per  million  of 

population in 2014. 

(33)  These  infrastructures  will  require  additional  ~  EUR  118 

million for the upgrading of outdated equipment. 

(34)  Scientific  publications  within  the  top  10%  most  cited 
scientific  publications  worldwide  as  %  of  total  scientific 
publications of the country: 4.5% (2013), ranks 27st among 
EU Member States. EU average: 10.5%. 

the 

remains  moderate. 

innovation  performance  of 
Overall, 
European 
Lithuania 
Innovation  Scoreboard  (EIS)  2016  ranks 
the 
country  24th  in  EU.  Despite  some  improvements, 
therefore 
innovation  performance 
Lithuania's 
remains  among  the  lowest  in  the  EU.  Lithuania 
faces  numerous  challenges 
its 
innovation  performance.  In  particular,  the  low 
efficiency  of  the  public  R&D  system,  the  need  to 
the  commercialisation  of  research 
incentivise 
results,  and  the  urgency  to  foster  a  governance 
system  and  a  policy  mix  that  are  supportive  of 
innovation.  

improve 

to 

in  R&D 

investment 

in  2015.  However,  growth 

Lithuania's 
steadily 
increased  in  recent  years  to  reach  1.04  %  of 
GDP 
in  R&D 
investment  is  mostly  propelled  by  the  use  of 
European Structural and Investment Funds, only a 
modest  contribution  is  coming  from  businesses. 
Public  R&D  intensity  increased  up  to  a  value 
slightly  above  the  EU  average  in  2015 (29),  while 
business  R&D  intensity  lags  behind  (30).  As  a 
result,  Lithuania  is  not  on  track  to  meet  the 
national R&D intensity target of 1.9% of GDP.  

in 

Private  sector  capacity  to  invest  into  research 
and innovation remains low in Lithuania due to 
the structure of the economy. The medium-high-
tech  and  high-tech  sectors  are  small (31)  and  their 
aggregate  share 
the  economy  stagnates. 
Photonics and bio-pharmaceuticals are the leading 
Lithuania’s  high-tech  sectors.  The  latter  has  a 
strong  science  base  with  good  connections  to 
business  and  has  proven  capable  of  attracting 
foreign direct investment. Generous tax incentives 
have  so  far  failed  to  increase  business  R&D 
investment significantly, indicating a possible need 
for  more  guidance  and  promotion.  However,  the 
tax  relief  was  recently  extended  to  5  years  in  the 
hope  of  boosting  its  use.  Also,  on  the  regulatory 

(29)  Public  R&D  intensity  (public  R&D  expenditure  as  %  of 

GDP) stood at 0.76 in 2015 (EU average: 0.71). 

(30)  Business enterprise expenditure on R&D (BERD) as % of 
GDP stood at 0.28 in 2015, with Lithuania ranking 25th in 
the EU (EU average is 1.30). 

(31)  Value 

added 

in  high-tech 

and  medium-high-tech 
manufacturing and in knowledge-intensive services as % of 
total  value  added  –  29.7  (ranks  28th),  EU:  48.  Compare 
with added value in manufacturing  – 19.3 (ranks 8th), EU: 
15.5. 

32 

 
 
                                                           
                                                           
3.5. Sectoral policies 

impetus 

ill-conceived 

to  country's 

launched  and  are  hoped 

coordinated. This leads to a lack of leadership and 
sometimes 
policy.  Recently, 
however,  important  policy  reform  initiatives  have 
to  provide  a 
been 
significant 
innovation 
performance (38) (39). Furthermore, the government 
requested that the European Commission's Horizon 
2020  Policy  Support  Facility  supports  the  design 
of Lithuanian policies on cooperation between the 
public science base and business and the attraction 
of innovation-oriented foreign direct investment40. 
The  launch  of  this  policy  support  activity  is 
envisaged in early 2017.  

3.5.2.  TRANSPORT 

line  between  Warsaw  and 

The  Rail  Baltica  European-gauge  railway 
infrastructure  project 
is  of  high  strategic 
importance  to  both  Europe  and  the  Baltic 
countries.  The  project  foresees  a  new  fully 
interoperable  electrified  1435  mm  higher  speed 
railway  line  from  Warsaw  via  Elk,  Kaunas  and 
Riga  to Tallinn. The  target date  for  completion  in 
the  Baltic  States  (as  agreed  by  all  the  partner 
countries) is 2025. Together with the upgrades on 
the 
the  Polish-
Lithuanian  border,  it  would  considerably  shorten 
the  journey  time  for  both  freight  and  passengers 
between  Tallinn  and  Warsaw,  as  well  as  connect 
with  the  rest  of  the  European  rail  network  in 
Poland  and  further  west.  It  is  also  expected  to 
stimulate economic growth across the Baltic region 
and  result  in  environmental  benefits  due  to  the 
expected modal shift from road to rail in passenger 
and  freight  transport,  as  well  as  gains  over  the 
current system where only diesel powered traction 
can be used.  

Rail Baltica's success depends primarily on the 
concerned  Member  States’  commitment  to  the 
the 
project’s 
effectiveness  of  their  cooperation.  Up  until 
recently, Lithuania's approach to implementing the 
Rail  Baltica  has  not  been  uniform.  While  it  has 

implementation 

and 

on 

(38)  Science  and  Innovation  policy  reform  guidelines  were 
issued  by  the  President's  Office  and  adopted  by  the 
parliament in 2016. 

