Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Lithuania and delivering a Council opinion on the 2019 Stability Programme of Lithuania
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Lithuania, economic policy, economic reform, education, health care system, investment, research policy, stability pact, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 515 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Lithuania and delivering a Council opinion on the 2019 Stability Programme of Lithuania    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Lithuania and delivering a Council opinion 
on the 2019 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 Commission, 

Having regard to the resolutions of the European Parliament, 

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 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for 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  21  March 
2019.  On  21  November  2018,  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 date, 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  21  March  2019.  On  9  April  2019,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘Recommendation  for  the 
euro area’).  

(2) 

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 

1 

OJ L 209, 2.8.1997, p. 1. 

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(3) 

(4) 

(5) 

(6) 

the  full  and  timely  implementation  of  the  Recommendation  for  the  euro  area,  as 
reflected in recommendation (2) and (3) below. In particular, investment measures will 
help  address  the second  euro area recommendation as  regards supporting  investment 
and  education  measures  will  help  address  the  third  euro  area  recommendation  as 
regards the functioning of the labour market.   
The  2019  country  report  for  Lithuania2  was  published  on  27  February  2019.  It 
assessed  Lithuania’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 13 July 2018, the follow-up given to the recommendations 
adopted in  previous  years and  Lithuania's progress  towards its  national  Europe 2020 
targets.  

On 10 May 2019, Lithuania submitted its 2019 National Reform Programme and, on 
30  April  2019,  its  2019  Stability  Programme.  In  order  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  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council3,  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 ESI Funds to sound economic governance4.  

Lithuania  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2019  Stability  Programme,  the  government  plans  to  achieve  a  headline  surplus  of 
0.4%  of  GDP  in  2019  and  0.2  in  2020,  before  it  is  projected  to  decrease  further  to 
0.1% of GDP in 2021. Based on the recalculated structural balance5, the medium-term 
budgetary objective, set at a deficit of 1% of GDP in structural terms, is overachieved 
throughout  the  programme  period.  In  2017,  Lithuania  was  also  granted  a  temporary 
deviation  linked  to  the  implementation  of  the  structural  reforms. This  deviation  is 
carried  forward  for  a  period  of  three  years. According  to  the  2019  Stability 
Programme, the general government debt-to-GDP ratio is expected to fall from 34.2% 
of GDP in 2018 to 32.9% in 2022. The macroeconomic scenario underpinning those 
budgetary projections is plausible. At the same time, the measures needed to support 
the  planned  surplus  targets  from  2020  onwards  have  not  been  sufficiently  specified. 
Based  on  the  Commission  2019  spring  forecast,  the  structural  balance  is  forecast  to 
register a deficit of 1% of GDP in 2019 and 0.9% of GDP in 2020, in compliance with 
the  medium-term  budgetary  objective.  At  the  same  time,  expenditure  developments 
should be monitored carefully in the short and the medium term, especially in light of 
possible  future  risks  to  the  robustness  of  revenues.  Overall,  the  Council  is  of  the 

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SWD(2019) 1014 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. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

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(7) 

(8) 

(9) 

opinion that Lithuania is projected to comply with the provisions of the Stability and 
Growth Pact in 2019 and 2020. 

In  June  2018,  the  government  adopted  a  set  of  legislative  acts  to  implement  a 
comprehensive package of six structural reforms covering the key areas of education, 
health, taxation, informal economy, pensions and innovation.  

Lithuania has continued to take measures to combat the shadow economy and improve 
tax  compliance.  While  these  measures  have  shown  encouraging  results,  overall  tax 
compliance  remains  low.  Lithuania  still  has  one  of  the  largest  VAT  gaps  in  the  EU. 
Further increasing tax compliance would raise revenues and make the tax system more 
fair.  No  measures  were  taken  to  broaden  the  tax  base  to  sources  less  detrimental  to 
growth. Environmental and property taxes remain below the European Union average 
and  there  are  no  changes  envisaged  to  car  taxation  or  the  road-use  tax  for  private 
passengers. 

