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# 52013SC0365

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for LITHUANIA Accompanying the document Recommendation for a Council Recommendation on Lithuania’s 2013 national reform programme and delivering a Council Opinion on Lithuania’s convergence programme for 2012-16 /\* SWD/2013/0365 final \*/**

  

TABLE OF Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments
and challenges. 7

2.1........ Recent economic
developments and outlook. 7

2.2........ Challenges. 7

3........... Assessment of policy
agenda. 9

3.1........ Fiscal policy and
taxation. 9

3.2........ Financial sector 14

3.3........ Labour market, education
and social policies. 15

3.4........ Structural measures
promoting growth and competitiveness. 19

3.5........ Modernisation of public
administration. 22

4........... Overview table. 24

5........... Annex. 27

Executive
summary

Economic outlook

After continued strong
growth of 3.7% in 2012, Lithuania’s economy is expected to remain resilient and
grow by 3.1% in 2013 and by 3.6% in 2014, according to the Commission's spring
2013 forecast. Unemployment, though still high, is
forecast to continue its gradual decline, from 13.2% in 2012 to 11.8% in 2013
and 10.5% in 2014. Inflation decreased to 3.2% in 2012, reflecting weaker
growth in food and energy prices, and is expected to decrease to 2.1% in 2013
before picking up to 2.7% in 2014.

Overall, Lithuania is on track to meet its fiscal targets, as the headline
government deficit dropped to 3.2% in 2012. Although
this is still above the 3% of GDP threshold (as specified in the excessive
deficit procedure), the cost of a systemic pension reform (estimated at 0.2% of
GDP in 2012) can be taken into account when assessing compliance, since
Lithuania’s debt-to-GDP ratio is consistently below the 60% of GDP reference
value. Moreover, the headline deficit is expected to improve to
2.9% in 2013 and 2.4% in 2014. The Commission estimates a decline in the
structural deficit (the headline deficit, minus one-off and short-term
measures) from 3.2% of GDP in 2012 to 2.8% in 2013 and 2014. Lithuania's medium-term objective is a structural deficit of 1% by 2016. According to the
Commission, government debt is set to stabilise at around 40% of GDP in 2013
and 2014 (falling from 40.7% in 2012).

Key issues

Over the past twelve
months, Lithuania has made limited progress in implementing the 2012 CSRs. There has been progress on correcting the excessive deficit and Lithuania has also advanced the reform of state-owned enterprises, implemented changes to
the second pillar pension funds and strengthened the measures to fight youth
unemployment. However, increased efforts on these measures would be welcome.

Lithuania still faces
important challenges with regard to fiscal sustainability, unemployment and
social exclusion, the interconnectedness of its energy sector and energy
efficiency. Strengthening policies to get the
unemployed back to work, increasing the quality and efficiency of education and
accelerating investments in energy and transport links with the rest of Europe would help boost medium- and long-term growth prospects.

·
Public finances: Although its deficit has improved over the years, Lithuania still lacks sufficient fiscal space to absorb adverse shocks to growth. Lithuania has a low overall tax burden (the lowest in the EU, at 26% of GDP in 2011) and
there is scope to raise the share of less-distortive taxation by increasing
property and environmental taxes. Revenues from environmental taxes amounted to
1.7% of GDP in 2011 (the second-lowest in the EU, where the average is 2.4%),
which does little to encourage energy efficiency. Moreover, tax compliance
could be further improved and the size of the shadow economy remains a concern
and a major pension reform is needed to address the needs of an ageing
population.

·
Labour market:
Youth and long-term unemployment rates remain high, at 26.4% and 6.7%
respectively, pointing to underlying structural problems which weigh on growth.
Skills mismatches are increasingly a problem and could lead to labour
shortages, hinting at insufficient relevance and quality of higher and
vocational education as well as inadequate active labour market policies
(ALMPs). This is further aggravated by high emigration (reducing population by
more than 1% annually on average since 2005). Poverty and social exclusion are
above the EU average (and increased from 29.5% of the population in 2009 to
33.4% in 2011). Adult participation in lifelong learning and early childhood
education are amongst the lowest in the EU (5.4% compared to a 9.1% EU average
in 2012) and action to reduce long-term unemployed remains insufficient.

·
Energy:
Electricity and gas links to neighbouring countries remain underdeveloped or
non-existent. This hinders the development of competition in the energy sector
and puts upward pressure on energy prices. Furthermore, energy efficiency is
still an issue and the energy intensity of the Lithuanian economy is more than
twice the EU average.

·
Research and innovation: Lithuania remains considerably below the EU average when it comes
to research and innovation (R&D intensity reached 0.92% of GDP in 2011, up
from about 0.8% in previous years, though the Europe 2020 target is 1.9%). The
Lithuanian science base performs poorly and collaboration between public
research bodies and businesses is underdeveloped.

1.
Introduction

In May 2012, the
Commission proposed a set of country-specific recommendations (CSRs) on economic
and structural reform policies for Lithuania. On the basis of these
recommendations, the Council of the European Union adopted six CSRs in the form
of a Council Recommendation in July 2012. These CSRs concerned public finances,
the pension system, the labour market, poverty and social exclusion, state-owned
enterprises, and energy. This Staff Working Document (SWD) assesses the state
of implementation of these recommendations in Lithuania.