(39)  The Smart Specialisation Coordinating group was set up as 
platform for stakeholders' involvement in the policy mix. It 
will continue to work in 2017-2020 and this might improve 
co-ordination of research and innovation policies. 
(40) https://rio.jrc.ec.europa.eu/en/policy-support-facility  

Graph 3.5.1:  Highly-cited publications and public R&D 

intensity 

(1) Fractional Counting method 
Source: European Commission 

Lithuania has pockets of international scientific 
excellence,  but  these  do  not  outweigh  the 
disadvantages  of  the  low  critical  mass  for 
research.  The  scientific  potential  is  dispersed 
across too many institutions (35) and the status quo 
is  maintained  by  an  inefficient  research  funding 
system  that  is  not  well  suited  to  promoting 
excellence. Public research institutes were merged 
but  attempts  to  merge  universities  were  met  with 
limited success so far (36). Large emigration of the 
high-skilled  has  created  a  shortage  of  talent  for 
Lithuania's  research  community.  Moreover,  the 
research entities attract an insignificant number of 
foreign  talent,  partly  due  to  the  heavy  burden 
associated  with  hiring  foreign  specialists  (OECD, 
2016c).  As  a  result,  low  scientific  production  is 
exacerbated  by  an  additional  problem  of  the  lack 
of available quality human resources (37) in public 
and private sectors.   

The  research  and  innovation  policy  planning 
and  implementation  continue  to  suffer  from 
fragmentation  and  lack  of  coordination.  The 
policy planning and implementation is split among 
several  ministries  and  implementing  agencies. 
is  poorly 
Often, 

their  work  overlaps  and 

(35)  Lithuania  is  a  country  with  less  than  3  million  inhabitants 

and it has 22 universities and 23 colleges. 

(36)  Only  two  universities  merged  and  as  a  result  formed  the 

Lithuanian University of Health Sciences. 

(37)  New  doctoral  graduates  per  thousand  population  aged  25-

34 – 1.11 (2014), ranks 22nd. EU average – 1.97 

33 

EUBEBGCZDKDEEEIEELESFRHRITCYLVLTLUHUMTNLATPLPTROSISKFISEUK2468101214160.20.40.60.81.01.2Highly-cited publications (%), 2013Public R&D intensity, 2013  
 
                                                           
                                                           
3.5. Sectoral policies 

were  83  fatalities  per  1  million  people  in  2015, 
while 
the  EU  average  was  51.5  (European 
Commission,  2016h).  There  is  further  scope  to 
enhance  road  safety  by  improving  road  users' 
behaviour,  developing  safer  infrastructure,  and 
introducing safer vehicles. 

3.5.3.  ENERGY 

recently 

completed 

Several 
energy 
infrastructure  projects  in  Lithuania  and  the 
significantly 
countries  have 
other  Baltic 
increased  the  security  of  gas  and  electricity 
supply.  Following  the  arrival  of  the  liquefied 
natural  gas  (LNG)  terminal  in  Klaipeda  and  the 
construction  of  the  Klaipeda  –  Kursenai  pipeline, 
Lithuania  and  the  two  other  Baltic  countries  now 
have access to two independent sources of gas. 

Lithuania also continues work on its section of the 
gas  interconnector  with  Poland  (known  as  GIPL) 
which  is  to  connect  for  the  first  time  the  gas 
transmission  systems  of  the  Baltic  countries  with 
the continental European gas network.  

increased  their 

Lithuania  and  the  two  other  Baltic  countries 
have  substantially 
level  of 
electricity  interconnection (41)  with  the  rest  of 
the  European  grid.  The 
total  capacity  of 
interconnections  as  a  percentage  of  total  electric 
energy  capacity  has  increased  from  4%  in  early 
2014  to  approximately  22%  now,  exceeding  the 
target  of  10%.  This  has  been  possible  due  to  the 
commissioning of electricity interconnections with 
Finland via the two Estlink interconnections, with 
Poland  via  LitPol  Link  and  with  Sweden  via 
NordBalt (42).      

The energy infrastructure projects have also had a 
positive  impact  on  electricity  and  gas  wholesale 
prices  in  the  Baltics,  which used  to  be  among  the 
highest in EU due to energy market isolation. Now 
they are much closer to prices in western European 
countries.   

The  construction  of  the  above  mentioned  energy 
infrastructure  was  financially  supported  by  the 
Union  under  various  programmes,  including  the 

(41)  The  capacity  of  electricity  interconnectors  (electricity 

lines) divided by the total installed capacity. 

(42)  Combined cross-border capacity amounts of 2200 MW. 

expressed  strong  interest  to  connect  to  Poland,  it 
has  shown  comparatively  less  commitment  to 
realise  the  line  between  Kaunas  and  the  Latvian 
border.  Nevertheless,  Lithuania's  stance  has 
changed  recently  as  the  new  government,  formed 
in December 2016, has taken a more balanced and 
forward-looking  view  towards  the  Rail  Baltica 
project. 

Looking  forward,  it  is  important  that  the  optimal 
solution  to  ensuring  the  rail  line  between  the 
Polish-Lithuanian  border  and  Kaunas  meets  the 
project's  speed  and  interoperability  standards  and 
is  sought  in  transparent  and  objective  manner 
where all parties take a constructive approach and 
that  the  construction  of  embankment  towards  the 
Latvian border progresses without delay.  

In  October  2016,  the  procurement  procedures  for 
the project were agreed upon, further defining the 
role of the Joint Venture RB RAIL AS and paving 
the way for successful negotiation and signature of 
the  Grant  Agreement.  Furthermore,  milestone 
progress  was  achieved  in  January  2017  when  the 
prime  ministers  of  the  Baltic  countries  signed  an 
intergovernmental  agreement,  which  underlines 
the  countries'  commitment  to  project  to  timely 
implementation.  The  agreement  has  to  be  ratified 
by  the  Baltics  countries'  parliaments,  before  it 
takes effect. 

