Source: EURLEX
Language: en
Format: md

*|*

# 52012SC0319

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and convergence programme for LITHUANIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Lithuania’s 2012 national reform programme and delivering a Council Opinion on Lithuania’s updated convergence programme for 2012-2015 /\* SWD/2012/0319 final \*/**

  

CONTENTS

Executive Summary.. 3

1..... Introduction.. 4

2..... Economic developments and challenges. 5

2.1.    Recent
economic developments and outlook. 5

2.2.    Challenges. 6

3..... Assessment of policy agenda.. 7

3.1.    Fiscal
policy and taxation. 7

3.2.    Financial
sector 13

3.3.    Labour
market, education and social policy. 14

3.4.    Structural
measures promoting growth and competitiveness. 17

3.5.    Modernisation
of public administration. 20

4..... Overview table. 22

5..... Annex.. 26

Executive
Summary

After a strong rebound in 2011, Lithuania's economic activity is expected to increase by 2.4% in 2012. Unemployment is
foreseen to decrease gradually from its former peaks to 13.8% in 2012; however,
unemployment remains high particularly among young and unskilled workers.

Helped by robust economic growth in 2011, Lithuania's general government deficit narrowed to 5.5% of GDP, and is expected to decrease
further to 3.2% of GDP in 2012. Lithuania made progress in improving tax
collection and reforming its state-owned enterprises.

Lithuania continues
to face important policy challenges:  demographic developments cast a doubt on Lithuania’s long-term fiscal sustainability, especially of its pension system. A low labour
force participation rate, very high youth unemployment, shortage of skilled
labour and skill mismatches, aggravated by high emigration, are other major
concerns in the medium to long term. The growing poverty and social exclusion
threatens to put an even higher strain on public finances in the near future.
The country’s infrastructure, particularly its energy system, lacks competition
and interconnections, thus hindering growth. Low energy efficiency, especially
of buildings, as well as the low level of R&D spending and poor performance
in innovation, are pressing issues. Modernising public administration and
finalising the reform of state-owned enterprises are also essential to boosting
competitiveness.

1.
Introduction

Procedural
aspects

In June 2011, the Commission proposed six country specific recommendations[1] (CSRs) for economic and
structural reform policies for Lithuania. In July 2011, the Council of the European Union adopted these
recommendations[2],
which concerned public finances, the pension system, the labour market,
state-owned enterprises, energy, competition and the business environment.

In November
2011, the Commission published its Annual Growth Survey for 2012[3] (AGS 2012) presenting the basis
for building the necessary common understanding of the priorities for action at
national and EU level in 2012. It focused on five priorities — growth-friendly
fiscal consolidation, restoring normal lending to the economy, promoting growth
and competitiveness, tackling unemployment and social consequences of the
crisis, and modernising public administration — and encouraged Member States to
implement them in the 2012 European Semester.

Against this
background Lithuania presented, in April 2012, updates of its national reform
programme and convergence programme, detailing progress made since July 2011
and plans going forward.

This Staff
Working Document assesses the state of implementation of the 2011 CSRs as well
as the AGS 2012 in Lithuania, identifies current policy challenges and, in this
light, examines the country’s latest policy plans.

Overall
assessment

Overall, Lithuania has made progress in
implementing the 2011 recommendations. On the positive side, economic growth
was robust in 2011 and the country managed to reduce its fiscal deficit. In
addition, the country took further steps towards improving tax collection and
reforming its state-owned enterprises. Notwithstanding these important
achievements, reform efforts were limited, in particular regarding the labour
market, social policies, energy efficiency and the energy sector. The
challenges identified in July 2011 and reiterated in the AGS 2012 therefore
remain valid in these areas. Regarding the pension system, Lithuania took a first important step by approving a gradual increase in the
pension age to 65 years for both men and women by 2026. Nevertheless, without a
comprehensive pension reform the long-term sustainability of public finances is
at risk.

Lithuania faces the
most pressing challenges in public finances, the labour market, the energy
sector and in relation to poverty or social exclusion. The budget deficit has
to be further reduced to reach the medium-term objective. This would also help
maintain the confidence of financial markets. A low labour force participation
rate, shortage of skilled labour and skill mismatches, aggravated by high
emigration, are other major concerns in the medium to long term, given
population ageing. The growing poverty and social exclusion threatens to put an
even higher strain on public finances in the near future. The country’s
infrastructure, particularly its energy system, lacks competition and
interconnections and thus is a factor that hinders growth. Low energy
efficiency, especially of buildings, as well as the low level of R&D
spending and poor performance in innovation are pressing issues. Finally, in
light of persistent uncertainties in international financial markets, prudent
and pre-emptive policies in financial regulation and supervision remain
important.

The policy plans submitted by Lithuania are relevant and substantiated, but in some areas they do not address the
challenges in a comprehensive way. The national reform programme contains
further plans (until the end of 2012) to maintain financial stability, foster
employment (particularly among young people), improve the business environment
and regulation, further restructure state-owned
enterprises (SOEs), and improve energy connections and
infrastructure. Medium-term plans include implementing social insurance reform,
continuing reforms in the energy and health care sectors, as well as improving
the business environment and conditions for research and innovation.

2.
Economic developments and challenges
2.1.
Recent economic developments and outlook

Strong economic
expansion prior to the financial crisis was accompanied by growing imbalances
and other signs of overheating, which led to a deep economic recession in 2009
(real GDP shrank by 14.8 %). Lithuania returned to growth in 2010 (+1.4 %)
as a result of an internal devaluation. In 2011, economic growth picked up
significantly and reached 5.9 %, despite the ongoing fiscal consolidation.
Substantial nominal wage decline and productivity improvements fostered
competitiveness and Lithuania took full advantage of growing export markets.
Corporate profits as well as employment increased. Consequently, private
consumption and investment growth gained momentum, and domestic demand took
over as the main driver of economic growth. However, at the end of the year, Lithuania started to feel the repercussions of the slowdown in the EU. In addition, the
bankruptcy of the domestic bank Snoras in November 2011 further dampened
consumer confidence and business expectations.

Despite strong
growth in 2011, unemployment remains high, standing at 13.9% at the end of the
year, especially among young people, and skill mismatches have appeared in some
sectors. Inflation (HICP) rose in 2011 on the back of higher energy and food
prices, reaching an annual average of 4.1 % compared to 1.2 % in
2010.

Going forward, Lithuania’s economy will be affected by the ongoing recession in the euro area. Lower
external demand and economic uncertainty are likely to dampen prospects for the
Lithuanian economy in 2012, and a rebound is expected only in 2013.  Overall,
real GDP is projected to increase by 2.4 % in 2012 and 3.5% in 2013.
Inflation is forecast to decrease in 2012, driven by lower commodity and food
prices as well as weaker domestic demand. This downward trend should continue
in 2013 due mainly to expected weaker oil prices. The unemployment rate will
remain in double figures in 2012-2013 as the situation on the labour market is
expected to improve only marginally.

According to
the convergence programme, GDP growth could average 3.85% in 2014-2015, in the
absence of adverse financial and external developments. This should further
lower the unemployment rate to around 10% in 2015. However, unfavourable
demographic tendencies will have the effect of reducing Lithuania’s potential growth in the medium and long term. Therefore, the government will have to
undertake a broad range of structural reforms in order to keep growth at this
level.