The SWD assesses policy
measures in light of the findings of the Commission’s Annual Growth Survey 2013
(AGS)[1]
and the second annual Alert Mechanism Report (AMR),[2] which were
published in November 2012. The AGS sets out the Commission’s proposals for
building the necessary common understanding about the priorities for action at
national and EU level in 2013. It identifies five priorities to guide Member
States to renewed growth: pursuing differentiated, growth-friendly fiscal
consolidation; restoring normal lending to the economy; promoting growth and
competitiveness for today and tomorrow; tackling unemployment and the social
consequences of the crisis; and modernising public administration. The AMR
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that a complete and durable rebalancing is achieved, 14 Member States were
selected for a review of developments in the accumulation and unwinding of
imbalances.[3]

Against the background of
the 2012 Council Recommendation, the AGS and the AMR, Lithuania presented updates of her national reform programme (NRP) on 9 April 2013 and of
her convergence programme on 26 April 2013. These programmes provide detailed
information on progress made since July 2012 and on the future plans of the
government. The information contained in these programmes provides the basis
for the assessment made in this SWD.

The programmes submitted
went through a consultation process involving representatives of various ministries,
the Bank of Lithuania and the national statistical office as well as the
European affairs committee of the national parliament. Social and economic
stakeholders and the general public were invited to submit proposals for
consideration by the government. The government adopted the NRP on 3 April 2013.

Overall
assessment

The analysis in this SWD
leads to the conclusion that Lithuania has made limited progress on measures
taken to address the CSRs of the Council Recommendation.

The general government
deficit has continued to fall as a consequence of continued fiscal
consolidation and overall favourable growth performance, and stood at 3.2% in
2012. Efforts were mainly concentrated on the expenditure side. Significant
progress has been achieved in the reform of state-owned enterprises; however,
regulatory and ownership functions still need to be separated. Only limited
progress has been made in implementing the 2012 recommendations on pension
reforms, labour markets and social exclusion.

Challenges identified in
2012 and reflected in the AGS remain valid. Consolidation needs to continue to
increase fiscal space and the long-term fiscal sustainability of pensions has
to be secured while safeguarding their adequacy. Although declining, unemployment,
for youth and the low-skilled in particular, remains high and continues to
weigh on the economy. Tackling skill mismatches by strengthening the emphasis
on active labour market policies and increasing the quality and efficiency of
education as well as accelerated investment in European energy and transport
interconnections would help boost medium- and long-term growth prospects.
Social exclusion remains a primary concern.

The NRP submitted by Lithuania comprehensively addresses the challenges identified in last year’s SWD and lists
actions subsequently undertaken. It demonstrates Lithuania’s commitment to
address the CSRs and confirms the willingness to tackle shortcomings though at
times lacking focus and prioritisation. The CP lays out a path to improve Lithuania’s budgetary position towards the MTO and to ensure the long-run sustainability of
public finances in line with the Stability and Growth Pact.

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

Recent
economic developments

In 2012 and early 2013,
growth and employment in Lithuania showed continued strong performance and
remained resilient despite a slowdown in the euro area and ongoing fiscal
consolidation. Supported by strong export growth
and initially robust private consumption, real GDP grew by 3.7%. However, despite
falling unemployment, domestic demand tailed off as
growth in household consumption dropped. In addition, public investment
contracted partly in response to consolidation measures. Net exports remained
strong, partially driven by an exceptional harvest and redirection of trade
towards CIS countries. Inflation (harmonised index of consumer prices or HICP)
decreased to 3.2% in 2012, reflecting weaker growth in food and energy prices.
Employment continued to grow across all sectors in 2012 and the unemployment
rate, though still high, decreased to 13.2% (from 15.3% in 2011). Young people
and the low-skilled in particular continue to face considerable challenges on
the labour market.

Economic
outlook

According to the
Commission 2013 spring forecast, growth is set to remain strong, but its
composition is expected to change. Lithuania’s real GDP is projected to grow by 3.1% in 2013 and by 3.6% in 2014. In
particular, private investment is expected to pick up, as credit is in
principle available, interest rates are at a historical low, and companies have
significant reserves to finance potential investment. Additionally, capacity
utilisation is above its long-term average, and a majority of businesses plan
to increase their investment in 2013. Inflation is forecast to decrease to 2.1%
in 2013 before picking up to 2.7% in 2014. Job creation is expected to continue,
albeit at a slower pace, in line with economic growth and a possible lack of
skilled labour. The unemployment rate is projected to decrease to 11.8% in 2013
and 10.5% in 2014.

The NRP and the
convergence programme share one common macroeconomic scenario. According to this scenario, GDP growth could average 3.7% in the
period 2013-16, in the absence of adverse developments in financial markets and
the external environment. This is expected to further lower the unemployment
rate to around 9% in 2016. 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 the projected level.

The structural reforms
listed in the NRP are not quantified and do not figure in the macroeconomic
scenario of the convergence programme.

2.2.
Challenges

Lithuania faces important challenges as regards growth-friendly fiscal
consolidation and fiscal sustainability, unemployment and social exclusion as
well as interconnectedness of its energy sector and energy efficiency. These policy challenges were already identified in the 2012 SWD and
reflected in last year’s CSRs issued for Lithuania. Their relevance has also
been reiterated in the AGS and AMR. Overall, progress with reforms is needed to
enhance the country’s growth potential.