The  Lithuanian  rail  network  remains  among 
the least electrified rail networks in the EU. No 
progress  has  been  observed  over  the  period  of 
2010-2014  and  only  6.9 %  of  rail  tracks  are 
electrified (European  Commission,  2016g).  With 
the  help  of  different  financial  and  funding 
instruments,  significant  progress  is  expected  over 
the coming years. 

to 

remains 

formally  open 
rail  market 

Although 
competition, 
non-
Lithuania's 
competitive.  No  entrants  have  emerged  in  rail 
freight  and  passenger  transport  markets  since  the 
opening 
the 
Commission is investigating a possible abuse of a 
dominant  market  position  by 
incumbent 
railway  company  Lietuvos  Geležinkeliai  and  sent 
it  a  Statement  of  Objections  in  2015  (European 
Commission, 2015b). 

competition.  Moreover, 

the 

to 

The  number  of  road  fatalities  in  Lithuania 
remains  among  the  highest  in  the  EU.  There 

34 

 
                                                           
Connecting  Europe  Facility  (CEF),  the  European 
Energy  Programme  for  Recovery  (EEPR)  and  the 
"old"  TEN-E  programme.  The 
total  support 
provided  to  Lithuania  under  these  programmes 
between 2006 and 2016 amounts to approximately 
EUR 190 million. 

One  of  the  key  objectives  of  Lithuania  (and 
Latvia  and  Estonia)  is  to  synchronise  their 
electricity  systems  with  the  European  network. 
For  historical  reasons,  the  Baltic  States  are  today 
operated  in  a  synchronous  mode  with  IPS/UPS 
forming  the  so-called  BRELL  ring  (Belarus-
Russia-Estonia-Latvia-Lithuania). The three Baltic 
States  aim  to  synchronise  their  grids  with  the 
European network by 2025. The  core of  the  work 
is  being  carried  out  within  the  Baltic  Energy 
Market Interconnection Plan (BEMIP).  

The  share  of  energy  coming  from  renewable 
sources reached 24.3% in 2015, up from 23.4% 
in  2014,  thus  exceeding  Lithuania's  Europe 
2020  target.  The  largest  contributor  was  the 
heating sector, where the renewables share reached 
41.6%,  considerably  above  the  planned  trajectory 
and the 2020 target. The most important source of 
renewable  energy  in  Lithuania  is  biomass  and 
waste  -  92%  in  2015.  The  contribution  of  wind 
power  represents  5.5%.  Linked  to  this  success, 
Lithuania has been named as one of the renewable 
energy  exporting  Member  States  within 
the 
cooperation  agreement  format  foreseen  in  the 
Renewable Energy Directive. Nevertheless, with a 
renewable  energy  share  of  4.3  %  in  2015,  the 
transport  sector  still  has  some  way  to  go  towards 
reaching the 10 % Europe 2020 target. 

Lithuania's final energy consumption decreased by 
2%  in  2015,  mainly  due  to  an  increase  in  final 
energy  consumption  in  the  transport  sector  by 
11%.  As  such,  Lithuania  has  to  increase  its  effort 
to decrease its final energy consumption further in 
order 
indicative  final  energy 
consumption 2020 target (4.3 Mtoe) and to keep its 
current  primary  energy  consumption  below  its 
primary energy 2020 target (6.5 Mtoe). 

to  achieve 

its 

According to latest national projections, Lithuania 
is  expected  to  meet  its  greenhouse  gas  emissions 

3.5. Sectoral policies 

target (43) by a margin of 18 pp. In fact, it expects 
it will emit 3 % less greenhouse gases in 2020 than 
it did in 2005. 

3.5.4.  ENVIRONMENTAL TAXES 

taxation 

is  very 

Revenue  generated  by  pollution  and  resource 
taxation 
low  and  the  social  and 
environmental  benefits  they  bring  are  limited. 
The largest proportion of the revenue derived from 
environmentally-related 
is  obtained 
through energy taxes. Revenue from pollution and 
resource taxes and transport taxes, excluding taxes 
on  fuel  constitute  only  around  3%  of  all 
environmental  tax  revenue.  Taxes  on  transport  in 
Lithuania  are  the  lowest  in  the  EU,  and  besides  a 
low  level,  they  do  not  take  into  account  the 
environmental  performance  of  vehicles (European 
Commission,  2014a;  European  Commission, 
2014b).  As  a  result,  the  emissions  of  newly 
registered cars in Lithuania are well above the EU 
average 
(European  Commission,  2014c; 
European  Environment  Agency,  2014).  The 
overall  implicit  tax  rate  on  energy  is  one  of  the 
lowest in the EU-28 (Eurostat, 2014).  

(44) 

3.5.5.  WASTE MANAGEMENT 

Managing  waste  efficiently  and  fulfilling  the 
obligations  from  the  EU  Directives  on  waste 
remains  a  challenge  in  Lithuania.  In  2015, 
municipal  waste  generation  in  Lithuania  was  448 
kg/inhabitant  per  year  -  slightly  below  the  EU 
average  and  16%  more  than  10  years  ago. 
Although,  Lithuania  landfills  significantly  less 
waste  than  it  did  6  years  ago (45)  it  was  still 
significantly  above  the  EU  average  of  26%  and 
disposal  in  landfills  remains  Lithuania's  main 
waste treatment method. Meanwhile recycling has 
increased only slightly from 2009 and is far behind 
target (46).  In  2016, 
Lithuania's  Europe  2020 
Lithuania  introduced  a  deposit  system  for  plastic 

(43)  For  its  Europe  2020  target,  Lithuania's  agreed  not  to 
increase its greenhouse gas emissions by more than 15% in 
2020 compared to 2005.  

