Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Lithuania and delivering a Council opinion on the 2018 Stability Programme of Lithuania
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Lithuania, adult education, budget deficit, economic policy, economic reform, innovation, organisation of health care, social policy, stability programme, tax reform

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 414 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Lithuania  and delivering a Council opinion on the 2018 Stability Programme of Lithuania  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Lithuania 

and delivering a Council opinion on the 2018 Stability Programme of Lithuania 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  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, which was endorsed by the 
European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’). 

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OJ L 209, 2.8.1997, p. 1. 
COM(2018) 414 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

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(2) 

(3) 

(4) 

(5) 

(6) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between the economies in the economic and monetary union, Lithuania should ensure 
the full and timely implementation of the recommendation on the economic policy for 
the euro area, as reflected in the recommendations below, in particular (1). 
The  2018  country  report  for  Lithuania4  was  published  on  7  March  2018.  It  assessed 
Lithuania’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 11 July 2017, the follow-up given to the recommendations adopted in 
previous years and Lithuania's progress towards its national Europe 2020 targets.  

On 26 April 2018, Lithuania submitted its 2018 National Reform Programme and on 
30 April its 2018 Stability Programme. To take account of their interlinkages, the two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

Lithuania  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2018  Stability  Programme,  the  government  plans  to  maintain  a  headline  surplus  of 
0.6 % of GDP from 2018 to 2020, before it is projected decrease to 0.3 % of GDP in 
2021. The medium-term budgetary objective — a deficit of 1 % of GDP in structural 
terms  —  is  planned  to  be  met  throughout  the  programme  period.  In  2016  and  2017, 
Lithuania was also granted a temporary deviation linked to the implementation of the 
systemic pension reform and due to the structural reforms. These deviations are carried 
forward for  a  period  of  three  years. According to the 2018  Stability Programme, the 
general government debt-to-GDP ratio is expected to fall from 39.7 % of GDP in 2017 
to  35.3  %  in  2021.  The  macroeconomic  scenario  underpinning  those  budgetary 
projections is plausible. At the same time, the measures needed to support the planned 
surplus targets from 2019 onwards have not been sufficiently specified. 

(7) 

On  11  July  2017,  for  2017  the  Council  recommended  Lithuania  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. This  is consistent with  a maximum nominal 
growth rate of net primary government expenditure7 of 6.4 % in 2018, corresponding 

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SWD(2018) 213 final. 
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. 
Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 

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(8) 

to an allowed deterioration in the structural balance by 0.6 % of GDP. Based on the 
Commission 2018 spring forecast, Lithuania’s structural deficit is forecast to stand at 
0.7  %  of  GDP  in  2018  and  0.6  %  of  GDP  in  2019.  The  structural  balance  is  thus 
forecast to remain above the medium-term budgetary objective in both years. Overall, 
the Council is of the opinion that Lithuania is projected to comply with the provisions 
of the Stability and Growth Pact in 2018 and 2019. 

Revenues  from  environmental  and  recurrent  property  taxes  remain  below  the  EU 
average.  Lithuania  has  undertaken  a  reform  of  its  property  tax  system,  which 
introduces  an  element  of  progressivity  into  the  system,  and  abolished  excise  duty 
exemptions  for coal and coke  used  for  heating purposes.  However,  scope remains to 
broaden the tax base to sources that are less detrimental to growth. Although Lithuania 
has  made  progress  in  recent  years  on  improving  tax  collection,  its  gap  for  the  value 
added  tax  is  still  among  the  widest  in  the  EU.  Lithuania  is  taking  further  steps  to 
combat tax evasion and improve tax compliance, and recently implemented measures 
are  showing  positive  early  results.  Further  increasing  tax  compliance  would  raise 
budget revenues and contribute to improving the fairness of the tax system. 

(9)  With  the  introduction  of  a  new  pension  indexation  formula  in  2018,  which  links 
pensions to the wage bill growth, the share of public pension expenditure in GDP is 
projected  to  stay  flat  until  2040.  This  would  ensure  the  fiscal  sustainability  of  the 
Lithuanian pension system. However, this is largely driven by a decline in the benefit 
ratio since the total wage bill is projected to increase at a slower pace than wages due 
to  the  rapidly  shrinking  working-age  population.  This  raises  concerns  about  pension 
adequacy,  which  is  already  among  the  lowest  in  the  EU.  It  is  also  unclear  how  this 
reform  will  work  in  practice  since  the  government  is  legally  obliged  to  propose 
measures in the event of a falling replacement ratio. If the replacement ratio were kept 
unchanged,  total  pension  expenditure  as  a  share  of  GDP  would  increase  by  almost 
45 %  by  the  end  of  the  2040s,  putting  a  strain  on  public  finances.  It  is  therefore 
important to clarify legal uncertainties over pension legislation and to ensure the long-
term fiscal sustainability of the pension system while addressing its low adequacy. 