Lithuania needs to continue with prudent fiscal policies and growth-friendly
consolidation to reach the MTO and increase the sustainability of public
finances. Although its deficit position has
improved over the years, Lithuania still lacks sufficient fiscal space to react
to adverse shocks. The country has scope to raise the share of less-distortive
taxation by increasing property and environmental taxes. In particular, the
level of environmental taxation is below the EU average and does little to encourage
reductions in the high energy intensity of the Lithuanian economy. Moreover, tax
compliance could be further improved and the size of the shadow economy remains
a concern. The implementation of laws strengthening the fiscal framework has
been delayed while demographic factors could jeopardise the sustainability of
public finances in the medium and long term. A comprehensive pension reform
thus remains an important issue to be addressed.

Tackling unemployment
and low labour force participation is a major challenge, with young and
low-skilled workers in particular suffering from high unemployment rates. Even though nominal unemployment rates continue to fall,
structural challenges remain, also with regard to long-term unemployment. Unemployment
is a major priority identified in the AGS and Lithuania breached the
unemployment threshold in the scoreboard of the Macroeconomic Imbalances
Procedure, as shown in the AMR. Skills mismatches represent a significant problem,
hinting at insufficient relevance and quality of higher and vocational
education as well as inadequate active labour market policies (ALMPs). Ensuing
shortages of skilled labour are exacerbated by high emigration rates. Rigidities
in the labour law may be negatively affecting labour market dynamism while
collective bargaining and social dialogue remain underdeveloped. Adult
participation in lifelong learning and early childhood education are amongst
the lowest in the EU and the activation of long-term unemployed benefit
recipients remains insufficient. Poverty and social exclusion remain worryingly
high and risk becoming persistent, thus underlining the importance of
protecting the most disadvantaged,
with a particular emphasis on addressing old-age poverty and the adequacy of
pensions.

Energy infrastructure
needs, in particular the interconnectedness with the European network, should
be urgently addressed. Electricity and gas links to
neighbouring countries remain to a large extent underdeveloped or non-existent.
This hinders the development of competition in the energy sector and puts
upward pressure on energy prices. Furthermore, energy efficiency continues to be
an issue. Progress has been sluggish and major challenges in the renovation of
private housing remain.

Despite
recent progress, the research and innovation performance of Lithuania remains considerably below the EU average. The Lithuanian
science base is insufficiently competitive and collaboration between public
research bodies and businesses and the commercialisation of research results
are underdeveloped. Despite the fact that the business environment is quite
good, further improvements, alongside modernisation of public administration
and finalisation of the reform of SOEs, could help to boost competitiveness and
growth potential.

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

Budgetary developments and debt dynamics

In its 2013 convergence programme, Lithuania confirms the commitment to further improve its fiscal position and make progress
towards the MTO. Although the new programme changes the MTO from a structural general
government surplus of 0.5% of GDP to a structural general government deficit of
1% of GDP, the new MTO continues to reflect the objectives of the
Stability and Growth Pact. The authorities explain this adjustment in terms of the
need to gain fiscal space in the short term for expenditure aimed at improving Lithuania’s medium-term growth potential. The programme is geared to
reaching the MTO in 2016 with planned annual progress towards the
MTO higher than 0.5% of GDP in structural terms on the basis of
the (recalculated) structural balance. However, according to the Commission’s
2013 spring forecast the annual progress towards the MTO in 2013 amounts to
only 0.3% and no progress is expected in 2014.[4] The planned
nominal consolidation path in the 2013 convergence programme is marginally
slower than presented in the previous programme.

Lithuania made some progress in implementing the
fiscal CSR, in particular on deficit reduction. According to Eurostat data, Lithuania’s general government deficit narrowed to 3.2% of GDP in 2012 from 5.5% of GDP a
year before. Progress was in large part due to expenditure restraint and
improvements in tax compliance, supported by solid economic growth. However,
the outcome fell short of reaching the target of 3.0% of GDP set in the 2012
convergence programme, mainly because state-owned enterprises only paid half of
the expected dividends to the budget and sales of carbon rights fell
considerably short of plan. In addition, local governments added 0.2% of GDP to
the deficit. The structural deficit as calculated by the Commission decreased
from 4.9% of GDP in 2011 to 3.2% in 2012.

The 2013 budget continues to restrict expenditure growth and targets a
fiscal deficit of 2.5% of GDP. Although the government has extended a public sector wage freeze, a
sizeable rise in minimum wages is set to increase the public sector wage bill.
This is projected to be offset by higher social contributions and personal
income tax collection triggered by the minimum wage increase. On the revenue
side, higher excise duties on gas oil and cigarettes are expected to compensate for reduced VAT rates on transport and
media, but are not sufficient to cover an extension of reduced VAT rates for
residential heating and medicines. The state social insurance is set to reduce
its deficit on the back of an improving labour market. The Commission’s 2013
spring forecast predicts a more moderate improvement in the fiscal position to
2.9% of GDP due to lower estimates of indirect tax revenues and higher public
investment in 2013.

The fiscal improvement
is expected to continue in 2014 albeit at a slower pace in structural terms. In the absence of further policy measures, the Commission expects
the general government deficit to narrow to 2.4% in 2014 compared with a
programme target of 1.5% of GDP. The revenue-to-GDP ratio under the 2013 CP is
projected to stay at 32.2% in 2013 and 2014 and the expenditure-to-GDP ratio is
expected to fall from 34.7% to 33.7% of GDP. These developments are broadly in
line with the Commission’s forecast, which expects marginally higher revenue-
and expenditure-to-GDP ratios. The Commission estimates a decline in the
structural deficit from 3.2% of GDP in 2012 to 2.8% in 2013 and 2014, whereas
the (recalculated) structural deficit of the programme is set to shrink in 2013
and 2014 from 2.7% to 1.9%. The difference is mainly due to the assumption that
no further policy measures are undertaken.