(44)  The  average  age  of  passenger  cars  in  Lithuania  is  around 
15 years while it is between 7 and 8 years in the EU.  
New passenger car emissions are 135.82 g CO2/km against the 

EU average of 123.40 g CO2/km. 

(45)  In 91% of all waste was landfilled, in 2015 54% of waste 

was landfilled 

(46)  50% of all waste should be recycled 

35 

 
                                                           
3.5. Sectoral policies 

bottles  and  cans.  This  is  expected  to  increase  the 
recycling share somewhat.  

Graph 3.5.2:  Waste treatment by type of disposal 

Source: European Commission 

Furthermore,  Lithuania  plans  to  build  two  new 
Combined Heat and Power plants in Vilnius and in 
Kaunas  with  combined  incineration  capacity  of 
360,000  tons  of  waste  per  year.  The  construction 
of  the  second  plant,  however,  is  likely  to  lead  to 
excess  capacity  of  waste  incineration.  Excess 
incineration  capacity  is  likely  further  to  hinder 
Lithuania's path towards meeting its 50% recycling 
target. 

The landfill tax was introduced in 2016. Although 
it started a low level, it will increase substantially 
until  2020 (47).  The  landfill  tax  could  encourage 
resource  efficiency  in  waste  management  and 
divert waste disposal away from landfilling. 

(47)  From  3  EUR/t  to  27.51  EUR/t  for  non-hazardous  waste, 
and from 47.79 EUR/t to 70.96 EUR/t for hazardous waste 

36 

050100150200250300350400450500200720082009201020112012201320142015Material recyclingComposting and digestionTotal incineration (including energy recovery)Landfill / disposal 
 
                                                           
3.6. PUBLIC ADMINISTRATION 

3.6.1.  PUBLIC INVESTMENT PLANNING 

Lithuania  could  improve  productivity  growth 
by better planning and  coordinating the  public 
investment.  The  public  investment  programme, 
which  is  the  main  planning  tool  for  public 
investment,  has  serious  shortcomings  and  did  not 
in fact serve its purpose of centralised planning of 
the  country's  public  investment  strategy  (National 
Audit Office of Lithuania, 2016). The audit found 
that  the  programme  planning  was  fragmented, 
lacked  coordination,  that  the  project  selection 
procedures  were  often  formalistic,  and  that  there 
was  no  monitoring  of  implementation  and  no  ex 
post  impact  assessment.  Overall,  the  link between 
public investment planning and country's strategic 
goals was deemed weak.  

3.6.2.  EFFICIENCY OF PUBLIC ADMINISTRATION 

improved 

Lithuania  has  further 
its  online 
public  services.  The  share  of  businesses  and 
citizens  that  use  e-government  services  (43  %) 
remains  solidly  above  the  EU  average  (34  %). 
Lithuania has further enhanced the availability and 
sophistication of available  online services and has 
made  continuous  progress  compared  to  previous 
of 
increasing 
years 
uptake 
eGovernment.  The 
survey  on 
eGovernment  reflects  this  improvement,  placing 
Lithuania  among  the  accelerator  EU  Member 
States,  with  growth  and  an  absolute  score  above 
the  EU  average  (European  Commission,  2016i). 
However,  it  is  lagging  behind  in  promoting  open 
data (European Commission, 2017b). 

its 
latest  EU 

towards 

3.6.3.  PUBLIC PROCUREMENT 

Raising  the  efficiency  of  public  procurement 
remains  important.  In  2016,  there  was  only  one 
bidder  for  17  %  of  the  public  procurement 
procedures  published  in  the  EU  Official  Journal.  
There  was  no  call  for  tender  in  5  %  of  them 
(European  Commission,  2016i).  Improving  the 
efficiency  of  the  public  tender  market  and  the 
quality  of  public  investments  may  need  further 
strengthening of  the public procurement  agents  as 
well as increasing the transparency throughout the 
process.  

is 

in 

insufficient 

Transparency 
public 
procurement,  in  particular  at  the  municipal 
level. In a 2015 study, 39 % of business managers 
claimed  that  corruption  prevented  them  from 
winning  a  public  tender  or  public  procurement 
contract,  compared  with  the  EU  average  of  34 
% (European  Union  Open  Data  Portal,  2015).  To 
reduce corruption risks and conflicts of interest in 
low-value  procurement,  the  government  obliged 
contracting 
online 
information  on  initiated  tenders,  the  successful 
bidders  and  the  contracts  awarded.  In  addition, 
weak  whistleblower  arrangements  discourage  tip-
offs about potential irregularities in the public and 
private  sectors.  In  a  2015  study  of  the  largest  41 
companies operating in Lithuania, only three were 
that  staff  reporting 
found 
suspected 
suffer 
not 
repercussions (TI Lithuania, 2015a).  

corruption  would 

to  publicly  state 

authorities 

publish 

to 

Lithuania  is  past  the  deadline  for  transposing 
the  three  new  public  procurement  directives. 
They  are  expected  to  ease  and  simplify  complex 
public  tender  requirements  and  introduce  stability 
into the legal system of public procurement. Also, 
they  aim  to  facilitate  the  transition  of  public 
procurement systems to fully digital mode.  

