Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Lithuania and delivering a Council opinion on the 2017 Stability Programme of Lithuania
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Lithuania, budget deficit, economic policy, economic reform, educational reform, organisation of health care, pension scheme, public investment, stability programme

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 514 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Lithuania  and delivering a Council opinion on the 2017 Stability Programme of Lithuania  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Lithuania 

and delivering a Council opinion on the 2017 Stability Programme of Lithuania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 
Having regard to the Recommendation of the European Commission,2 
Having regard to the resolutions of the European Parliament,3 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  in  which  it 
did not identify Lithuania as one of the Member States for which an in-depth review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council Recommendation on the economic policy of the euro 
area. That Recommendation was endorsed by the European Council on 9-10 March 
2017 and adopted by the Council on 21 March.6  

(2) 

As  a  country  whose  currency  is  the  euro  and  in  view  of  the  close  interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Lithuania  should 

1 
2 
3 
4 
5 
6 

OJ L 209, 2.8.1997, p. 1. 
COM(2017) 514 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
2017/C92/01 

EN 

2 

   EN 

 
 
 
                                                 
ensure the full and timely implementation of the Recommendation for the euro area 
which is reflected in recommendation 2 below. 
The  2017  country  report  for  Lithuania7  was  published  on  22 February  2017.  It 
assessed  Lithuania’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 12 July 2016, the follow-up given to the recommendations 
adopted in previous years and Lithuania’s progress towards its national Europe 2020 
targets.  

On 27 April 2017, Lithuania submitted its 2017 National Reform Programme and on 
28 April 2017 Lithuania submitted its 2017 Stability Programme. To take account of 
their interlinkages, the two programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States' programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,8 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.9 

Lithuania is currently under the preventive arm of the Stability and Growth Pact. In 
its 2017 Stability Programme, the government plans an improvement of the headline 
balance from a deficit of 0.4% of GDP in 2017 to a surplus of 1.3% of GDP in 2020. 
The medium-term budgetary objective — a deficit of 1 % of GDP in structural terms 
—  is  planned  to  be  met  with  a  margin  throughout  the  programme  period.  The 
allowed  adjustment  path  incorporates  the  systemic  pension  reform  starting  from 
2016.  In  2017  it  reflects  additional  major  structural  labour  market  and  pension 
reforms. According to the Stability Programme, the general government debt-to-GDP 
ratio  is  expected  to  fall  from  40.2  %  of  GDP  in  2016  to  33.8  %  in  2020.  The 
macroeconomic  scenario  underpinning  these  budgetary  projections  is  plausible.  At 
the same time, the measures needed to support the planned surplus targets from 2017 
onwards have not been sufficiently specified.  

In  its  2017  Stability  Programme,  Lithuania  requested  to  avail  of  the  temporary 
deviation  of  0.5%  of  GDP  under  the  preventive  arm  pursuant  to  the  "Commonly 
Agreed Position on Flexibility within the Stability and Growth Pact" endorsed by the 
ECOFIN Council in February 2016 in view of the planned implementation of major 
structural  reforms  with  a  positive  impact  on  the  long-term  sustainability  of  public 
finances.  Notably,  this  concerns  raising  the  sustainability  of  the  pension  system 
through  a  reinforced  indexation  and  a  gradual  increase  of  the  pensionable  service. 
However,  the  reforms  stopped  short  at  establishing  an  automatic  link  between 
retirement  age  and  life  expectancy.  In  addition,  the  reforms  modernise  labour 
relations  by  introducing  new  types  of  employment  contracts,  shorter  periods  of 

SWD(2017) 80 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 

(3) 

(4) 

(5) 

(6) 

(7) 