Overall, the steps
discussed above have put Lithuania on track to fulfil the Council
recommendations on fiscal consolidation, even though Lithuania’s average fiscal effort does not meet the Council’s
recommendation. The headline deficit is close to the reference value of
3.0% of GDP in 2012. Since Lithuania’s debt-to-GDP ratio is consistently below
the 60% of GDP reference value, Council Regulation (EU) No 1177/2011 allows the
cost of a systemic pension reform to be taken into account for assessing
whether effective action has been taken. This cost is estimated at 0.2% of GDP
in 2012, which is sufficient to cover the gap between the deficit and the
reference value. According to the 2013 spring forecast, the structural balance reached
3.2% of GDP in 2012. The corrected average annual fiscal effort over the
reference period amounts therefore to 1.3% of GDP and falls considerably short
of the 2¼% as specified in the Council’s recommendation.

Box 1. Excessive deficit procedure for Lithuania

On 7 July 2009, the
Council decided that an excessive deficit existed in Lithuania. The most recent
Council Recommendation under Art. 126(7) TFEU was adopted on 9 February 2010.
The Council recommended that the Lithaunian authorities should put an end to
the present excessive deficit situation by 2012 in a credible and sustainable
manner. Specifically, to this end, the Lithuanian authorities should: (a)
implement rigorously the corrective measures planned in the budget for 2010 and
adopt additional measures, if necessary, to achieve the envisaged
consolidation; (b) ensure an  average annual fiscal effort of at least 2¼ % of
GDP over the period 2010-2012, notably by containing primary current
expenditure; (c) specify and adopt the additional measures necessary to achieve
the correction of the excessive deficit by 2012, cyclical conditions
permitting, and accelerate the reduction of the deficit if economic or
budgetary conditions turn out better than currently expected. In addition, to
limit risks to the adjustment, Lithuania should enhance the medium-term
budgetary framework, as well as improve the monitoring of the budget execution
throughout the year. Furthermore, the Council invited the Lithuanian authorities
to implement reforms with a view to raising potential GDP growth and reduce the
risks to long-term sustainability of public finances including reforms in the
areas of public administration, healthcare and the social security system.

An overview of the current
state of excessive deficit procedures, including additional steps adopted after
the finalisation of this Staff Working Document, is available on:

http://ec.europa.eu/economy\_finance/economic\_governance/sgp/deficit/index\_en.htm
(please refer to country sections at the bottom of the page).

Box 2. Main measures

|| Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2012 ||

|| Abolition of reduced VAT rate for hotels (+0.02% of GDP) Increase in excise duties (+0.02%) || Cuts in government spending (‑0.5% of GDP) Increase in retirement age (-0.1% ) Cuts in road investments (-0.03%) ctd. public sector wage freeze (‑0.5%) Reversal of previous temporary cuts in social insurance pensions (+0.5%) ctd. cuts in state pensions (‑0.1%) Reduction in social benefits, mainly health care and maternity benefits (‑0.5%) Reduction in transfers to the second pillar pension funds (-0.1% ) ||

|| 2013 ||

|| Changes to land tax (+0.1% or higher) Increase in excise duties on fuel and tobacco products. Extension of VAT exemptions and introduction of new ones (-0.4%). || ctd. public sector wage freeze (‑0.5%). Increase in retirement age (-0.1%) Increase in minimum wages for public sector employees (+0.15%). Lithuanian EU presidency (+0.1%). Increase in transfers to the second pillar pension funds (+0.2%) ||

|| 2014 ||

|| · Increase in excise duties on cigarettes || Reversal of the public sector wage freeze (+0.5%) ||

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

Lithuania’s 2013 convergence programme describes an
adequate path towards the MTO, but fails to specify detailed measures. The 2012 recommendation
on fiscal consolidation required that Lithuania’s budgetary strategy for the
year 2013 and beyond should ensure an adequate structural adjustment effort to
make sufficient progress towards the MTO, including meeting the expenditure
benchmark. The planned annual progress towards the MTO in the period 2013-16,
i.e. following the correction of the excessive deficit, is higher than the
benchmark of the Stability and Growth Pact of 0.5% of GDP in structural terms.
The (recalculated) average annual fiscal effort between 2013 and 2016 set by
the programme is around 0.8%, thus allowing the MTO to be reached by 2016. The
measures to sustain such fiscal effort, however, have not been specified in the
programme.

According to the programme, the growth rate of
government expenditure will respect the expenditure benchmark and thus contribute to an
annual structural adjustment towards the MTO of at least 0.5% of GDP. The
expenditure growth rate is set to be below 0.76% in 2013 and below 0.4% in 2014
and 2015 and thus below the lower rate under the expenditure benchmark. However,
according to the Commission’s 2013 spring forecast, the expenditure growth
exceeds the benchmark by 0.2 percentage points in 2013 and 2014, which
indicates a risk of delaying progress towards the MTO.

The envisaged improvement in the fiscal position over
the programme period is largely driven by restraint in expenditure growth and
robust economic growth. While the Law on Fiscal Discipline limits expenditure
growth, the programme does not define specific revenue measures, which might be
required to offset the end of the temporary expenditure freezes as of 2014 and
to reach the programme’s fiscal targets until 2016.