3.6.4.  ANTI-CORRUPTION 

The  number  of  bribery  cases  that  reach  courts 
is  on  the  rise.  From  2013  to  2014,  there  was  a 
further  increase  in  the  officially  reported  number 
of  bribery  investigations  (1053  to  1237),  persons 
involved (880 to 1032) and final convictions (776 
to  907) (European  Commission,  2016j).  However, 
provisions  against  petty  and  high-level  corruption 
are  not  always  applied  in  practice.  A  greater 
number  of  local  elected  officials  declare  their 
assets  and  interests  but  the  capacity  to  monitor, 
analyse  and  follow-up  on  declarations  remains 
limited. The Chief Officials Ethics Commission is 
responsible  for  overseeing  lobbying,  but  a  2015 
study  finds  that  much  of  the  actual  lobbying 
activity takes place outside the scope of regulation 
(TI  Lithuania,  2015b).  The 
lobbyist  register 
contains  only  36  active  lobbyists.  A  legislative 
loophole has not yet been closed after the Supreme 
Court  ruled  in  March  2014  that  private-to-private 
bribery  could  no 
longer  be  criminalised  by 
reference to provisions for public officials. 

37 

 
 
ANNEX A 

Overview Table 

Commitments 

2016 Country-specific recommendations (CSRs) 

CSR 1:  Reduce  the  tax  burden  on  low-income 
earners  by  shifting  the  tax  burden  to  other  sources 
less  detrimental 
tax 
compliance, in particular in the area of VAT. 

to  growth  and 

improve 

  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. 

Summary assessment 

Lithuania  has  made  some  progress 
in 
addressing  CSR 1  (this  overall  assessment  of 
CSR1  does  not  include  an  assessment  of 
compliance  with  the  Stability  and  Growth 
Pact): 

  Substantial  progress  has  been  made  in 
reducing  the  tax  burden  on  low-wage 
earners.  Lithuania 
substantially 
increased  the  non-taxable  allowance  for 
the low wage earners. 

has 

  Lithuania raised the non-taxable allowance 
and  the  allowance  for  dependent  children 
substantially as from 2017. 

  As a result, the tax wedge to low earners is 
lowered  by  up  to  2.5  pp  for  households 
without  children  and  by  up  to  3.5  pp  to 
households with children. 

  However, these tax measures fail to further 
lower  the  tax  wedge  to  some  of  the  most 
vulnerable  households,  e.g.  single  earners 
with two children or more. 

  Some  progress  in  shifting  the  tax  burden 
to  other  sources.  Measures  to  compensate 
for  the  revenue  loss  due  to  reduced  tax 
burden  on  labour  cover  about  a  half  of 
those losses.  

  The diversity of new tax sources; however, 
is  limited  however  as  the  vast  majority  of 
additional revenue comes from increase in 
excise taxes on cigarettes and alcohol.  

  Some  progress 

improving 

tax 
in 
compliance.  Lithuania  has  adopted  a 
number  of  measures  that  are  expected  to 
improve  its  analytical  and  tax  collection 
ability  substantially.  The  actual  impact  on 
tax  collection  of  these  efforts;  however  is 
yet to be seen. 

  During  2016  Lithuania 

electronic 
electronic waybill system. 

invoicing 

introduced  an 
system  and  an 

CSR 2:  Strengthen  investment  in  human  capital  and  Lithuania  has  made  some  progress 

in 

38 

 
 
address  skills  shortages,  by  improving  the  labour 
market  relevance  of  education, raising  the quality of 
teaching  and  adult  learning.  Reinforce  the  coverage 
and  effectiveness  of  active  labour  market  policies. 
Strengthen  the  role  of  social  dialogue  mechanisms. 
Improve the performance of the healthcare system by 
strengthening outpatient care, disease prevention and 
the  coverage  and 
Improve 
health  promotion. 
adequacy  of  unemployment  benefits  and  social 
assistance. 

  Strengthen  investment  in  human  capital  and 
address skills  shortages, by improving the labour 
market relevance of education, raising the quality 
of teaching and adult learning. 

A. Overview Table 

addressing CSR 2: 

  Limited  progress  has  been  made 

in 
strengthening  the  investment  in  human 
capital.  Overall,  Lithuania  has  adopted 
some  measures  that  partly  address  the 
CSR,  but  a  fair  amount  of  work  is  still 
needed to fully address the CSR. 

  Lithuania 

continues 

implementing 
measures  to  improve  the  attractiveness  of 
vocational education and training, and has 
taken steps to expand availability of work-
based learning.  

  Reinforce the coverage and effectiveness of active 

labour market policies. 

  However,  there  is  limited  progress  on 
improving  the  quality  of  teaching,  and 
especially  the  working  conditions  and 
professional development of teachers.  

  Also, there is a lack of improvement in the 

uptake of adult learning.  

  Some  progress  has  been  made 

in 
reinforcing  the  coverage  and effectiveness 
of  active  labour  market  policies.  Overall, 
LT has adopted some measures that partly 
address  the  CSR,  but  a  fair  amount  of 
work  is  still  needed  to  fully  address  the 
CSR. 

  Lithuanian  Public  Employment  Service 
implemented  specific  activation  projects 
targeting 
long-term 
unemployed, older and disabled persons.  

low-skilled, 

the 

  Lithuania  has  adopted  the  new  Law  on 
Employment,  which  is  planned  to  come 
into force in July 2017.  

  Strengthen 

the 

role 

of 

social 

dialogue 

  Some progress in strengthening the role of 

mechanisms. 

social dialogue mechanisms. 

39 

 
A. Overview Table 

labour  code. 
for 

  LT has adopted the legislative package on 
the  "new  social  model",  among  them  a 
includes  new 
new 
collective  bargaining, 
provisions 
industrial  action,  and  the  participation  in 
the 
the 
implementation  is  postponed  to  1  July 
2017.  