7 
8 

9 

EN 

3 

   EN 

                                                 
 
notice,  lower  severance  allowances  and  more  flexible  working  hours.  The  reforms 
also  strengthen  the  coverage  and  adequacy  of  unemployment  and  social  insurance 
benefits,  expand  the  scope  of  active  labour  market  policies  and  reduce  the  level  of 
illegal  and uninsured employment. The authorities  estimate that  the reforms have  a 
positive  impact  on  the  sustainability  of  public  finances  by  generating  an  average 
annual pension expenditure savings of up to 3.8% of GDP in the long run, while the 
labour  market  part  of  the  reform  may  increase  an  average  annual  number  of  the 
employed  by  up  to  10%,  which  seems  to  be  a  broadly  plausible  assumption. 
Therefore, if fully and timely implemented, this reform will have a positive impact 
on  the  sustainability  of  public  finances.  On  this  basis,  Lithuania  can  currently  be 
assessed as qualifying for the requested temporary deviation in 2017, provided that it 
adequately  implements  the  agreed  reforms,  which  will  be  monitored  under  the 
European Semester. However, in view of the need to ensure  a continued respect of 
the  minimum  benchmark  (i.e.  a  structural  deficit  of  1.5%  of  GDP)  and  taking  into 
account the previously-granted allowance under the systemic pension reform clause 
(0.1% of GDP),  Lithuania can  currently  be assessed  as  qualifying  for an additional 
temporary deviation of 0.4 % of GDP in 2017, which is slightly below the requested 
0.5% of GDP.  

On  12  July  2016,  for  2017  the  Council  recommended  Lithuania  to  ensure  that  the 
deviation  from  the  medium-term  budgetary  objective  is  limited  to  the  allowance 
linked to the systemic pension reform.10 Taking into account the allowances linked to 
the  pension  reform  granted  for  2016  and  the  temporary  deviation  linked  to  the 
implementation of structural reforms granted for 2017, the structural balance would 
be allowed to deteriorate by 1.3% of GDP in 2017. Based on the Commission 2017 
spring  forecast  Lithuania  is  projected  to  comply  with  this  requirement  in  2017.  In 
2018,  Lithuania  should  achieve  its  medium-term  objective,  taking  into  account  the 
allowances related to the implementation of the systemic pension reform granted for 
2016 and the structural reform granted for 2017, as temporary deviations are carried 
forward for a period of three years. Based on the Commission 2017 spring forecast, 
this  is  consistent  with  a  maximum  nominal  growth  rate  of  net  primary  government 
expenditure  of  6.4%  in  2018,  corresponding  to  a  deterioration  in  the  structural 
balance  of  -0.6%  of  GDP.  Under  unchanged  policies,  Lithuania  is  projected  to 
comply  with  this  requirement  in  2018.  Overall,  the  Council  is  of  the  opinion  that 
Lithuania is projected to comply with the provisions of the Stability and Growth Pact 
in 2017 and 2018. 

Following  the  latest  increase  in  the  non-taxable  minimum  wage,  the  tax  burden  on 
low-income  earners  has  been  substantially  reduced  over  recent  years  and  is  now 
close  to  the  EU  average.  At  the  same  time,  compensating  tax  increases  have  been 
limited and consequently, tax revenue as a share of GDP remains among the lowest 
in  EU,  limiting  Lithuania’s  ability  to  address  its  social  challenges.  The  low  tax 
revenue is due to the relatively large share of the shadow economy and relatively low 
revenue from environmental and capital taxation.  

(8) 

(9) 

(10) 

Although Lithuania has made progress in recent years to improve VAT collection, its 
VAT  gap  is  among  the  highest  in  the  EU.  Underreporting  of  wages  adds  to  the 
problem  of  low  tax  collection.  Increasing  tax  compliance  would  raise  budget 

10 

Lithuania  is  allowed  to  deviate  from  its  medium-term  budgetary  objective  in  2017  and  2018  by 
allowance  under  the  systemic  pension  reform  clause  granted  for  2016,  as  temporary  deviations  are 
carried forward for a period of three years. 

EN 

4 

   EN 

                                                 
(11) 

(12) 

(13) 

revenues  and  improve  the  fairness  of  the  tax  system  and  the  efficiency  of  the 
economy. 

The  rise  in  the  old-age  dependency  ratio  is  set  to  intensify  and  under  the  existing 
pension rules expenditure on pensions as a share of GDP is projected to rise by some 
50 %  by the end of the 2030s. Linking  the pension  benefits with  life expectancy is 
essential to limit the strain the pension expenditure will put on public finances.  