Since 2018, public pensions are automatically indexed to the wage bill growth. This is 
expected to reduce public pension expenditure from 6.9% of GDP in 2016 to 5.2% in 
2070.  However, due to the projected fall in employment, pension adequacy is set to 
decrease  because  pension  benefits  would  not  keep  pace  with  wage  growth.  The 
pension  benefit  ratio  –  which  expresses  the  average  pension  in  terms  of  the  average 
wage – is expected to steadily decline from what is already one of the lowest levels in 
the  Union.  Current  legislation  states  that  when  the  benefit  ratio  declines,  the 
government needs to propose corrective measures. Due to uncertainty over the precise 
nature and timing of such future measures, they  are not  accounted for in  the Ageing 
Report projections.  They do, however, represent  a risk to  the sustainability  of public 
finances. If the total benefit ratio were kept unchanged until 2070, pension expenditure 
would  increase  to  7%  of  GDP  instead  of  decreasing  to  5.2%  as  projected.  There  is, 
therefore,  uncertainty  about  how  pension  legislation  will  be  applied  in  practice  and 
what  its  consequences  would  be  for  fiscal  sustainability  and  pension  adequacy  over 
time. 

(10)  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 
inclusive  economic  growth.  Despite  continued  economic  growth,  many  members  of 
Lithuanian  society  (e.g.  the  elderly,  people  with  disabilities,  children,  single-parent 
households  and  the  unemployed)  face  a  particularly  high  risk  of  poverty  and  social 
exclusion. While the social  safety net  has been improved in  recent  years, the overall 
corrective  power  of  the  Lithuanian  tax  and  benefit  system  and  social  protection 
expenditure as a share of GDP remain among the lowest in the European Union. Some 
first steps were taken to address the high level of poverty and income inequality, such 
as the introduction of the ‘amount of minimum consumption needs’, the increase in the 
universal  child  benefit  and  the  indexation  of  old-age  pensions.  However,  the 
persistently high levels of poverty and inequality show that the country still has a long 
way to  go to converge towards the European Union average levels of social security 
and that investment to address social exclusion is needed. Active inclusion strategies 
for  vulnerable  groups  are  more  effective  when  they  combine  better  adequacy  of 
minimum  income  and  pension  schemes,  labour  market  activation  and  enhanced 
provision of social services, including childcare and social housing. 

(11)  The labour market has become tight as a result of employment growth, but also due to 
adverse  demographic  developments,  including  emigration.  To  mitigate  the  effect  of 
the  shrinking  working-age  population,  investment  in  human  capital  and  enhanced 

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access  to  the  labour  market  for  all  are  needed.  In  the  face  of  the  persistent  skills’ 
shortages  and  mismatches,  it  is  important  that  Lithuania  speeds  up  the  reforms  to 
improve the quality and efficiency at all education levels and ensures equitable access 
to  quality  and  inclusive  education  and  training.  Demographic  decline  has  put  the 
school network under pressure. The demographic shift calls for strategies to preserve 
access  to  high-quality  education  for  all  while  ensuring  the  efficiency  of  the  school 
network  and  supporting  teachers  affected  by  school  consolidation.  Significant  steps 
are  still  required  to  consolidate  the  higher  education  network,  comprising  more  than 
40  state-owned  and  private  universities  and  colleges.  Vocational  education  and 
training  providers  need  to  modernise  the  curricula  as  well  as  improve  their 
responsiveness to the needs of local and regional labour markets. Effective and easily 
accessible  adult  learning,  re-skilling  and  upskilling  measures,  together  with  the 
provision  of  social  services,  could  bring  more  people  into  the  labour  market. 
Participation  in  adult  learning  remains  low,  at  6.6%  in  2018,  well  below  the  EU 
average of 11.1%. The Lithuanian economy has potential to benefit from investment in 
skills  upgrading,  including  digital  skills,  innovation  and  better  integration  of  the 
disadvantaged into the labour market (for example persons with disabilities, and older, 
unemployed or inactive adults). In a broader context, strengthening the capacity of the 
social partners is important to foster their engagement. 