Tripartite 

Council, 

but 

It 

adopted 

the  Action  Plan 

  The Ministry of Social Affairs and Labour 
for 
has 
Strengthening  of  Social  Dialogue 
in 
Lithuania  for  2016-2020.  It  will  support 
the  promotion  of  social  dialogue  between 
employers  and  employees'  representatives 
(at  national  and  local  levels),  and  include 
capacity 
other  measures, 
building for the social partners, in order to 
foster  the  social  dialogue.  However,  some 
social partners indicated that they were not 
fully  involved  in  designing  the  Action 
Plan, which may not cover their real needs. 

including 

 

Improve the performance of the healthcare system 
care,  disease 
strengthening  outpatient 
by 
prevention and health promotion. 

  Some  progress  has  been  made 

in 
improving  the  performance  of  healthcare 
system.  

  Lithuania has advanced on the fourth stage 
of  the  health  system  reform,  particularly 
on  shifting  patients  from  inpatient  to 
outpatient settings.  

  A  State  Health  Promotion  Fund  was 
established  in  2016  funded  by  resources 
from  alcohol  excise  duties  and  some 
projects  are  being  supported  by  the  fund; 
being 
projects 
small 
other 
implemented.  

are 

  Other  actions 

that  could  support 

the 
improvement  of  the  performance  of  the 
health  system,  as  the  Action  Plan  for 
reducing health inequalities 2014-2023 are 
still to be effectively launched.  

  Regarding  corruption  on  healthcare  the 
authorities  have  concrete  plans  that  seem 
to  be  adequate,  but,  as  in  all  other  areas, 
the  success  of  implementation  will  be 
crucial. 

 

Improve 

the 

coverage 

and 

adequacy  of    Some  progress  has  been  made 

in 

40 

 
unemployment benefits and social assistance. 

A. Overview Table 

improving  the  coverage  and  adequacy  of 
unemployment  benefits.  There  was  no 
progress 
the  adequacy  of  social 
assistance  but  a  slight  one  as  regards 
coverage. 

in 

  LT  has  adopted  measures  that  address  the 
CSR,  but  a  fair  amount  of  work  is  still 
needed to fully address the CSR as only a 
few  of  the  adopted  measures  have  been 
implemented,  and 
is  not 
tangible yet. 

their  effect 

  LT  has  adopted  the  new  labour  code  and 
the "social model", but the implementation 
is  postponed  to  1  July  2017.  The  initial 
analysis  shows  that  while  coverage  of  the 
unemployment 
insurance  benefits  may 
increase, the increase in adequacy could be 
only  marginal.  The  effect  of  the  new 
legislation  "on  the  ground"  is  not  clear  at 
the moment. 

  Regarding 

the 

social  benefits, 

the 
amendments indeed increase the coverage, 
and  for  some  beneficiary  groups,  the 
adequacy  might  be  slightly  improved. 
However,  overall  the  adequacy  of  the 
social  benefits  remains  low,  and  no  major 
changes  have  been  implemented  since 
2008. 

CSR 3: Take measures to strengthen productivity and 
the  adoption  and  absorption  of  new 
improve 
technology  across 
the 
coordination  of  innovation  policies  and  encourage 
inter  alia,  by  developing 
investment, 
private 
alternative means of financing. 

the  economy. 

Improve 

Lithuania  has  made  limited  progress  in 
addressing CSR 3: 

  Take  measures  to  strengthen  productivity  and 
improve  the  adoption  and  absorption  of  new 
technology across the economy. 

  Limited  progress  has  been  made 

in 

strengthening the productivity.  

  Although, implementation of the European 
Structural  and  Investment  Funds  and  the 
Lithuanian 
Specialisation 
Framework  are  expected  to  support  this 
process in the coming years, no additional 
measures  to  address  the  challenge  have 
been adopted. 

Smart 

 

Improve the coordination of innovation policies…    Limited  progress  has  been  made 

to 
innovation 

improve 

coordination 

of 

41 

 
A. Overview Table 

policies.  

  President's Office called for reforms in the 
"Lithuanian Science and Innovation Policy 
Reform  Guidelines",  these  were  adopted 
by  the  Parliament  and  are  expected  to 
trigger the reform process in 2017. 

  …and encourage private investment, inter alia, by 

developing alternative means of financing. 

  Some  progress  has  been  made 

in 
developing alternative means of financing.  

  Lithuania  has  helped  establish  and  fund  a 
number of venture capital and seed capital 
funds.  Also,  the  government  has  recently 
passed a law on crowd-investing. 

Europe 2020 (national targets and progress) 

Employment rate: 72.8% 

The employment rate reached 75.1 % in 2016. 

R&D: 1.9  % of  GDP with  half  coming  from  private 
sector 

In  2015,  Lithuania's  R&D  investment  was 
1.04 % of GDP compared to 0.78% of GDP in 
2010.  While  improving,  the  R&D  investment 
is  unlikely  to  reach  the  target  level  by  2020, 
mainly due to low level of private investment.  

Greenhouse gas (GHG) emissions target: 

Europe 2020 target: 15 % 

+15% compared to 2005 emissions, ETS (Emissions 
Trading  System)  emissions  are  not  covered  by  this 
national target. 

Lithuania  is  expected  to  meet  its  target  by  a 
margin of 18 pp.: -3 % in 2020 compared with 
2005.  This  is  according  to  the  latest  national 
projections submitted to the Commission, and 
when  existing  measures  are 
into 
account. 

taken 

Non-ETS 2014 target: -1 %.  