The national reform programme was approved by
the government on 23 April 2012 and the convergence
programme was adopted on 25 April 2012. Both were
presented to the Lithuanian Parliament’s European Affairs Committee, where they
were debated without being voted upon; there was thus no formal parliamentary
approval of the programmes. Although stakeholders were consulted in the
process, they did not provide comments. The convergence
programme was submitted to the European Commission on 27
April 2012 and the national reform programme on 30
April 2012, together with the commitments made by Lithuania under the Euro Plus
Pact. The programmes are consistent with the guidance provided by the
Secretariat-General of the Commission and the code of conduct. They outline in
an integrated manner the fiscal consolidation efforts, the key structural
reforms and the reforms that underpin macroeconomic stabilisation. Both documents share the same economic outlook, which is broadly in
line with the most recent Commission forecast. The 2012 convergence report will
assess the progress made by Lithuania in fulfilling its obligations regarding
the achievement of economic and monetary union.

2.2.
Challenges

Lithuania needs to speed up its reform agenda to
improve its growth potential. Although the main policy challenges for the
country have remained broadly unchanged since the European Semester 2011, some
new areas that have been identified merit closer government attention.

In particular,
continued growth-friendly fiscal consolidation is required to reach the
medium-term objective (MTO) for the deficit and maintain the confidence of
financial markets. Lithuania has scope for making use of less distortive and
more growth-friendly taxation; moreover, tax collection and administration
could be further improved. Lithuania’s high energy intensity remains an issue
that could be addressed through a shift in taxation towards energy use as
identified in the 2011 Commission Staff Working Paper. The structural
weaknesses of the fiscal framework require attention: low share of growth-enhancing
expenditure, weak monitoring of budget implementation and a lack of enforceable
and binding expenditure ceilings in the multi-annual budgetary planning.
Demographic developments cast a doubt on Lithuania’s long-term fiscal
sustainability and a comprehensive pension reform, targeting both
sustainability and adequacy of pensions, remains an important issue.

Regarding
labour supply, the main challenge is to increase labour force participation by
improving flexibility of contractual arrangements, enhancing labour market
relevance and quality of skills and making better use of active labour market
policies. The situation among young people and unskilled workers is
particularly worrying. Skill mismatches have appeared in some sectors and
long-term unemployment has increased in Lithuania. Another important challenge,
also highlighted in the Annual Growth Survey for 2012, is the fight against
youth unemployment. Despite robust growth, the youth unemployment rate is one of the highest in the EU (32 %), and young people often lack the necessary skills or qualifications to
find a job.

Weaknesses in the area of business
conditions, despite some progress, and the quality of education and low R&D
investment continue to restrict growth and competitiveness in Lithuania. Limited competition among electricity suppliers, poor interconnections with other Member States, ageing generation capacity, and the absence of alternative gas supply routes
keep energy prices high. Furthermore, energy efficiency, especially of
buildings, is an urgent challenge. Enterprises would greatly benefit from
further improvements in the business environment, while notable progress has
been made on improving start-up conditions and reducing the time taken to
obtain construction permits. Modernising public administration and finalising
the reform of state-owned enterprises is also essential to boosting
competitiveness.

Since 2011 a new challenge has arisen. Lithuania is the EU country with the highest income inequality and has the fourth highest
rate of poverty or social exclusion. It is particularly worrying that, despite
economic growth, these rates have increased further. So far, the causes have
not received the required policy attention and the plans presented in the
national reform programme are not specific enough.

3.
Assessment of policy agenda
3.1.
Fiscal policy and taxation

Budgetary developments and debt dynamics

In its 2012
convergence programme, Lithuania confirms to correct the excessive general
government deficit by 2012 and to progress towards the medium-term
budgetary objective (MTO). The
programme confirms the previous MTO, i.e. a structural general government surplus
of 0.5 % of GDP, which adequately reflects the requirements of the Stability
and Growth Pact, and outlines a consolidation of at least 1 percentage point
per year, planning a balanced budget by 2015. In structural terms, the planned
annual progress towards the MTO is slightly higher than 0.5% of GDP, on the
basis of the recalculated structural balance from the programme (using the
commonly agreed methodology for calculating the structural budget balance).

Lithuania took steps to implement the fiscal CSR. Some temporary measures
adopted during the crisis concerning social benefits have been made permanent,
and tax compliance and administration were reinforced. According to the 2012
spring forecast, Lithuania’s general government deficit decreased from 7.2 %
of GDP in 2010 to 5.5 % of GDP in 2011, somewhat worse than the target of
5.3 % of GDP set in the 2011 convergence programme due to unforeseen calls on state-guarantees on corporate loans and a higher than planned
deficit of local governments. This reduction was the
result of consolidation efforts on the back of robust economic growth reaching
5.9 % in 2011. The adjustment has largely relied on expenditure restraint. The
structural deficit decreased from 5.1 % of GDP in 2010 to 4.6 % in
2011.

The 2012 budget targets a further reduction
in the deficit to 3.0% and includes additional structural measures: mainly
substantial cuts in expenditure and additional non-tax revenue (see the Box 1 below). The 2012 spring forecast expects the general government deficit to decline to
3.2 % of GDP. Compared to the previous programme, the current one projects
both revenue and expenditure lower in absolute terms, and by 3.4-3.6 precentage
points lower in terms of GDP. The programme envisages lower tax revenue due to
less favourable economic growth assumptions, and lower non-tax revenue, mainly
related to EU grants, as well as lower current expenditure following further
cuts in the 2012 budget and lower public investment as the main drivers. The
Commission and the national authorities broadly agree on the macroeconomic outlook
for 2012 and 2013.

|| Box 1. Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2011 ||

|| Increase in excise duties (+0.1 % of GDP) || Cuts in government spending, including extension of the public sector wage freeze (-1.0 %) Continuing freeze in social benefits, including pensions (-0.6 %) Reduction in social benefits, mainly maternity benefits (-0.2 %) ||

|| 2012 ||

|| Increase in dividends from state-owned companies (+0.5 % of GDP) Introduction of ‘luxury tax’ on residential properties (+0.02 %) Reduction in transfers to the second pillar pension funds (+0.1 % of GDP) Sales of carbon rights (+0.3 % of GDP) Abolition of reduced VAT rate for hotels (+0.02 % of GDP) Increase in excise duties (+0.02 %) || Cuts in government spending (-0.5 %) Increase in retirement age (-0.1 % of GDP) Cut in road investment (-0.03 % of GDP) Continuing public sector wage freeze (-0.5 % of GDP) Reversal of previous temporary cuts in social insurance pensions (+0.5 %) Continuing cuts in state pensions (-0.1 %) Reduction in social benefits, mainly health care and maternity benefits (-0.5 %) ||

|| 2013 ||

|| Changes to land tax (+0.1 % or higher) Increase in transfers to the second pillar pension funds (+0.2 % of GDP) || Reversal of the public sector wage freeze (+0.5 %) Increase in retirement age (-0.1 % of GDP) Environmental investment following sales of carbon rights (+0.3 % of GDP) ||

Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A plus sign means that revenue/expenditure increases/decreases as a consequence of this measure. The degree of detail reflects the type of information made available in the stability or convergence programme and, where available, in a multiannual budget.

The budgetary
adjustment in 2012 has a strong focus on expenditure-reducing measures, which
should contribute some 1.3 % of GDP, whereas revenue is expected to
increase by around 0.9 % of GDP. According to the 2012 spring forecast,
the revenue-to-GDP ratio is projected to increase from 32.0 % in 2011 to
33.5 % in 2012 and the expenditure-to-GDP ratio is expected to fall from
37.5 % to 36.7 %, broadly in line with the 2012 convergence programme.