(12)  Weak  health  outcomes  and  low  investment  in  healthcare  are  persisting  challenges. 
There remains significant potential to rationalise the use of resources through a further 
shift from inpatient to outpatient care. The consumption of hospital services continues 
to  be  high,  with  high  rates  of  hospitalisations  for  chronic  diseases  coupled  with 
relatively  low  bed  occupancy  rates.  Further  rationalisation  of  hospital  resources  use, 
together with targeted investments to strengthen primary care services, including in the 
healthcare  workforce,  are  necessary  to  drive  efficiency  gains  and  improve  health 
outcomes.  The  quality  of  care  remains  one  of  the  main  reasons  for  poor  health 
outcomes. Measures to improve the quality of care are fragmented, with very low take-
up  of  accreditation  in  the  primary  care  sector  and  a  lack  of  application  of  the 
accreditation  system  in  hospitals.  Investment  in  disease  prevention  measures  is 
particularly  low.  Moreover,  steps  taken  to  strengthen  disease  prevention  measures  at 
local  level  lack  an  overarching  vision  and  are  impaired  by  a  lack  of  systemic  co-
operation between public health offices and primary care. Lastly, low levels of health 
spending  coupled  with  relatively  high  informal  payments  and  high  out-of-pocket 
payments have negative implications for equity of access to healthcare.    

(13)  Some  measures  have  been  taken  in  the  fight  against  corruption,  but  an  integrated 
registry  of  interest  declarations  is  still  missing.  Implementing  legislation  to  the 
whistleblowers'  protection  law  was  adopted  in  2018,  and  a  new  law  regulating 
lobbying  is  under  discussion.  Irregularities  persist  in  addressing  corruption  in  the 
healthcare system. 

(14) 

Investment as a share of GDP in Lithuania remains below both the averages in the EU 
and  in  other  Baltic  countries.  The  level  of  innovation  and  the  technology  absorption 
capacity  of  businesses  in  Lithuania  is  low.  Higher  investment  levels  in  research  and 
innovation are needed, especially in the private sector. This would boost productivity, 
which,  despite  a  recent  pick-up,  remains  well  below  the  EU  level.  The  shortage  of 
information and communication technology specialists points to the need to invest in 
digital  skills  which  support  competitiveness,  innovation  and  Lithuania’s  capacity  to 
absorb technology, and foster the shift toward more knowledge-based and higher value 
added economy.  

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(15)  The  economy  is  relatively  resource-intensive,  with  high  dependency  on  imports  of 
energy and materials. Resource productivity is low while energy consumption is high, 
especially  in  the  residential  and  transport  sectors.  More  investment  in  energy 
efficiency,  in  particular  in  the  buildings  sector  and  domestic  energy  generation  from 
renewable sources would help to 'green' the economy and put it on a more sustainable 
growth path, while also reducing dependency on energy imports.  

(16)  Lithuania  still  suffers  from  low  international  accessibility  in  terms  of  rail,  road, 
maritime and air transport and needs to be integrated further with the rest of Europe. 
Better transport connectivity would increase the economy's productivity and allow it to 
take full advantage of the single market. Transport sector performance is far below the 
EU average in terms of the extent of the TEN-T road and rail networks, research and 
innovation  investment  in  the  transport  sector,  sustainability  aspects  and  road  safety. 
Rail  traffic  is  dominated  by  East-West  flows,  while  the  North-South  axis  remains 
underdeveloped. Significant investments are therefore needed to develop a sustainable, 
climate-resilient, smart, secure and intermodal TEN-T network and its accessibility, as 
well  as  to  promote  sustainable  urban  mobility.  Moreover,  greenhouse  gas  emissions 
from  road  transport  have  increased  strongly  the  last  5  years.  The  synchronisation  of 
Lithuania’s  electricity  system  with  the  continental  European  network  is  key  to 
ensuring the security of the electricity supply in the entire Baltic region.  