(10)  The labour market is tightening quickly as a result of robust economic growth, but also 
due  to  adverse  demographic  developments  and  emigration,  leading  already  to  skills 
shortages. Such a situation demands an education and training system able to provide 
everybody with the relevant skills. While the reforms launched over the past year are a 
step in the right direction, it is important that Lithuania implements these reforms to 
improve  the  outcomes  of  its  education  and  training  system.  The  financing  and 
accreditation rules in Lithuania’s tertiary education are helping to increase the number 
of  people  with  tertiary  education,  but  at  the  same  time  have  contributed  to  concerns 
about its quality, fragmentation and labour market relevance. The ongoing university 
consolidation,  if  complemented  with  changes  to  accreditation  and  financing  rules, 
should  help  address  the  current  challenges.  In  addition,  persistent  demographic 
pressures have affected the efficiency of the education system and made more urgent 
the need to provide equitable access to quality and inclusive education. To address the 
below-average performance of Lithuania’s pupils in basic skills, reforms are needed in 
teachers’  initial  training,  careers  and  working  conditions,  complemented  by  other 
quality-focused reforms.  

mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out 

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(11)  The  low  participation  of  adults  in  learning  in  Lithuania  indicates  that  adult  learning 
remains  underdeveloped  and  is  not  enabling  the  economy  to  benefit  from  skills 
upgrading,  innovation  and  better  integration  of  the  disadvantaged  into  the  labour 
market  (for  example  older,  unemployed  or  inactive  adults).  Despite  investment  in 
infrastructure, the content of the vocational education and training curriculum is often 
outdated, while alignment with the needs of local and regional labour markets could be 
more  developed.  Work-based  learning  is  still  at  the  initial  phase  and  could  be 
expanded.  Active  labour  market  policy  measures  contain  a  larger  training  offer,  but 
this  offer  could  be  enhanced  further.  The  recent  reforms  and  measures  taken  in  this 
field have not had significant results so far. In a broader context, strengthening social 
partners' capacity is important to foster their engagement.  

(12)  Challenges  in  healthcare  outcomes  persist;  these  are  having  a  negative  impact  on 
productivity,  competitiveness  of  the  economy  and  quality  of  life.  The  delivery  of 
health services remains too hospital-centric, leaving room for further strengthening of 
primary  care.  Further  rationalisation  of  resources  together  with  measures  to  improve 
quality of both hospital and primary care are key to making healthcare more effective. 
Disease  prevention  and  health  promotion  policies  should  curb  risk  behaviours  more 
strongly and rapidly. However, the scale of such policies remains small, while cross-
sectoral  collaboration  is  underdeveloped  and  accountability  for  results  is  not 
sufficiently embedded at municipality level. High reliance on out-of-pocket payments, 
a  low  level  of  health  spending  and  an  inefficient  allocation  of  resources  are  limiting 
the efficiency of the healthcare system. 

(13)  The high proportion of people at risk of poverty or social exclusion, together with high 
income inequality, remain major challenges for Lithuania that hinder its prospects for 
economic  growth.  They  also  threaten  social  cohesion  and  could  fuel  emigration. 
Despite  continued  economic  growth,  the  elderly,  people  with  disabilities,  children, 
single-parent  households  and  the  unemployed  face  the  highest  risk  of  poverty  and 
social exclusion. The corrective power of the Lithuanian tax and benefit system is one 
of  the  lowest  in  the  EU.  While  some  significant  initial  steps  were  taken  to  fight 
poverty  and  income  inequality,  the  country  still  has  a  long  way  to  go  to  converge 
towards the EU poverty and income inequality averages. The relatively high tax wedge 
on  low  income  earners  may  limit  their  incentive  to  work  and  increase  the  risk  of 
poverty  and  inequalities.  Levels  of  poverty  and  inequality  could  be  lowered  by 
incentivising labour market participation, in particular among people from vulnerable 
groups and low income earners, and by increasing the corrective power of the tax and 
benefit  system  supported  by  better  collection  of  taxes.  Such  measures  could  also 
increase social fairness.  

(14)  After  being  subdued  since  2012,  productivity  growth  rebounded  in  2017,  alleviating 
pressures on cost competitiveness. However, this improvement is largely driven by the 
private  sector.  Only  limited  progress  has  been  made  in  improving  the  efficiency  of 
public  investment.  In  particular,  the  efficiency  of  public  R&D  expenditure  and  the 
cooperation between businesses and science remain low. Moreover, public investment 
in research and development dropped significantly in 2016. Fragmented coordination 
and  governance  of  research  and  innovation  policy  lead  to  inefficiencies  and  prevent 
businesses from fully benefiting from the variety of support schemes. Further progress 
in  the  ongoing  reform  of  the  organisation  and  funding  of  the  public  research  sector 
should help achieve better use of the available resources.   

(15)  Lithuania  made  progress  in  strengthening  its  corruption  prevention  framework  by 
adopting  legislation  on  lobbying  and  whistle-blower  protection  for  both  public-  and 

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(16) 

private-sector  workers.  However,  implementing  the  legislation  remains  a  challenge.  
Corruption in the health sector still raises concerns, despite the commendable results 
of the government’s ‘clean hands’ programme. 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Lithuania’s  economic  policy  and published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
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 Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

(17) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme  and  is  of  the  opinion  that  Lithuania  is  expected  to  comply  with  the 
Stability and Growth Pact. 

HEREBY RECOMMENDS that Lithuania take action in 2018 and 2019 to: 

1. 

2. 

3. 

Improve  tax  compliance  and  broaden  the  tax  base  to  sources  less  detrimental  to 
growth. Ensure the long-term sustainability of the pension system while addressing 
the adequacy of pensions. 

Improve  the  quality,  efficiency  and  labour  market  relevance  of  education  and 
training, including adult learning. Improve the performance of the healthcare system 
by  a  further  shift  from  hospital  to  outpatient  care,  strengthening  disease  prevention 
measures,  including  at  local  level,  and  increasing  the  quality  and  affordability  of 
care. Improve the design of the tax and benefit system to reduce poverty and income 
inequality. 

Stimulate  productivity  growth  by  improving  the  efficiency  of  public  investment, 
ensuring efficient governmental coordination of research and innovation policy and 
tackling  gaps  and  inefficiencies  in  public  measures  supporting  science-industry 
cooperation. 

Done at Brussels, 

For the Council 
The President 

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