Fiscal adjustment should be structured to support both
growth and social fairness as stated in the AGS. Thus, expenditure restraint should
be implemented in such a way as not to undermine medium-term growth prospects
by prioritising growth-friendly expenditure. The fiscal adjustment in Lithuania
could be supported by more revenue-based consolidation (see section below on
taxation), as the already very low share of general government revenues as a percentage
of GDP is envisaged to decline even further throughout the programme, in part
due to decreasing revenues from EU funds, which are not compensated by new
revenue measures. The ongoing review of the tax system is welcome, since it is
an opportunity to complement the mostly expenditure-based consolidation with
appropriate revenue measures as well as strengthening budget planning and
improving control of its execution.

The projected
consolidation path is subject to a number of risks, especially if Lithuania’s economic growth evolves less dynamically than expected. The growth prospects of this small open economy depend considerably
on the development of its main trading partners. The authorities’ commitment to
comprehensive changes in the revenue and expenditure structures is a step in
the right direction, but remains to be specified.

The general government
debt increased more than twofold during the crisis, but has stabilised at a
level well below 60% of GDP, thus the debt reduction benchmark is not
applicable. According to the Commission’s forecast,
general government debt is set to stabilise at around 40% of GDP in 2013 and
2014 (after 40.7% in 2012), while the 2013 convergence programme expects it to
ease to 39.7% in 2013 and to decline further to 34.5% by 2016. Differences from
the Commission’s projection are above all the result of lower assumed deficits
in the convergence programme. Medium-term debt projections (see Graph below
Table V in annex) indicate that full implementation of the programme would lead
to a smaller debt-to-GDP ratio by 2020.

Long-term sustainability

Lithuania does
not appear to face a risk of fiscal stress in the short term. The country’s sustainability risk is
medium from both the medium- and long-term perspectives. Further containing
age-related expenditure growth would contribute to the sustainability of public
finances in the long term.

Despite a projected substantial increase in Lithuania’s long-term
age-related expenditure, a comprehensive pension system reform is yet to be
adopted. The proportional
increase in pension spending over 50 years is estimated to be about three times
the EU average (in percentage points of GDP). However, recently proposed
changes in contributions to different pension pillars do not sufficiently
address the problem of long-term fiscal sustainability of the pension system. Assuming
no change in policy, debt would increase moderately to 47.6% of GDP by 2020.
Therefore, fiscal consolidation needs to continue beyond the forecast horizon
to put debt on a downward path.

Fiscal framework

Lithuania’s medium-term budgetary framework specifies revenues and
expenditure of the national budget for three years; however, it lacks binding
targets and a clear connection between the medium-term targets and the annual
budgets. The 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, which,
however, allows deficits that cannot exceed the borrowed amounts spent for
capital expenditure.

Lithuania’s work on
reform of budget planning and execution is ongoing, not least due to ratification
of the intergovernmental Treaty on Stability, Coordination and Governance. The constitutional law on sustainability of general government
sector finances in accordance with the Treaty’s requirements is being drafted
with the aim of elevating the structural budget-balance rule to constitutional
level. The new legislation would also reinforce the binding character of the
medium-term framework. The draft, however, has not yet been approved by the government,
which intends to submit it to parliament during the 2013 spring session. While
these plans are relevant, their implementation remains uncertain at this stage.

Tax system

The Lithuanian tax system is characterised by a low overall tax burden
(the lowest in the EU, at 26% of GDP in 2011), especially on capital and to a
lesser extent on labour, and a significant degree of tax evasion. Available indicators show that the shadow
economy is large, with a high degree of undeclared work. In spite of a low overall
tax burden, post-crisis fiscal consolidation was mainly based on expenditure
restraint. Lithuania has space for more revenue-based consolidation by further broadening
the tax bases and promoting tax compliance. A low tax burden for some of the
least distortionary taxes, in particular environmental and recurrent immovable
property taxes, may indicate some scope for tax increases in these areas.

Revenue from recurrent
property taxes is significantly lower than in most EU countries.[5] In line with the CSRs, Lithuania has taken steps to increase recurrent
property tax revenue. As of 1 January 2012 the tax base has been broadened: individuals
owning residential real estate with a total value exceeding LTL 1 million
(EUR 290 000) are taxed at a 1% rate on the excess. From 2013, Lithuania has introduced new immovable property tax rates varying from 0.3% to 3% of the
taxable value of the property (previously from 0.3% to 1%). It remains to be
seen how this will influence tax revenues as the exact tax rate has to be set
at municipal level. Additionally, amendments to the law on land tax entered
into force in 2013 changing among other things the assessment of property
values from a cadastral to a market-price based system.

Environmental taxes present an additional option for increasing tax
revenues in a less distortionary way and promoting reduction of greenhouse gas
emissions in the transport sector. Lithuania’s revenues from environmental taxes are on a downward trend
and were the second lowest in the EU, at 1.7% of GDP versus 2.4% for the EU‑27
in 2011, also due to the lowest level of transport taxes in the EU‑27. Additionally,
excise duties on fuel including petrol are significantly below the EU average. In
this context, introduction of annual circulation taxes for cars could be an
appropriate way to raise revenues.

Tax enforcement efforts
need to continue as tax evasion remains a challenge. Lithuania’s State tax inspectorate continued to implement a ‘taxpayer
compliance and tax collection assurance strategy’ for 2011-12 whose objectives
include encouraging taxpayers to pay taxes in good faith, developing services
for taxpayers, reducing the scope of the shadow economy and increasing the
efficiency of tax administration. In addition, cash registers were introduced in
food markets and border controls were stepped up. The tax inspectorate also renewed
its tax compliance action plan for 2013-14, focusing efforts on curtailing the most
common tax evasion practices. The plan identifies nine major risks to tax compliance and
develops 209 measures to address these risks.