Overall, these
steps have put Lithuania on track to reduce the deficit further under the EDP.
The 2012 spring forecast indicates that the country is likely to reduce its
general government deficit to close to 3 % of GDP (the reference value of
the Treaty) in 2012.

The average
annual fiscal effort over the period 2010-2012 is expected to be lower than
recommended by the Council despite fiscal consolidation efforts. The 2012
spring forecast sees the structural balance decreasing substantially, from a
deficit of 5.1% in 2010 to 4.6% of GDP in 2011 and 2.9% of GDP in 2012, 0.3 pp.
higher than the (recalculated) structural balance[4] forecast by the Lithuanian
authorities. The average annual fiscal effort over the reference period amounts
therefore to 1.1% of GDP, substantially below the recommended 2.25 percentage
points of GDP. The structural balances are strongly
affected by extensive revision of potential growth following the boom and bust Lithuania’s economy experienced before and during
the crisis. The Commission has revised Lithuania’s potential growth downwards to 0.3% in
2011 and 1.6 % on average in the period 2011-2015, much lower than its growth
performance in 2011 and the forecast for 2012/13. Therefore part of the
budgetary improvement which comes from fiscal consolidation should be
attributed to cyclical changes.

Going forward,
the 2012 convergence programme targets a general government deficit of 2.0 %
of GDP in 2013 and a further improvement until a balanced budget is reached in
2015. It is, however, not specified how such progress will be made. Based on
the Commission 2012 spring forecast, a further slight decrease in the general
government deficit to 3.0 % of GDP is expected in 2013 as the overall
expenditure increase will be contained by the state budget expenditure rule but
some temporary measures are set to be reversed, including the freeze of
government wages. Therefore, the difference is mainly
due to the no-policy-change assumption as budgetary targets in the programme
represent targets requiring unspecified measures. The deficit targets presented
in the 2012 convergence programme differ slightly from those presented in the
previous one. The planned consolidation path is somewhat slower due to the
projection of subdued macroeconomic growth, especially in 2012. From 2013
onwards consolidation will mainly be driven by significant cuts in current
expenditure.

The 2011
recommendation on fiscal consolidation required that Lithuania should make
adequate progress towards the MTO, i.e. a structural general government surplus
of 0.5 % of GDP, which is
not expected to be achieved within the programme period. This recommendation was also reflected in general terms in the AGS
2012. The budgetary adjustment needed to reach the target has been gradual over
the period 2011-2012 with an average annual fiscal effort of around 1.1 %
of GDP. As the (recalculated) structural deficit is projected to stand at 2.6 %
of GDP in 2012, the average annual fiscal effort between 2013 and 2015 is set
at around 0.6% of GDP, slightly above the standard benchmark of 0.5 % of
GDP. Based on the information on structural measures for the period 2013-2015 contained
in the 2012 convergence programme, timely progress towards the MTO will demand
significant additional efforts.

The measures
adopted or announced so far, while relevant and corresponding to the specific
recommendations of the AGS 2012, lack ambition and sometimes credibility. The
adopted changes in the retirement age will yield substantial savings only in
the long run. The announced concept of social security system reform is
ambitious compared to the overall policy challenge but very sensitive and
subject to political decisions, especially in view of the general elections
planned in autumn 2012. Consequently, significant changes cannot be excluded at
this stage and a proper assessment has to wait until the final version is
formally adopted.

The analysis of
the development of the
structural balance is complemented by an assessment of the expenditure
benchmark. According to the information provided in the 2012 convergence
programme, the growth rate of government expenditure, net of discretionary
revenue measures, over 2013 will not exceed a rate which is lower than the
reference medium-term rate of potential GDP growth (0.77%) and which ensures an
annual structural adjustment towards the MTO by 0.5% of GDP (-0.58%). However,
according to the Commission’s
2012 spring forecast, the expenditure growth rate of around 2.23% in 2013 far
exceeds the benchmark, which indicates that progress towards the MTO might not
be sufficient. In 2014 the programme target is in line with the expenditure
benchmark, while it foresees much stronger expenditure growth in 2015 (3.04%)
than would be needed to progress towards the MTO. Based on the 2012 spring
forecast, it is unlikely that the 2013 target will be met without additional
measures. It will therefore be even more difficult to meet targets in
2014-2015.

At the same time, expenditure cuts should be structured in such a
way as not to undermine medium-term growth prospects, as mentioned in the AGS
2012. This aspect deserves particular attention as further savings in Lithuania could be achieved through structural fiscal reforms and better targeting and
improving tax collection (see section below on taxation) rather than
expenditure cuts. Prioritising growth-friendly expenditure such as public
investment, R&D, education and training is
important to enhance Lithuania’s growth.

Furthermore, the projected consolidation
path is subject to a number of risks. Lithuania’s economic growth, and thus its
tax revenues, may evolve less dynamically than expected, as the growth
prospects of this small open economy depend considerably on the development of
its main trading partners. In addition, volatile financial markets may result
in a rise in the government’s interest cost, thus putting additional pressure
on the state budget. Considering the substantial consolidation efforts needed,
there are also implementation risks in view of upcoming elections in autumn
2012.

The general
government debt increased substantially during the crisis from 15.5 % of
GDP in 2008 to 38.0 % of GDP in 2010 and stabilised at 38.5% of GDP in
2011. Both the Commission and Lithuania expect it to remain well below 60 %
of GDP over the programme period; thus, the debt reduction benchmark is not
applicable. Nevertheless, the Commission’s 2012 spring forecast is for public
debt to rise to around 41 % of GDP in 2013, while the 2012 convergence
programme expects it to drop to 38.6 % in 2013 and further to 34.9 %
in 2015.  This divergence stems mainly from the 1 pp difference in the deficit
forecast in 2013, which relates to the application of the no-policy-change
assumption in the Commission’s 2012 spring forecast. In addition, the GDP
forecast in the convergence programme is slightly higher (0.2 pp) than
predicted in the 2012 spring forecast.

Long-term
sustainability

Lithuania’s
long-term change in age-related expenditure is above the EU average. The
initial budgetary position adds to the long-term costs. Under a no-policy-change
assumption, debt would increase to 44.6% of GDP by 2020. Therefore, additional fiscal
consolidation is needed beyond the forecast horizon to put debt on a downward
path. Full implementation of the convergence programme would be enough to put
debt on a downward path by 2020. Recent pension reform measures have
contributed to improvement of fiscal sustainability, but further comprehensive
reforms are needed to curb the projected substantial increase in age‑related
expenditure. Ensuring continued sufficient primary surpluses over the medium term,
as planned in the convergence programme, would further improve the
sustainability of public finances.

Fiscal
framework

Lithuania’s medium-term budgetary framework specifies revenues and
expenditure of the national budget for three years. The fiscal framework also
includes four fiscal rules, applicable separately to central and local levels
of government. At the central level, the government has to respect a limit on
net borrowing and take into account revenue and expenditure rules for the state
budget. The revenue rule calls for the deficit of the state budget to be
reduced by the estimated ‘excess’ revenue of the current year. The expenditure
rule links expenditure ceilings to revenues. For the local governments, there
is a balanced budget rule.

However, the
framework has failed to prevent pro-cyclical fiscal policy in years of high
growth, and the rules are not sufficiently binding. They lack a robust
enforcement mechanism, e.g. automatic spending cuts or sanctions for
non-compliance. Moreover, the fiscal framework suffers
from a non-transparent budgetary process, including appropriate reporting of
revenue and expenditure executions, insufficient monitoring of fiscal target
execution and the comparability of budgetary indicators on cash and accrual bases.