Greenhouse  gas  emissions  from  sectors  not 
covered  by  the  emissions  trading  scheme  fell 
by  10 %  between  2005  and  2015.  Therefore 
Lithuania has achieved its 2015 target. 

Renewable energy target: 23 % 

Share of renewable energy in transport sector: 10 % 

42 

With  a  renewable  energy  share  of  23.9 %  in 
2014,  Lithuania  is  already  above  its  23% 
target  in  2020.  Lithuania  has  also  considered 
holding  negotiations  with  other  Member 
States  on  sharing 
its  excess  renewables 
production  (up  to  2020)  under  cooperation 
renewable  energy.  The 
mechanisms 
this 
encourages 
Commission 

strongly 

for 

 
 
 
 
A. Overview Table 

initiative  and  hopes  that  it  will  result  in  the 
signing of relevant cooperation agreements in 
2015/2016. 

Energy efficiency: 17 % reduction in final energy use 
compared  to  2009  level  (reduction  of  740  ktoe), 
which implies reaching a 2020 level of 6.49 Mtoe of 
primary and 4.28 Mtoe of final energy consumption. 

the 

Comparing 
trend  of  primary  energy 
consumption  with  changes  in  GDP  over  the 
past  decades,  shows  evidence  that  there  has 
been a strong decoupling of both in Lithuania. 

Early school leaving target: <9 % 

Tertiary education target: 48.7 % 

Risk of poverty or social exclusion target: 814,000 

However,  in  light  of  the  increase  of  the  final 
energy  consumption  in  2014,  Lithuania  will 
have to increase its effort to decrease its final 
to 
in  order 
energy  consumption  further 
achieve its 2020 energy efficiency targets. 

The  early  school  leaving  rate  among  18-24 
year  olds  decreased  further  to  5.5%  in  2015. 
Lithuania  is  successful  at  staying  below  the 
9%  national 
is  also 
significantly below the EU average of 11%. 

target.  This  figure 

Tertiary attainment among 30-34 year olds in 
Lithuania  is  the  highest  in  the  EU,  having 
reached  57.6%  in  2015.   It  is  above  the 
national  target  and  among  the  highest  in  the 
EU. 

Lithuania  has  met  its  national  target:  in  2015 
there  were  857 000  people  at  risk  of  poverty 
or  social  exclusion  (29.3 %  of  the  total 
population).  Compared  to  2014,  the  number 
and share of people at risk of poverty or social 
exclusion has increased. 

43 

 
ANNEX B 

MIP Scoreboard 

Table B.1:  Macroeconomic imbalances scoreboard 

Source: Alert mechanism report 2017 
Highlighted figures are those falling outside the threshold established in the European Commission Alert Mechanism Report. 
For REER and ULC, the first threshold applies to euro area Member States 

44 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-3.9-0.7-1.8-1.21.30.9-35%-55.9-52.5-53.4-47.0-45.8-44.7Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 7.21.7-6.7-0.61.54.0Export market share - % of world exports5 years % change-6%19.430.133.320.234.415.5Nominal unit labour cost index (2010=100)3 years % change9% & 12% 0.3-7.8-4.26.28.811.66%-8.62.4-3.20.26.34.614%-5.9-2.20.3-1.20.22.2133%74.564.761.156.354.055.060%36.237.239.838.740.542.7Unemployment rate3 year average10%12.515.715.513.512.010.516.5%0.32.5-0.6-1.316.36.7-0.2%2.33.02.22.22.32.30.5%6.06.73.3-2.3-3.2-2.72%27.319.3-2.9-13.8-13.3-10.4Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2 2016. 
(2) Quarterly values are not annualised 
* Measured in basis points. 

Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

45 

201120122013201420152016Total assets of the banking sector (% of GDP)79.073.268.769.766.469.7Share of assets of the five largest banks (% of total assets)84.783.687.185.786.8-Foreign ownership of banking system (% of total assets)73.572.072.773.472.2-Financial soundness indicators:1)              - non-performing loans (% of total loans)13.410.98.56.55.24.7              - capital adequacy ratio (%)14.215.717.521.324.819.3              - return on equity (%)2)15.57.88.67.77.56.4Bank loans to the private sector (year-on-year % change)-1.42.2-1.0-0.35.311.1Lending for house purchase (year-on-year % change)0.2-0.80.62.23.57.1Loan to deposit ratio133.2125.4115.799.397.1102.6Central Bank liquidity as % of liabilities1.41.91.70.01.91.4Private debt (% of GDP)64.761.156.354.055.0-Gross external debt (% of GDP)1) - public32.338.233.237.938.135.2    - private21.218.819.217.417.517.7Long-term interest rate spread versus Bund (basis points)*255.2333.6226.2162.988.587.6Credit default swap spreads for sovereign securities (5-year)*234.5203.1107.5100.976.462.8 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators (A) 

(1) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(2) Long-term unemployed are people who have been unemployed for at least 12 months.       
(3) Not in education, employment or training.       
(4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       

Source: European Commission (EU Labour Force Survey) 