Lithuania  has  postponed  the  entry  into  force  of  the  new  Labour  Code  and  other 
legislation  on  the  new  social  model.  This  gives  it  an  opportunity  to  ensure  a  good 
balance between flexibility and security in its labour relations. The high proportion 
of  people  at  risk  of  poverty  or  social  exclusion,  together  with  growing  income 
inequality,  remain  major  challenges  for  Lithuania.  The  ratio  of  the  incomes  of  the 
richest 20 % of households to that of the poorest 20 % rose from 5.3 in 2012 to 7.5 in 
2015  and  is  the  second highest  in  the  EU.  This  is  detrimental  to  economic  growth, 
macroeconomic  stability  and  development  of  an  inclusive  society.  At  the  moment, 
the social safety net does not effectively address this challenge due to low spending 
on social protection. Moreover, the difference in income inequality before and after 
taxes  and  social  transfers  is  amongst  the  smallest  in  the  EU.  However,  the 
government has put the fight against poverty and social exclusion high on its agenda. 
The  legislation  on  the  new  social  model  envisages  increasing  the  adequacy  and 
coverage  of  unemployment  benefits,  and  there  are  some  discussions  on  improving 
the adequacy of social assistance. These important decisions still have to be adopted 
and implemented. To tackle poverty among the elderly, in 2016 Lithuania added an 
indexation  mechanism  to  its  pension  legislation  which  can  be  used  to  improve  the 
adequacy of pensions. 

It  is  important  that  Lithuania  address  its  skills  challenges  and  tackle  the  negative 
effects  of  its  shrinking  working  age  population.  The  proportion  of  pupils  with 
insufficient  basic  skills  remains  high.  Despite  high  tertiary  education  attainment 
rates, higher education is marred by poor quality standards and financial incentives 
that  promote  oversize  and  inefficiency  rather  than  performance.  Efforts  should  be 
pursued to ensure high quality teaching at all levels of education (including through 
reforming  careers  and  working  conditions).  This 
tackling 
underachievement  and  educational  shortcomings  and  to  ensuring  quality  in  higher 
education (including by introducing performance-based funding and by consolidating 
higher education institutions). The persistence of low levels of participation in adult 
learning in Lithuania is hindering the effectiveness of labour market reforms and the 
development of a better skilled workforce. Lithuania has been focusing its efforts on 
increasing the offer and relevance of publicly provided learning opportunities, but so 
far  this  has  not  yielded  tangible  results.  To  achieve  higher  and  sustainable 
participation rates in adult learning, Lithuania also needs to encourage individuals to 
take up learning and incentivise more employers to provide learning opportunities for 
their employees.  

is  crucial 

to 

(14) 

Unemployment among low-skilled and medium-skilled individuals is still above the 
EU  average.  Persons  with  disabilities  have  a  high  poverty  rate,  partly  due  to  their 
weak labour market integration. Active labour market policy measures currently play 
a limited role in helping people re-enter the labour market in Lithuania. Lithuania has 
substantial  scope  to  make  its  labour  market  more  inclusive,  including  by  offering 
more support measures to persons with disabilities. This implies, for instance, scaling 
up  supported  employment  and  the  Vocational  Rehabilitation  Programme,  and 
enhancing  the  availability  of  rehabilitation  budgets.  The  recently  adopted  Law  on 

EN 

5 

   EN 

(15) 

(16) 

(17) 

(18) 

(19) 

Employment  has  the  potential  to  improve  the  provision  of  active  labour  market 
policy measures. 

Lithuania  has  made  progress  in  recent  years  to  improve  the  social  dialogue.  The 
social partners are actively involved in the discussions on the new labour code and 
the  new  social  model,  and  the  government  has  put  in  place  the  action  plan  to 
strengthen the social dialogue. It is aimed at capacity building of the social partners, 
promoting collective bargaining and improving the social dialogue at all levels. 