Lithuania has taken some further steps to strengthen its fiscal framework, implementing
the 2011 recommendation in this area. The work on reform of budget planning and
execution is progressing. Some concepts and draft laws have been presented to
the public, but the government has not yet approved them. If adopted, these
laws would increase transparency, monitoring and execution of the budgetary
process, since they provide for an independent body located in the State audit
office, and introduce other measures. Of particular relevance is the aim to
improve accountability within the fiscal framework. The draft laws propose to
tighten rules on treasury reserves and to allocate greater responsibilities to
the Ministry of Finance. The new legislation would also enhance and reinforce
the binding character of the medium-term framework. However, these reform
proposals are currently subject to public consultation, and it is unclear when and
in what form this legislation will be adopted and implemented. These plans therefore
are relevant, but still need to be approved. Finally, there has been some
progress with adjusting the national classification of public accounts to the
ESA95 standards.

Tax system

The Lithuanian tax system is characterised
by significant tax evasion and low administrative efficiency. Tax compliance
shows scope for improvement, with the shadow economy being perhaps as large as
30 % of GDP, well above the EU average of 15.9 %. Lithuania has potential for increasing VAT efficiency as estimates of the VAT ‘compliance gap’[5] point to widespread VAT fraud
and evasion. Administrative costs per collected revenue are relatively high and
the time costs of paying taxes for businesses could be further reduced. The
Lithuanian government has adopted a comprehensive tax compliance strategy and a
plan of measures for 2011-2012. Cash registers have been introduced for food
products in markets and border controls strengthened. Measures implemented in
2011 to reinforce tax compliance and administration have strengthened the tax
bases and yielded additional revenue. Efforts and implementation will continue
in 2012 and beyond. The measures taken are relevant and progress is being made
as these measures enter into force. However, there is still room to step up
efforts in this respect.

In 2010 Lithuania had the lowest tax-to-GDP ratio in the EU and has not increased major taxes in
recent years. Fiscal consolidation so far is mainly due to expenditure
restraint. Since Lithuania shows an unsustainable initial budgetary position,
there is scope to look at additional tax revenue sources that are least
detrimental to growth. In particular, Lithuania has scope for less distortive
and more growth-friendly taxation. The tax structure relies on taxing labour
and consumption, while at the same time taxes on property and environment are
among the lowest in the EU.

The tax burden
on labour has been steadily decreasing over the last decade and is now slightly
below the EU average. The tax burden on the low-skilled is also below the EU
average. Capital taxation, which is considered as the most detrimental to
growth, is favourable in Lithuania. The implicit tax rate on capital was 10.9 %
in 2010 and is one of the lowest in the EU, partly due to generous exemptions
and lower rates for SMEs. The implicit tax rate on consumption of 18.2 %
(in 2010) is one of the lowest in the EU. The standard VAT rate is 21 %
and Lithuania applies two reduced rates (of 5 % and 9 %) only to a
limited number of goods and services.

Revenue from environmental taxes is the third lowest in the EU. This
is largely due to the transport taxes (excl. fuel),
which are the lowest in the EU. Lithuania is among the few European states not to
have motor vehicle taxation (no road tax or car registration tax). The car fleet
in Lithuania remains one of the most energy-intensive in the EU. The same
applies to the energy intensity of production. The
implicit tax rate on energy consumption was the seventh lowest in the EU in
2010 whereas energy taxes in GDP terms are only slightly below the EU average. Regarding
the implementation of the 2011 recommendation to take action to ‘shift taxation
towards energy use’, only a few measures have been taken

The composition
of tax revenue is quite favourable, as a large part is raised from indirect taxes
that are less distortive for growth. However, recurrent property taxes or
environmental taxes are relatively low. Going forward, Lithuania could broaden the tax base, improve efficiency of tax collection, eliminate existing tax
exemptions and extend use of environmental and recurrent property taxes. The
latter could be used much more to shift taxation towards a growth-friendly tax
policy in line with the 2011 recommendation on energy taxation. The government
has so far addressed only some of these crucial aspects of taxation.

3.2.
Financial sector

Financial stability

Foreign-owned
banks, in particular Scandinavian banking groups, play an important role in Lithuania’s financial sector. In total, foreign subsidiaries manage 90 % of the
banking system assets; 69 % are controlled by the three largest banks. The
financial crisis severely hit the banking system, but it managed to absorb
adverse economic shocks thanks to support from parent foreign banks and
determined policy action by the Lithuanian authorities. In 2011, banking
profits reached pre-crisis levels and the loan portfolio quality started
improving. The share of non-performing loans fell to 21.1% in 2011 from 23.3%
in 2010 (compared to the EU average of 7% in 2010) as clients that had
previously been regarded as insolvent started to repay business and consumer
loans. Capital and liquidity ratios are well above the regulatory minima for
the banking system as a whole, with the capital adequacy ratio standing at
13.5% and the liquidity ratio at 44%[6].

As recommended
in the AGS 2012, Lithuania started to address the weaknesses of its regulatory
and supervisory framework. It has adopted a new macro-prudential instrument to
avoid re-emergence of unsustainable credit and house price developments. The
Regulation for Responsible Lending came into effect on 1 November 2011 and has
several objectives: protecting the population against too high a financial
burden and insulating the financial system and ultimately the Lithuanian
economy against shocks. The regulation forces credit institutions to respect
clear limits when they evaluate the solvency of clients and issue loans. This
relevant measure should allow for more normal lending patterns to business and
to private households, without the excessive risk-taking of the pre-crisis
period, in line with the AGS 2012.

In addition,
the legislators decided to centralise financial supervision entirely within one
institution, the Bank of Lithuania. A new supervision service established as of
January 2012 is tasked with supervising commercial banks, other credit and
payment institutions, securities and insurance markets, as well as investigating
disputes between consumers and financial institutions. The new model of
supervision is expected to be more effective as well as cost-efficient and
should lead to reinforced stability of the financial system since it will put
more emphasis on macro-prudential, systemic risk supervision as well as on
consumer protection and education.

The importance
of close financial supervision was demonstrated in the wake of the bankruptcy
of a domestically owned, medium-sized bank, Snoras, in November 2011. Through
immediate action the Lithuanian authorities maintained confidence among
consumers and investors and ensured that other banks were not affected. Going
forward, continued scrutiny of the banking sector and pre-emptive financial
supervision are required to avoid similar events like Snoras.

Funding
of the economy

Credit to
enterprises started to increase in the last quarter of 2011, after a continuous
decline since 2009, when the credit bubble burst. However, lending remains low
given the continuing deleveraging process. The government continues to support
SMEs through EU structural funds[7]
and SMEs have no major problems in obtaining finance beyond those difficulties
usually experienced by smaller enterprises. It is weak demand and a lack of
good projects that is holding back lending rather than supply constraints. The
venture capital market is embryonic and not a significant source of finance for
SMEs.

Overall, Lithuania is addressing the lessons learned from the financial crisis with the recently
adopted measures, but needs to follow closely their implementation and
performance, so as to adjust them if required.

3.3.
Labour market, education and social policy

During and
after the financial crisis Lithuania’s labour market proved to be highly flexible
in wage determination, which contributed to regaining competitiveness and
ultimately economic growth in 2010 and 2011. The labour market remains one of
the daunting challenges the country has to tackle if it wants to maintain its
growth potential and counteract negative demographic and social developments.