The government has set up
working groups to assess the scope and content of a possible tax reform and
come up with proposals to reduce the shadow economy. Findings of these interdisciplinary and multi-stakeholder groups are
expected by June 2013. While these arrangements are important, their relevance
and ambition can be assessed only on the basis of proposals and ultimately
implementation.

3.2.
Financial sector

In recent years, the
Lithuanian banking sector has strengthened its resilience. The closure of two domestic banks and several credit unions
demonstrates the commitment of the Bank of Lithuania to adhere to strict
supervision standards. Scandinavian banks continue to dominate the financial
sector in Lithuania and account for about 90% of the market.

Following the economic
crisis in 2008‑09, all banks deleveraged significantly and the loan-to‑deposit
ratio dropped to 126% in 2012,[6]
while the profitability
of the banking sector has recovered. However, non-performing
loans amounted to 13.9% of all loans at the end of 2012, slightly above the EU
average. Banks in Lithuania comfortably meet all prudential requirements. At
the end of 2012 the capital adequacy ratio amounted to 14.4% (up 0.5 percentage
points from 2011), while the liquidity ratio (bank’s liquid assets to current
liabilities) was 40.8%.

In early 2013 the
largest remaining domestic bank, Ukio bankas,[7]
was declared insolvent and the supervisor revoked its operating licence. Its problems were a result of risky lending during the boom years, in
particular related lending, i.e. loans to businesses owned by the bank’s main
shareholder. The supervisor decided to transfer the insured deposits of Ukio
bankas as well as its good assets to another domestic bank. The remaining uninsured
liabilities and ‘bad’ assets were left at Ukio bankas, which will face bankruptcy
proceedings. The solution allowed the exposure of the state deposit insurance to
be minimised and gave customers swift access to their accounts.

In addition, in late
2012 and early 2013 irregularities emerged in certain credit unions that led to
the suspension of their licences or restriction of financial activities. Credit unions’ market share has doubled over the past few years
(albeit to a still small 2.6%), partially due to aggressive pricing and
interest rate offers. As a consequence of the latest developments, the
supervisor tightened prudential requirements for all credit unions to avoid
further incidents. Overall, these developments demonstrated the importance of
continued attention and, if required, pre-emptive action to ensure stability of
the financial system.

Credit growth in 2012
was flat as a result of both supply and demand factors. Demand for loans was subdued as economic uncertainty in key export
markets induced companies to delay investments, while households continued to
deleverage. On the supply side, banks tend to apply strict lending standards focusing
their business on larger clients and major economic centres, whereas SMEs and
rural areas receive less attention. While responsible lending on the part of
banks is welcome, this should not lead to a restriction of credit once demand picks
up. Attention might therefore have to be given to ensuring sufficient credit
supply to SMEs, supporting investment and growth going forward. This is particularly important in view of
the new EU funds financing period, where emphasis on financial engineering
instruments (revolving credit funds, guarantees, export credits, etc.) may be
quite significant.

3.3.
Labour market, education and social policies

In 2012, the labour
market situation in Lithuania improved further but youth and long-term
unemployment levels remain a serious concern. Lithuania’s unemployment rate dropped from 15.3% in 2011 to 13.3% in 2012, while youth
unemployment dropped by 4.3 percentage points. The employment rate reached 68.7%,
still falling short of the national target of 72.8% by 2020. Moreover, youth
and long-term unemployment rates remain high at 26.4% and 6.7% respectively, pointing
to underlying structural problems. Besides affecting the country’s growth
potential, continued high unemployment and inactivity put many people constantly
at risk of poverty and social exclusion.

In 2012, the Council
Recommendation for Lithuania contained CSRs concerning unemployment, pension
reform and social exclusion. The authorities were
invited to tackle high levels of joblessness by increasing the scope and
efficiency of ALMPs and improving apprenticeship schemes and labour legislation,
to improve work incentives and to strengthen the links between social
assistance and activation measures. They were furthermore urged to proceed with
a comprehensive pension reform by aligning the statutory retirement age with
life expectancy and establishing clear rules for pension indexation, and to enhance
active ageing measures.

Despite relevant
measures implemented in early 2012, youth unemployment is still high and further efforts with a more coordinated approach to deliver a Youth
Guarantee would be welcome. Lithuania has refocused part of its EU funds on
better targeting of young people, by extending successful European Social Fund
measures and introducing new ones.[8]
A set of 23 measures adopted in March 2012 contributed to a reduction in youth
unemployment over the course of one year; however, at levels above 26% it continues
to be a major concern.[9]
Increased efforts to lay the groundwork for a Youth Guarantee,[10] notably by
improving administrative capacity and the effectiveness of education and
training as well as by providing adequate funding could help underline Lithuania’s commitment to combating youth unemployment.

The CSR seeking to
redirect ALMPs towards low-skilled and long-term unemployed persons has not
been implemented. The overall coverage of ALMPs and
the financial allocation per individual measure remain insufficient, and measures
are poorly targeted. A new system of training vouchers for the unemployed and
those having received notices of dismissal was introduced in 2012 Meanwhile, the
current selection of participants carries the risk of excluding the low-skilled
and unskilled.