In Lithuania, health outcomes continue to have a significant negative impact on the 
potential  available  workforce  and  labour  productivity.  Although  efforts  are  being 
made to shift patients to more cost-effective types of healthcare, the health system’s 
performance  continues  to  be  hampered  by  high  reliance  on  in-patient  care  and  low 
expenditure on prevention and public health. Out-of-pocket payments are very high, 
in particular for pharmaceuticals. 

Adverse  demographic  developments  mean  that  growth  will  increasingly  depend  on 
labour  productivity.  Over  the  period  2000-2015  Lithuania  had  one  of  the  highest 
labour productivity growth rates among EU Member States, but recently growth rates 
have  slowed  down.  Lithuania’s  public  investment  suffers  from  poor  planning  and 
linkage  to  the  country’s  strategic  goals.  Public  R&D  intensity  increased  to  a  value 
slightly  above  the  EU  average  in  2015,  while  business  R&D  intensity  still  lags 
behind. The ‘Lithuanian Science and Innovation Policy Reform Guidelines’ adopted 
in 2016 aim to address the persisting challenges in research and innovation. They do 
so by calling for reform of institutional R&D funding; consolidation of research and 
higher  education  institutions,  science  valleys  and  technology  parks;  and  improved 
policy coordination, monitoring and evaluation. Lithuania has made some progress in 
supporting  alternative  means  of  finance.  It  has  helped  to  establish  a  number  of 
venture  capital  and  seed  capital  funds.  The  government  has  also  recently  passed  a 
law on crowd-investing. 

The  number  of  bribery  cases  brought  to  courts  has  been  on  a  steady  rise  in  recent 
years, thus showing Lithuania’s stepped  up efforts to  fight corruption.  However, in 
some important areas, like healthcare and public procurement the provisions against 
petty  and  high-level  corruption  are  not  always  applied  in  practice.  The  health  care 
sector  suffers  from  the  frequent  practice  of  informal  payments  to  doctors.  There  is 
insufficient transparency in public procurement, in particular at the municipal level. 
In  addition,  weak  whistle-blower  arrangements  discourage  tip-offs  about  potential 
irregularities in  the public and private sectors. The government has set tackling the 
corruption in health care sector as a priority in its anti-corruption programme. Also, 
to  reduce  corruption  risks  and  conflicts  of  interest  in  low-value  procurement,  the 
government  has  obliged  contracting  authorities  to  publish  online  information  on 
initiated  tenders,  the  successful  bidders  and  the  contracts  awarded.  However, 
continued monitoring is necessary to ensure implementation of these policies. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Lithuania’s economic policy and published it in the 2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Lithuania 
in  previous years.  It has taken into account  not only  their relevance for sustainable 
fiscal  and  socioeconomic  policy  in  Lithuania,  but  also  their  compliance  with  EU 
rules  and  guidance,  given  the  need  to  strengthen  the  EU’s  overall  economic 
governance by providing EU-level input into future national decisions.  

EN 

6 

   EN 

(20) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion11 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Lithuania take action in 2017 and 2018 to: 

1. 

2. 

3. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  remain  at  its  medium  term  budgetary 
objective in 2018, taking into account the allowances linked to the implementation of 
the  systemic  pension  reform  and  of  the  structural  reforms  for  which  a  temporary 
deviation  is  granted.  Improve  tax  compliance  and  broaden  the  tax  base  to  sources 
that  are  less  detrimental  to  growth.  Take  steps  to  address  the  medium  term  fiscal 
sustainability challenge related to pensions. 

Address skills shortages through effective active labour market policy measures and 
adult  learning  and  improve  educational  outcomes  by  rewarding  quality  in  teaching 
and  in  higher  education.  Improve  the  performance  of  the  healthcare  system  by 
strengthening  outpatient  care,  disease  prevention  and  affordability.  Improve  the 
adequacy of the social safety net. 

Take  measures  to  strengthen  productivity  by  improving  the  efficiency  of  public 
investment and strengthening its linkage with the country's strategic objectives.  

Done at Brussels, 

For the Council 
The President 

11 

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

EN 

7 

   EN