The overall low
participation rate is an important concern. Only 68 % of the population in
the 20-64 age group are active on the labour market. Particularly worrying is
the situation among young people and unskilled workers. The youth unemployment
rate is one of the highest in the EU (32 %) and the unemployment rate of
the low-skilled is second highest in the EU (39.5%). Long-term unemployment
rose from 1 % to 8 % over the last three years. In addition, skill
mismatches have appeared in some sectors and, together with insufficiently
flexible labour legislation and a social assistance system that contains disincentives
to work, hinder employment growth.

These issues
were identified by last year’s CSRs and reiterated in this year’s AGS. The
government has acknowledged them in the national reform programme and set an
employment target of 72.8 % for 2020. This objective is very ambitious
compared to the current situation and requires additional forward-looking
efforts. Lithuania has taken or is planning a set of measures targeting older
workers, youth and unskilled persons. In addition, it intends to reduce skill
mismatches and amend the labour legislation to make it more flexible and reform
the social assistance system.

Regarding
labour market flexibility, the Law on Temporary Employment Agencies to
facilitate short-term employment entered into force on 1 December 2011. The law
defines employment relations between temporary employees and temporary
employment enterprises.  However, its impact may not be significant, since
temporary work agencies were already operating in Lithuania previously.
Instead, a comprehensive review of the labour law could identify unnecessary
restrictions and administrative hurdles that prevent flexible contractual
agreements, such as dismissal provisions and flexible working time
arrangements. Lithuania attempted to facilitate fixed-term employment by
allowing use of fixed-term contracts in newly created jobs. However, this
measure expires in July 2012. Discussions
on changing the Labour Code have started, but no agreements have been reached
so far. The national reform programme presents a number of measures to ease the
regulative and administrative burden for employers and employees. It is,
therefore, very important that these plans are realised swiftly and
efficiently.

As regards
older worker employment, Lithuania continued to implement the Active Ageing
Strategy. However, its general nature and a lack of quantifiable indicators, a
clear timetable and financial means do not allow its impact to be assessed and call
its credibility into question. A new strategy after 2013 could address these
shortcomings. However, the national reform programme does not present any plans
in this regard. Fiscal disincentives for people of pensionable age (lower
pensions for those who receive employment-related income) expired at the end of
2011. However, the new pension legislation has expanded the possibilities for
early retirement (no longer limited to the long-term unemployed). This in part
counteracts the removal of fiscal disincentives.

The challenge
of youth unemployment (above 30 % at the end of 2011) became especially
evident during the crisis, which revealed that young people do not possess the
skills and practical experience demanded by employers. Addressing it was
identified as one of the main priorities. Following the
European Council of 30 January 2012, the Lithuanian authorities and the Commission
examined measures for reducing youth unemployment, including changes to the
regulatory framework and reallocation of the European Structural Funds. As a result, it was decided to re-focus the European
Social Fund (ESF) in the period 2012-2013, implying
that around 18 000 additional young people could benefit from ESF support in Lithuania. The national reform programme reflects this initiative and the government is
implementing active labour market policy measures, training of entrepreneurial skills,
vouchers for vocational training, job experience, first job subsidies[8] and support for apprenticeship
schemes, internship and volunteering. Furthermore, from the European Regional
Development Fund (ERDF), young people could receive support for start-ups,
coaching and information about business financing as well as grant schemes for
SMEs. However, additional efforts are needed to ensure a smooth transfer from
education to the labour market. To address the problem of skills mismatch, Lithuania is developing a system of qualification demand forecasting, which should help to
align training with labour market demands.

The key tool for improving employability,
active labour market policy, struggles to cope with the increasing number of
unemployed. The activation rate in Lithuania is among the lowest in the EU and
the financial allocations to the active labour market policy are decreasing.
Hence, it is essential to improve its coverage, focus and efficiency. It is
important to limit public works to the most vulnerable and provide more labour
market relevant re-skilling and up-skilling programmes. To this end, the
vocational training of the unemployed was reformed in January 2012. A voucher
scheme was introduced to allow job seekers to choose their trainers, including
potential employers. The measure is relevant, but it needs to be based on
sufficient financial resources, transparent and simple implementation
procedures and efficient quality control. The other active labour market policy
measures would benefit from a similar review and refocusing.

Lithuania faces important
challenges in education with regard to the transition from education to the
labour market, underachievement in general education, and availability of pre‑school
education and care, as well as adult learning. Lithuania seeks to sustain the
level of tertiary attainment above 40 % (43.8 % in 2010) by
introducing measures such as a state-supported study loan scheme, social
scholarships, financial support for students with disabilities, and targeted
scholarships for certain study programmes. The ongoing higher education reform
mainly aims at improving quality and consolidating institutions. The government
is also tackling mismatches between the supply of graduates and the labour
market needs. Lithuania has made progress in increasing the number of maths, science and
technology graduates. Currently, the early school leaving rate is below
the EU average (at 8.1 % in 2010). To keep it below 9 % by 2020, Lithuania is implementing measures involving collection of data on potential drop-outs,
targeting priority groups, aiming to raise the quality of education and
targeted support. The impact of these measures is still to be seen; however, Lithuania’s target for early school leavers could be set to a higher level.

In general, considering all the measures
taken, in terms of ambition and adequacy Lithuania has addressed the
country-specific recommendations related to the labour market only partially.
Additional measures to enhance participation in the labour market especially
for young people, unskilled and older workers, and to improve labour market
flexibility are necessary.

Lithuania’s social
security system is posing several challenges. Firstly, its pension system needs
to be reformed to become sustainable in the long run, while safeguarding its
adequacy aspects. Secondly, the financial crisis has exposed a sizeable number
of people to the risk of poverty or social exclusion and resulted in greater
income inequality. These challenges were highlighted in the AGS 2012. In
addition, the first challenge was identified in last year’s CSRs and Lithuania has started to tackle it.

Lithuania’s pension
system is currently underpinned by favourable demographics but these will
change in the future. The old-age dependency ratio is projected to more than
double by 2060. At the same time, the working-age population is expected to
drop by 35.8 %, compared with 13.5 % for the EU-27. These
developments cast serious doubts on the sustainability of the pension system. Adequacy
also remains an issue, as the share of the population 65+ living in poverty or
social exclusion is well above the EU average. A relevant first step was taken
in June 2011, when the Lithuanian Parliament amended the Law on State Social
Insurance Pensions and approved a gradual increase in the pension age to 65
years for both men and women by 2026. However, this alone will not ensure a
sustainable and adequate retirement income in the future, and supplementary
measures are needed. These could include linking the pensionable age and future
benefits to demographic factors, establishing clear rules for indexation, reforming
of pension accumulation system and promoting occupational pension funds. In
addition, elimination of incentives to early retirement and implementation of
active ageing measures would enable people to work longer.

Lithuania could in
addition make better use of supplementary voluntary pension provision, which
remains marginal at 0.1 % of the labour force. In addition, there is the
possibility to establish occupational pension schemes (pension plans created by
an employer for the benefit of an employee), though none have been created so
far. If they were taken up on a broader scale, they would ease the burden of
the social security system and at the same time improve the adequacy of future
pension incomes.