Some progress has been
made in reforming the Lithuanian Labour Exchange, intending to implement
result-oriented performance appraisals. The reform
started in 2012 and aims at achieving faster employment of job seekers and
better matching of employers and pre-selected or pre-trained employees by linking
the performance assessment of labour exchange staff to the successful placement
of job seekers in the labour market. While it is an important step forward, the
reform is likely to be more advantageous to those who are easy to place in the
labour market and could put the less-qualified at risk of being left behind.

Labour force
adaptability and productivity are limited due to significant skills mismatches,
exacerbated by insufficient labour market relevance of higher education and the
low uptake of vocational education and training (VET) and apprenticeships.[11] Participation of adults in lifelong learning remains at one of the
lowest levels in the EU,[12]
while recommendations to make apprenticeship and VET schemes more effective have
been only partially implemented, as they continue to suffer from low quality
and attractiveness. The law on apprenticeships was introduced in 2007 but so
far there has been little progress in its implementation. A special
apprenticeship project (2013-15, part of the Practical VET Resources
Development Programme, updated in October 2012) is intended to strengthen and
expand this training form. This effort is complemented by a monitoring system
for ensuring quality and efficiency in the provision of career services in
general education and in VET as career guidance is currently insufficiently
developed. Employment in medium-level qualification jobs in Lithuania is
forecast to increase by 17.2% up to 2020, while high-level qualification jobs
are expected to decrease (-9%), in contrast to EU developments.[13] This further
accentuates the need for a well-established employee training system.

Lithuania’s educational outcomes remain mixed with particular challenges in
basic skills. Lithuania ranks below the EU average
for pupil achievement in literacy and numeracy and performs below the EU
benchmark on participation in early childhood education due to a lack of
available places.[14]
At the same time, Lithuania performs better than the EU average (6.6% in Lithuania compared to 12.9% EU average in 2012) in terms of early school leaving and its
tertiary attainment rate (47.9% in 2012) is significantly above the EU average
of 35.5%. However, significant gender differences exist.[15] So far, there have been no concrete
government initiatives to address either the relatively poor performance in
basic skills or gender differences in educational performance.

Lithuania has created more opportunities for concluding fixed-term contracts,
facilitating short-term employment and liberalising working time regulations; however,
the impact has so far been limited. Some of the
measures are new and only temporary, and the adoption of more far-reaching
reforms has been postponed to 2013. The percentages of employees on temporary
contracts or in part-time work and self-employment remain significantly below the
respective EU averages. Provisions in the labour code that allow for a certain
degree of flexibility in collective agreements have had only limited effect,
since collective bargaining is not common. Overall, the situation could warrant
a further review of the appropriateness of labour legislation with regard to
flexible contract agreements, dismissal provisions and flexible working time
arrangements.

Considering the
measures taken and planned, in terms of ambition and adequacy, Lithuania has only made limited progress in addressing the CSRs related to the labour
market. Additional measures to reduce unemployment
and enhance participation in the labour market, especially for young, unskilled,
long-term unemployed and older workers are necessary. A stronger emphasis on
reduction of skills mismatches, for example by increasing the job relevance of
education and training, would be welcome. Also, it might be worthwile examining
whether labour markets are flexible enough to accommodate job seekers.

Lithuania introduced
important but isolated measures in late 2012 relating to changes in the statutory
funded pension scheme in response to the CSR, and these will enter into effect
in 2014. They include motivational payments from
the state budget matching contributions by the insured to the second pillar
pension funds.[16]
This measure is a step in the right direction if properly implemented. Its fiscal
impact will be challenging and this measure alone will not be sufficient to
ensure adequacy of pensions in the future. Lithuania’s rapidly ageing
population underscores the importance of active ageing measures and the
promotion of longer working lives.[17]
In this context the recent lifting of the requirement to be registered as
unemployed to obtain access to early retirement can be seen as a step in the
wrong direction. The national strategy on overcoming the consequences of ageing
expires in 2013. So far, no interim assessment has been presented. However, a detailed
evaluation of outcomes is needed for developing a new action plan that is
envisaged by the 2013 NRP. Linking the statutory retirement age to life
expectancy, further promoting occupational and voluntary supplementary pension
schemes as well as encouraging and enabling women and men to work longer could
improve the adequacy and sustainability of the pension reform. Additionally,
clear indexation rules would help tackle old-age poverty, improve predictability
and reduce excessive politicisation of pension payments by limiting ad hoc
decisions on pension increases. All in all, the recommendation on pension
reform has only been partially fulfilled.

Also as regards the CSR
on social assistance reform, progress was limited; there is no clear intent to fight
poverty and social exclusion, and activation
remains insufficient. Amendments to the Law on Cash Social Assistance
include measures on work incentives, increased coverage, a new method for
calculating the amount of benefits and a new model of social support
distribution (in selected pilot municipalities). First results of the pilot
project indicate that the efficiency of allocations may have improved, as overall
payments and the number of recipients decreased.[18] However, a
more detailed analysis of the reform’s wider impact on poverty reduction,
social exclusion and benefit fraud as well as its activation effect is
necessary. In particular, it is essential to ensure that the reform does not
simply incentivise municipalities to redirect funds from social assistance to
other fields. The activation rate in Lithuania remains among the lowest in the
EU,[19]
while the scale of activation of long-term beneficiaries due to cash social
assistance reform remains unclear. The recent increase in the minimum wage,[20] together with
previously adopted measures,[21]
might reduce the inactivity trap and potentially alleviate the risk of poverty
for lower-income earners and the elderly. However, they are not sufficient to
counter a substantial rise in the population facing multiple disadvantages[22] and a very
high poverty gap.[23]
This concerns in particular families
with many children, people living in rural areas, youth and people with
disabilities. In spite of this, the NRP 2013 does not contain
either a comprehensive strategy or an action plan for fighting poverty.