(17)  Regional  disparities  in  Lithuania  are  wider  than  the  EU  average  and  have  been 
widening  over  the  past  two  decades.  The  benefits  of  Lithuania's  speedy  economic 
convergence  are  heavily  concentrated  in  the  two  metropolitan  areas.  Predominantly 
rural regions, which cover most of the territory and host nearly 55% of the population, 
are  experiencing  strong  population  declines  compounded  by  decreasing  access  to 
quality public services. Significant socio-economic disparities within the country show 
that certain regions have distinct investment needs. Increasing links between adjacent 
territories within Lithuania, including transport and digital connections, also remains a 
challenge. 

(18)  To improve the efficiency of public investment, the Lithuanian authorities updated the 
rules  for  preparing  and  selecting  investment  projects  financed  from  the  state  budget. 
Since 2018 all new investment projects should be screened with a cost-benefit analysis 
and  fulfil  additional  selection  criteria.  While  this  is  an  important  first  step,  more  is 
needed  to  maximise  the  impact  of  public  investment  on  increasing  the  long-term 
growth  potential  and  addressing  growing  regional  disparities.  The  authorities  have 
started the revision of the state budgeting system with the objective of lengthening the 
time  horizon  for  budgeting  and  strengthening  the  link  between  expenditure  and  the 
overall  economic  goals.  It  is  crucial  to  ensure  that  the  new  strategic  investment 
planning system is ready for the 2021-2023 budgeting process and the start of the new 
EU funding cycle in 2021. 

(19)  Lithuania  has  no  single  strategy  for  research  and  innovation.  The  landscape  is 
characterised by fragmented policies and a proliferation of support schemes that lack 
synergies. The existence of several implementing agencies that do not take a concerted 
approach  to  supporting  the  research  and  innovation  policy  mix  adds  to  a  complex 
governance  system  that  appears  to  restrict  users'  access  to  the  panoply  of  available 
instruments.  This  state  of  affairs  is  particularly  harmful  for  science-business 
cooperation  and  hampers  innovative  activity.  The  new  division  of  responsibility  for 
research and innovation policy between the Ministry of Economics and Innovation and 
the  Ministry  of  Education  and  Science  is  not  yet  conducive  to  a  coherent  policy 

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framework with synergetic support schemes, as would be available through a one-stop 
shop for potential beneficiaries. 

(20)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex D to the country report6. This would allow Lithuania to make the best use of 
those funds in respect of the identified sectors, taking into account regional disparities.  

(21) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Lithuania’s  economic  policy  and  published  it in  the  2019 
country  report.  It  has  also  assessed  the  2019  Stability  Programme  and  the  2019 
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.  

(22) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  Stability 
Programme  and  is  of  the  opinion7  that  Lithuania  is  expected  to  comply  with  the 
Stability and Growth Pact. 

HEREBY RECOMMENDS that Lithuania take action in 2019 and 2020 to: 

1. 

2. 

3. 

Improve  tax  compliance  and  broaden  the  tax  base  to  sources  less  detrimental  to 
growth.  Address  income  inequality,  poverty  and  social  exclusion,  including  by 
improving the design of the tax and benefit system. 

Improve  quality  and  efficiency  at  all  education  and  training  levels,  including  adult 
learning. Increase the quality, affordability and efficiency of the healthcare system. 

Focus  investment-related  economic  policy  on  innovation,  energy  and  resource 
efficiency,  sustainable  transport  and  energy  interconnections,  taking  into  account 
regional  disparities.  Stimulate  productivity  growth  by  improving  the  efficiency  of 
public investment. Develop a coherent policy framework to support science-business 
cooperation and consolidate research and innovation implementing agencies. 

Done at Brussels, 

For the Council 
The President 

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SWD(2019) 1014 final. 
Under Article 5(2) of Regulation (EC) No 1466/97. 

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