Around one third of the Lithuanian
population is at risk of poverty or exclusion as they live in households with
very low work intensity or are materially deprived. This is the fourth highest
value in the EU. Single parents, families with three or more children, unemployed
persons, single adults and retired persons are particularly vulnerable. The
relatively low level of social assistance benefits together with limited quality
training and active labour market policy measures put vulnerable groups
particularly at risk of long-term exclusion. Lithuania is also the EU country
with the highest income inequality. Its causes have not received a lot of
policy attention until now. Some measures have been taken to ensure more
equity, such as a tax-exempt threshold, introduction of equivalent scales into the
social benefits scheme and compensations. Despite these efforts, income inequality
and poverty or social exclusion were still increasing in 2010, which suggests
that these measures may not be sufficient to tackle the growing poverty or
social exclusion and income inequalities.

In 2011, Lithuania amended the Law on Cash
Social Assistance to reform the social support system as of January 2012. It
has launched a pilot model of social support distribution, changed the method
for calculating the amount, introduced certain work incentives and increased
coverage. The social assistance reform is a step towards reducing disincentives
to work (in-work benefits for the long-term unemployed, gradual decrease of
social benefits for non-working recipients of workable age) and close
monitoring of the reform is required to see if it can overcome low wage traps
and ultimately encourage employment without aggravating the situation of the
most vulnerable. The reform could also benefit from additional emphasis on
labour market inclusion measures, e.g. by providing activation measures for
long-term social beneficiaries.

Lithuania has addressed
the recommendations related to social policies only partially. More determined
efforts are needed to reform the pension system. The effectiveness of the
social protection system is still hampered by inadequate assistance and
coverage and could be better targeted. However, the national reform programme
does not present a clear solution. High income inequalities remain an important
issue.

3.4.
Structural measures promoting growth and
competitiveness

Lithuania’s economy has been undergoing a substantial adjustment in recent
years. To enhance its growth potential, it is important that the country
tackles the challenges that were identified in the European Semester 2011 and
the AGS 2012. The modernisation of the country is a key issue in that respect,
especially regarding its business environment and infrastructure, innovation
frameworks, energy dependency and efficiency.

State-owned
enterprises

The government has been undertaking a far-reaching
reform of state-owned enterprises (SOEs) since 2010. The objective is to
restructure corporate governance, increase transparency and separate ownership
and regulatory functions (and increase competition and efficiency). The reform
is relevant and involves legislative as well as organisational changes. Major
progress was made in all areas in 2011. In particular, transparency and
accountability have significantly improved as reports are now published on a
quarterly and annual basis and clear enterprise objectives have been
established. However, the government has postponed some parts of the reform, in
particular the recommendations on separation of commercial and non-commercial
activities of SOEs, and guidelines on separation of ownership and regulatory
functions. These are to be approved in the first half of 2012 according to the
national reform programme. As a result, the corresponding CSR has only been
partially implemented.

Energy
efficiency

Lithuania has made some progress in implementing the 2011 recommendation on
improving the energy efficiency of buildings. According to the national reform
programme, 85 multi-apartment buildings were modernised in 2011. Moreover, EU
structural funds for 2007-2013 for the renovation of public buildings were
already depleted and assigned to concrete projects. With the aim of increasing
efficiency, the renovation of public buildings is well under way with financing
allocated to 66 additional projects in 2011. In contrast, progress has been
slower with respect to the ERDF-funded JESSICA Holding Fund, under which an
estimated 1 000 buildings
are expected to be upgraded by the end of the programming period. At the
beginning of 2012, there were about 50 projects signed and another 200 in the
pipeline. However, only 4 official multi-apartment renovation projects were
finalised using JESSICA. Therefore, the government approved a revision of the
Multi-Apartment Building Modernisation Programme in December 2011. The new approach
is less ambitious and is expected to deliver lower savings. In general the
target number of buildings to be renovated has been reduced; however,
additional financial support to renovation projects with large potential for
energy efficiency improvements is planned. While the programme has sufficient
relevance, subsidies available in other policy areas might counteract the
impact of JESSICA and the Ignalina NPP closure funds, which can also be used
for renovation of buildings. Low-income households are entitled to receive
subsidies to cover increased energy costs. Furthermore, Lithuania is applying a 9 % reduced VAT rate to residential heating until the end of 2012.
Taken together, these two measures reduce the incentives for inhabitants of
residential buildings to improve their energy efficiency. Considering that in Lithuania there are above 30 000 multi-apartment houses with very low energy efficiency
performance, further substantial and accelerated efforts are needed to improve
energy efficiency of buildings.

Competition

As regards
strengthening competition, investigations undertaken so far by the National
Competition Council have provided no indications that the Lithuanian retail
market is subject to anti-competitive practices or a high degree of
concentration significantly different from other EU Member States. In any
event, the Lithuanian Competition Council is best placed to monitor the situation
and act if required. Since March 2012 it has become an independent body and has
received new powers to control competition across all sectors. In particular,
the ability to set its priorities for conducting infringement investigations
and sector inquiries as well as concentrating its resources on the most
important cases is an improvement that should allow the Competition Council to
act more effectively in the future.

Infrastructure

Lithuania’s gas and electricity market is suffering from market isolation and
a lack of supply alternatives. To address this problem in the gas sector, the
government is considering several investment projects in transmission gas
system and interconnection capacity, such as the diversification
of natural gas supply with a regional LNG terminal in the Baltic States. In the electricity sector, the planned interconnections with Poland and Sweden should ease this problem once implemented. The insufficient interconnections
hinder the emergence of competition in energy markets. Concentration remains
high (above 90 %) in both the gas and electricity markets. Electricity
prices are still regulated until 2015. Lithuania has transposed the Directives
of the Third Energy Package and now needs to implement them after adopting key
legislation in both the electricity and gas sectors.

Lithuania’s renewables targets for 2020 are 23 % of total energy
consumption and 10 % of consumption in the transport sector. By 2009, Lithuania had already achieved its interim 2011/2012 target. However, progress on non-cost
barriers to large-scale development of renewable energy, particularly in the
electricity sector, is relatively slow.

Furthermore, Lithuania’s transport infrastructure continues to restrict growth. In rail, only 7 % of the tracks are electrified and average speed is low. The
country has only limited connections to Poland and Western Europe. The ongoing
Rail Baltica project, connecting major EU rail networks with North-eastern Europe, has recently received priority in the TEN-T policy review. Progress can be expected once the participating countries have
agreed on a common approach within the deadline set by the Commission to
receive EU structural fund support. Lithuania still has to overcome some
administrative, technical and regulatory obstacles to create an efficiently
functioning rail market. In particular, the rail sector
requires attention since the
independence of infrastructure management from rail operations has not been
ensured. Lithuania continues to
benefit greatly from cohesion policy over the period 2007-2013 with a total
allocation of nearly EUR 6.8 bn, with priorities focusing on innovation and
balanced growth. The financial progress is more than satisfactory with nearly
48 % of payments already made by the Commission. The level of contracted
projects is satisfactory — 89 % for the ERDF (European Regional
Development Fund) and CF (Cohesion Fund) programmes — although some sectors,
such as R&D and ICT, need further attention.

R&D
and innovation

The Lithuanian economy’s low level of innovation is a significant
weakness. The country ranks among the poorest performers in the EU.[9] Compared to the current level
of R&D spending, Lithuania has set a very ambitious national R&D
intensity target at 1.9 % of GDP by 2020. R&D expenditure has stagnated
at around 0.8 % of GDP, almost unchanged since 2004, and is one of the
lowest in the EU. This low R&D level is worrying because it has important
repercussions on the wider economy, in which the scientific and technological
performance and export structure are poor. In order to
improve the situation, Lithuania has been conducting deep reforms of its
science base, including development of five clusters (called ‘Science valleys’
and funded by the ERDF) integrating higher-education institutions, research
institutions and businesses in a number of scientific and technological areas.
These clusters are complemented by financial incentives, in particular an R&D
tax credit in place since 2008, intensive use of structural funds and
innovation vouchers. Furthermore, new legislation which
proposes to allow public authorities to use up to 5 % of their procurement
budgets to purchase R&D-related products and services is being debated in
the Lithuanian Parliament. The target date for implementation is 2013.