46 

201120122013201420152016 4Employment rate(% of population aged 20-64)66.968.569.971.873.375.1Employment growth (% change from previous year)0.51.81.32.01.32.2Employment rate of women(% of female population aged 20-64)66.667.968.670.672.274.1Employment rate of men (% of male population aged 20-64)67.269.171.273.174.676.2Employment rate of older workers (% of population aged 55-64)50.251.753.456.260.464.3Part-time employment (% of total employment, aged 15-64)8.38.98.48.67.67.6Fixed term employment (% of employees with a fixed term contract, aged 15-64)2.42.32.42.41.81.9Transitions from temporary to permanent employment53.316.154.943.5::Unemployment rate1 (% active population, age group 15-74)15.413.411.810.79.18.1Long-term unemployment rate2 (% of labour force)8.06.65.14.83.93.3Youth unemployment rate (% active population aged 15-24)32.626.721.919.316.314.4Youth NEET3 rate (% of population aged 15-24)11.811.211.19.99.2:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)7.46.56.35.95.5:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)45.748.651.353.357.6:Formal childcare (30 hours or over; % of population aged less than 3 years)8.05.010.017.0:: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and social indicators (B) 

(1) People at risk of poverty or social exclusion : individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
(2) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
(5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 
(2007 survey refers to 2006 incomes)       

Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

47 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare4,74,54,24,14,1:Disability1,81,61,51,41,4:Old age and survivors7,97,17,26,96,7:Family/children2,21,71,41,11,1:Unemployment0,80,60,40,40,3:Housing0,00,00,00,00,0:Social exclusion n.e.c.0,70,80,70,60,4:Total18,116,215,514,414,0:of which: means-tested benefits1,01,00,90,70,5:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)34,033,132,530,827,329,3Children at risk of poverty or social exclusion  (% of people aged 0-17)35,834,631,935,428,932,7At-risk-of-poverty  rate2 (% of total population)20,519,218,620,619,122,2Severe material deprivation rate3  (% of total population)19,919,019,816,013,613,9Proportion of people living in low work intensity households4 (% of people aged 0-59)9,512,711,411,08,89,2In-work at-risk-of-poverty rate (% of persons employed)12,69,57,69,18,39,9Impact of social transfers (excluding pensions) on reducing poverty34,536,434,532,030,522,4Poverty thresholds, expressed in national currency at constant prices5681764486964731374202303Gross disposable income (households; growth %)0,95,33,45,51,71,9Inequality of income distribution (S80/S20 income quintile share ratio)7,35,85,36,16,17,5GINI coefficient before taxes and transfers54,654,351,853,551,9:GINI coefficient after taxes and transfers37,033,032,034,635,0: 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.        
2 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3 Percentage population aged 15-64 having completed tertiary education.       
4 Percentage population aged 20-24 having attained at least upper secondary education.       
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6 Aggregate OECD indicators of regulation in energy, transport and communications.       

Source: "European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans)."       

48 

Performance Indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry13.046.24-1.113.906.350.50Labour productivity in Construction17.1916.76-10.15-0.7514.34-7.34Labour productivity in Market Services3.026.783.933.76-0.741.51Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-7.32-1.942.500.543.666.90ULC in Construction-0.66-0.1111.98-0.96-4.924.70ULC in Market Services-5.111.272.433.593.614.74Business Environment201020112012201320142015Time needed to enforce contracts1 (days)300.0300.0370.0370.0370.0370.0Time needed to start a business1 (days)22.022.019.58.55.55.5Outcome of applications by SMEs for bank loans2na0.92na1.161.271.14Research and innovation201020112012201320142015R&D intensity0.780.900.890.951.031.04Total public expenditure on education as % of GDP, for all levels of education combined5.365.174.834.66nanaNumber of science & technology people employed as % of total employment474747484950Population having completed tertiary education3272829303133Young people with upper secondary level education4878889909191Trade balance of high technology products as % of GDP0.230.110.230.06-0.08-0.45Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallnana1.52OECD PMR5, retailnana1.11OECD PMR5, professional servicesnana1.85OECD PMR5, network industries6nana2.02 
 
 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as a percentage of total value added for the economy  
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)   
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP  
Proportion of greenhouse gas (GHG) emissions covered by EU Emission Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions  
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency   
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)  
Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels  
* European Commission and European Environment Agency  

Source: European Commission (Eurostat) unless indicated otherwise 

49 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.240.240.230.210.200.21Carbon intensity kg / €0.910.870.840.760.73-Resource intensity (reciprocal of resource productivity)kg / €1.731.771.561.831.661.57Waste intensity kg / €0.25-0.23-0.24-Energy balance of trade % GDP-7.1-7.6-7.5-6.1-5.8-Weighting of energy in HICP%13.6315.3516.3916.8414.2513.60Difference between energy price change and inflation %6.46.93.8-1.8-4.8-9.2Real unit of energy cost% of value added28.228.728.128.128.7-Ratio of environmental taxes to labour taxesratio7.17.47.67.77.6-Ratio of environmental taxes to GDPratio1.81.71.61.61.7-Sectoral Industry energy intensity kgoe / € 0.190.190.190.180.170.16Real unit energy cost for manufacturing industry excl. refining% of value added14.014.013.313.113.3-Share of energy-intensive industries in the economy% GDP------Electricity prices for medium-sized industrial users€ / kWh0.100.100.110.120.120.10Gas prices for medium-sized industrial users€ / kWh0.030.040.050.040.040.02Public R&D for energy % GDP0.020.020.010.020.010.02Public R&D for environmental protection% GDP0.000.000.000.000.010.01Municipal waste recycling rate%4.919.923.527.830.533.1Share of GHG emissions covered by ETS*%30.325.926.437.435.936.1Transport energy intensitykgoe / €0.650.610.590.560.600.64Transport carbon intensitykg / €1.941.821.711.631.74-Security of energy supplyEnergy import dependency%81.881.780.378.378.078.4Aggregated supplier concentration indexHHI98.997.899.797.587.5-Diversification of energy mixHHI0.300.290.290.270.27- 
 
 
 
 
 
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