The reform of the science base is expected
to make the Lithuanian research and innovation system more efficient and productive
in the years to come. However, scientific and technological areas where Lithuania can be internationally competitive would merit much more focus and concentration
of resources. Demand-side measures for innovation are clearly less developed.
Removing obstacles to — and supporting — the growth of innovative companies
would be beneficial to future economic growth as these companies can be a key
engine of structural change. Financing the very early phase of the development
of a new technology-based business is often difficult and would benefit from
public-sector support, to enable the founders to subsequently leverage private
funds. Also, in order to improve the capacity of the country to exploit
research results commercially, there is an urgent need to develop a culture of
entrepreneurship and innovation, skills in higher education and in the public
research sector, as well as the right incentives and training for researchers
in the public sector to engage in knowledge transfer and commercialisation
activities.

Environment

Lithuania has
committed itself to limiting the increase in greenhouse gas emissions to 15%
(compared to 2005) by 2020. According to Lithuania’s latest projections,
emissions are expected to increase by 23% in this period, leading to a
shortfall of the target by 8 percentage points. This underachievement could be
mostly due to the country’s relatively high energy intensity (twice the EU
average). House heating, particularly in multi-apartment buildings, and the
emission-intensive transport sector, particularly that of passenger cars, are
important contributors with potential for cuts. Therefore, additional efforts
need to be made to ensure that Lithuania meets its greenhouse gas emissions
target.

Lithuania also has substantial room for improvement in its waste management
system as more than 90 % of municipal waste is landfilled, and its
recycling rate of 4 % is one of the lowest in the EU. If the country wants
to reach its recycling targets, steps towards encouraging resource efficiency
could be taken in the form of landfill taxes, increasing producer
responsibility, or favouring prevention and participation in separate collection.

3.5.
Modernisation of public administration

The functioning
of public administration, policy design and delivery are weaknesses of public
institutions in Lithuania. To implement the 2011 recommendation on start-up
conditions and delivery of construction permits, reforms have been enacted
(like online registration, no more notary involvement) that allow a public
limited company (PLC) to be registered seven days faster, while reducing the
costs of registration by 65 %. There has been some improvement in delivery
of construction permits. The number of procedural requirements has been reduced
from 17 to 14 with time savings of 50 % (28 to 14 days). Lithuania has fully implemented the 2011 recommendations for start-up conditions and construction
permits.

Lithuania is undertaking a major regulatory reform project, intended to
streamline business inspection institutions. Currently business inspections are
carried out by more than 70 public institutions; the reform aims at
consolidating these into nine clusters by a target date of 2013/2014. This
reduction will be supplemented by draft guidelines, which should provide for
less frequent, less burdensome and more targeted and standardised inspections.
Some progress has been made already and the reform is on track for completion
by the target date.

Moreover, Lithuania is trying to change other aspects of its administration, though these attempts to
reform the civil service are lacking a systemic approach and a clear strategy. The
previous strategy on public administration reform ended in 2010 and was
replaced in February 2012. Although its principles and objectives are relevant,
its ambition and credibility will depend on the action plan, and more in
particular on concrete actions aiming at strengthening result- and client-oriented
dimensions of public administration. This could be achieved through the
introduction of quality management systems and service quality standards in the
public sector. Better implementation of the principles of the European
Administrative Space could be achieved through designing the recruitment and
career paths of civil servants, as well as by encouraging and improving the
mobility of public servants between different public institutions, while
continuing skills development.

Although the online availability of public
services for citizens increased in 2011 to 69%, it is still far below the EU
average. Take-up by citizens is also far below the EU average although slightly
increasing. Availability is higher for services for businesses (at 75%), though
still below average. Finally, take-up by businesses exceeds the EU average by
20 percentage points and is the third highest value in the EU.

To improve the business
environment, Lithuania has set an objective of reducing the administrative
burden on enterprises by 30 % by the end of 2012. The 2010 law on
restructuring of enterprises offers enterprises experiencing temporary
financial difficulties more flexibility and the possibility of restructuring
instead of bankruptcy. In addition, the government has proposed further
measures — a proposal to simplify employment procedures and recent tax
administration reforms. The legislation still needs to be approved and put in
place before the impact can be properly assessed. Overall, modernising of
public administration remains one of the challenges for the Lithuanian
government and is in line with the AGS 2012 priorities.

4.
Overview table

2011 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Adopt additional fiscal measures of a permanent nature by the time of the 2012 budget to correct the excessive deficit in line with the Council recommendations under the EDP. Reinforce tax compliance and take full advantage of the economic recovery to further accelerate deficit reduction and ensure progress towards the medium-term objective by at least 0.5 % of GDP annually. Strengthen the fiscal framework, in particular by introducing enforceable and binding expenditure ceilings in the medium-term budgetary framework. || Lithuania has partially implemented the CSR. The 2012 budget, which received parliamentary approval in December 2011, targets a general government deficit of 3 % of GDP, which is consistent with the aim to correct the excessive deficit by 2012 if fully implemented. Some of the temporary measures adopted during the crisis concerning social benefits have been made permanent. Tax compliance and administration were reinforced in 2011 and this strengthened the tax bases and improved revenues. The medium-term objective of a structural surplus of 0.5 % of GDP is not expected to be achieved until 2014. Measures have yet to be specified and structural reforms accelerated. If adopted, draft laws would improve budgetary process and execution by establishing an independent body. There are also plans to tighten rules on treasury reserves.

CSR 2: Adopt the proposed implementing legislation on Pension System Reform. In order to enhance participation in the labour market, remove fiscal disincentives to work, especially for people at pensionable age. || Lithuania has partially implemented the CSR. Gradual increase in the pensionable age is a step in the right direction but further steps are yet to be taken. The restoration of full pensions to working pensioners has removed fiscal disincentives to work for people of or approaching pensionable age.

CSR 3: Enhance labour market flexibility by amending the labour legislation to make it more flexible and to allow better use of fixed-term contracts. Amend the relevant legislation to ensure that the social assistance system does not contain disincentives to work. || Lithuania has partially implemented the CSR. No significant changes to the labour legislation were made in 2011. The amendment to allow fixed-term employment contracts in ‘newly created’ jobs expires on 31 July 2012. The social assistance reform is a step towards reducing disincentives to work.

CSR 4: Implement all aspects of the State-owned enterprise reform package by the end of 2011, ensuring a separation of ownership and regulatory functions, clear enterprise objectives, enhanced transparency and a separation of commercial and non-commercial activities. || Lithuania has partially implemented the CSR. Draft ownership guidelines were prepared at the beginning of 2012. No full separation of ownership and regulatory functions is envisaged. Lithuania has significantly advanced as regards the transparency objective. Separation of commercial and non-commercial activities is postponed until 2012.

CSR 5: Improve the energy efficiency of buildings, including through a rapid implementation of the Holding Fund, and take steps to shift taxation towards energy use. || Lithuania has only partially implemented the CSR. The Programme for the Modernisation of Multi-apartment Houses, and in particular the implementation of the JESSICA mechanism, has been stalling for the last few years. Minor measures were implemented regarding shifting taxation towards energy use.

CSR 6: Take steps to improve start-up conditions and the delivery of construction permits, and to strengthen competition in the energy and retail sectors. || Lithuania has fully implemented the business-conditions part of the CSR, while it has only partially implemented the competition part, especially in relation to the energy sector. Improvement has been made in formal requirements for start-up conditions. The number of procedural requirements for delivery of construction permits has been reduced and timing has been reduced nearly by half. The National Competition Council was given new powers to control competition in different sectors in March 2012.

Euro Plus Pact (national commitments and progress)

Commitments to further improve public finance sustainability include laws on facilitating accumulation of funds in the State Treasury reserve for times of economic difficulties, promoting a responsible anti-inflationary budgetary policy, ensuring sustainability and adequacy of pensions and social benefits, and optimising the State Social Insurance Fund (SSIF) as well as the healthcare network. || Lithuania has only partially implemented the commitments. Draft laws on facilitating accumulation of funds in the State Treasury reserve have been prepared but not yet adopted. Ensuring sustainability of pensions is part of the social security system reform, which Lithuania has started to implement. Restructuring of the SSIF administration was adopted by the government in July 2011 and will be implemented from 2012.

Commitments to foster employment focus on increasing labour participation and promoting employment of young people. These include providing conditions for flexible employment agreements, promoting self-employment, providing incentives to employ young people, installing a system for long-term qualification demand forecasting and reforming the planning of vocational training for unemployed persons. || Lithuania has partially implemented the commitments. Gradually increasing the pensionable age will help boost the participation of older workers, if supported by active ageing measures, but will have no effect on other population groups where low participation remains an issue. No significant changes to the labour legislation have been made so far. The Law on Vocational Training was amended and the Ministry of Economy is going to organise forecasting of qualification demand. Employing young unemployed is temporarily subsidised. Expenses related to the acquisition of a business certificate are reimbursed to registered unemployed persons. A new system of training based on ‘training vouchers’ will allow job-seekers to choose their trainers, including potential employers.

Commitments to foster competitiveness presented by the government focus on education (improving quality and ensuring greater consolidation of the higher-education network), innovation (fostering protection of industrial property rights and promotion of clustering through the Innovation Voucher scheme) and improving administrative efficiency (by reducing overall administrative burden and unifying remuneration terms for employees performing work of the same complexity and requiring the same qualifications in different entities funded by the State). || Lithuania has partially implemented the commitments. Progress has been made in consolidating the higher-education network and the merger of some universities. A new Law on Education and Science transferred the ownership of intellectual property rights from the State to the higher-education institutions. Five thematic ‘valleys’ are being developed. The government is also keeping up its efforts to raise the quality of higher education and address the mismatches between the supply of tertiary education graduates and labour market needs. The implementation of the Innovation Voucher scheme is on track. Reducing the administrative burden has been slower than planned and no progress has been made so far on unifying remuneration in the public sector, but the relevant legislation is planned to be drafted in 2012.

Commitments to contribute to financial stability include laws on financial stability, the Provisions for Banks’ Organisation of Internal Control and Risk Assessment, and the Plan for the Prevention and Management of Financial Crises. It was also decided to devote special attention to actions promoting the cooperation between Lithuanian institutions and their counterparts in the Nordic and other Baltic States in the area of crisis prevention and management. || Lithuania has partially implemented the commitment. The Law on Financial Stability provides for consolidation of measures strengthening financial stability and enhances the readiness to manage crisis situations, while contributing to higher stability in the financial sector. In addition, amendments to other legal acts made factoring, reforming, and sales process of problematic banks more efficient.

Europe 2020 (national targets and progress)

Employment rate target (population aged 20-64): 72.8 % || The employment rate of the population aged 20-64 was 67.2 % in 2009, 64.4 % in 2010 and 67.2 % in 2011. The objective of 72.8 % by 2020 is very ambitious compared to the current situation. The key tool for improving employability — the active labour market policy  — helped in making progress towards the objective (68.0 % in Q4 2011) but the high number of unemployed is still a challenge. Little progress has been made towards achievement of the target.

R&D target: 1.9 % || The R&D target of Lithuania is very ambitious compared to the current level of R&D spending. Gross domestic expenditure on R&D was 0.84 % of GDP in 2009 and 0.79 % in 2010. The capacity of the country to increase R&D intensity has not been demonstrated for the last seven years. No progress has been made towards achievement of the target.

Greenhouse gas emissions target: +15 % (compared to 2005 emissions, ETS (Emissions Trading System) emissions are not covered by this national target) || The non-ETS greenhouse gas emissions were reduced by 11% between 2005 and 2010, which corresponds to the current ETS scope.

Renewable energy target: 23 % || The share of renewable energy in gross final energy consumption increased to 17 % in 2009 and to 19.7 %% in 2010. Lithuania has already achieved its 2011/2012 interim renewable energy target.

Energy efficiency — reduction in primary energy consumption by 2020: 1.14 Mtoe || The energy efficiency objectives are set according to national circumstances and national formulations. As the methodology for expressing the 2020 energy consumption impact of these objectives in the same format was agreed only recently, the Commission is not yet able to present this overview.

Early school leaving target: <9 % || Early leavers from education and training (percentage of the population aged 18-24 with at most a lower secondary education and not in further education or training) stood at 8.1 % in 2010. Lithuania’s early school leaving rate is below the EU average. The national target set for 2020 is to keep this rate below 9 %. The target has been achieved.

Tertiary education target: 40 % || Tertiary educational attainment stood at 40.6 % in 2009, and 43.8 % in 2010. The target has been achieved.

Target on the reduction of population at risk of poverty or social exclusion: 814 000 || Due to the increase in the number of people who are severely materially deprived or live in households with very low work intensity, the national target has become difficult to reach. The number of people at risk of poverty or social exclusion increased from 985 000 in 2009 to 1 109 000 in 2010. The deterioration of the situation means that no progress has been made towards achievement of the target.

5.
Annex

Table I. Macro economic indicators

Table II. Comparison of macroeconomic developments and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

Figure. Medium-term debt projection Table V. Long-term sustainability indicators ||

||

||

Table VI. Taxation

Table VII. Financial market indicators

Table VIII. Labour market and social indicators

Table VIII. Labour market and social indicators (continued)

Table IX. Product market performance and policy indicators

Table X. Indicators on green growth

[1]       SEC(2011)
823 final of 7 June
2011

[2]       2011/C 210/01 of 12 July 2011

[3]       COM(2011) 815 final of 23 November 2011

[4] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission on the basis of the information provided in the
programme, using the commonly agreed methodology.

[5] The ‘compliance gap’ is the difference between accrued VAT receipts
and the theoretical net VAT liability for the economy given the VAT rate structure.

[6] The source of the financial soundness indicators in this paragraph
is the IMF.

[7] Currently, there
are two holding funds in operation funded by the ERDF with a total allocation
of EUR 228 million, one fund administered by the EIF (EUR 170 million from
ERDF) and one administered by INVEGA (EUR 58 million from ERDF). Implementation
on the ground started to take off in 2011 and further progress is expected in
2012.

[8] The employer-paid
social insurance contributions have been reduced from 31 % to 7.7 %
for persons starting their first job until July 2012.

[9] Ranking based on
business expenditure on research and development in manufacturing: 21/25;
services: 23/25, patent intensity in manufacturing: 26/27; share of high-tech
(also high and medium tech) in manufacturing: 23/25. It is the worst performer
in the EU regarding the share of knowledge-intensive services.

[Top](#document1)