3.4.
Structural measures
promoting growth and competitiveness

Lithuania’s economy
continued its adjustment process in 2012 and competitiveness indicators
improved as subdued wage growth met with productivity increases. As a consequence, the real effective exchange rate decreased and
helped sustain a rebound in exports. However, export growth is slowing and
there is a risk that recent competitiveness gains may be short-lived as the
labour market tightens. Greater investment is essential in order to maintain
productivity gains over the long term. Further improvements in infrastructure,
particularly energy, transport and broadband, higher R&D spending to spur
innovation as well as continued efforts to reduce the administrative burden on
businesses are essential to further enhance Lithuania’s growth potential.

In 2012, the Council
Recommendation for Lithuania contained CSRs on reforming SOEs, improving energy
efficiency and furthering the interconnectivity with EU countries of both the
electricity and gas networks. The progress is
assessed in the following subsections.

State-owned
enterprises

The government has been
undertaking a far-reaching reform of SOEs since 2010, to restructure corporate
governance, increase transparency and separate ownership and regulatory
functions. The reform encompasses 140 entities with
a combined asset value of around 25% of GDP and aims to increase competition
and efficiency. It involves legislative and organisational changes, and
performance targets. Most of the legislative aspects of the reform have been
completed. 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 separation of commercial and
non-commercial activities of SOEs and guidelines on the separation of ownership
and regulatory functions — envisaged in the national reform programme for 2012 —
have so far not progressed decisively. In addition, monitoring tools to assess
full compliance with the reform and its effectiveness need to be made
operational. As a result, despite significant progress, the corresponding CSR
has only been partially implemented.

Energy
efficiency

Lithuania has made
limited progress on improving the energy efficiency of buildings and only
partially implemented the Council Recommendation.
While the renovation of public buildings did continue, progress remained slow
with respect to the JESSICA Holding Fund (financed by the European Regional
Development Fund), under which approximately 1 000 private buildings are
expected to be upgraded. At the beginning of 2013 only ten multi-apartment
renovation projects had been finalised. As a consequence, in January 2013 the
government approved a revision of the Law on Multi-Apartment Building
Modernisation. The new approach allows municipal entities to take loans on
behalf of apartment owners in order to implement municipal multi-apartment
modernisation programmes. In addition, in order to strengthen the incentives
for residents to improve energy efficiency of their apartments, the government
is planning to revise the existing legal base related to energy cost subsidies
for low-income households. While these are relevant steps, further substantial
and speedier efforts are needed to improve overall energy efficiency, considering
that there are more than 30 000 multi-apartment dwellings with very low
energy efficiency performance.

Infrastructure

Lithuania’s gas and
electricity market continues to suffer from isolation and lack of supply
alternatives and progress is slow. Insufficient
interconnections hinder competition in energy markets, in particular as
concentration in both electricity and gas retail markets is high. In the gas
sector, the government has started several investment projects to improve the
transmission system and interconnection capacity to diversify natural gas
supply. Notably, in June 2012, Lithuania
joined NordPool gas trading to further its integration into international
markets. Moreover, the government is developing an LNG terminal and plans to
construct a Lithuanian-Polish interconnector. In the
electricity sector, the planned interconnections with Poland and Sweden should improve
the situation once they are in place. Currently, electricity network costs are
among the highest in the EU and account for a significant proportion of the
final retail price. Electricity prices will remain regulated until 2015. The
government transposed the directives of the Third Energy Package in early 2012,
but additional efforts are needed for their implementation in either the
electricity or gas sector. Since the creation of interconnections is still at an
initial stage and progress in market liberalisation is slow, recommendations
can only be considered partially implemented. To accelerate the process, a scaling
up of political efforts while ensuring adequate and timely financing (also
considering EU funds) is required.

The transport
infrastructure in Lithuania remains underdeveloped as only 7% of rail tracks are
electrified and a North-South rail connection is missing. The Rail Baltic
project would connect the main EU networks with north-eastern Europe as part of
the TEN-T policy and is planned to be to be taken forward during the next
financing period of 2014-2020. The project should be completed by 2023. Though
some existing lines have been upgraded, efforts slowed markedly in 2012. Funding of the
overall projects and regional political commitment remain major concerns.
Moreover, obstacles to efficient functioning of the internal market should be
removed and the transparency of procurement increased. There are still
administrative, technical and regulatory obstacles in the rail sector and
competition is limited. Further strengthening of the rail regulator and an
independent body for traffic management could improve market functioning.
Furthermore, introduction of incentive and performance schemes for operators
could lead to increased service quality for consumers.

Business
environment, R&D and innovation, and the
environment

Lithuania has implemented
some measures to address shortcomings in the business environment, R&D and
environmental policies, however, challenges remain.

The regulatory burden for
business remained roughly the same in 2012, with a slight improvement compared
to the previous year. The cost of completing business
procedures fell in most cases, particularly for ‘starting a business’, while
the required level of paid-in capital is still comparatively high. Reforms
enacted in 2012 include online registration for limited liability companies,
lifting of notary requirements and revising of export and import procedures in
order to reduce administrative delays and costs. Additionally, reforms aiming at consolidating and
streamlining business inspection procedures have been launched. Progress
includes steps to introduce uniform telephone consulting, standardised
checklists and a grace period for newly established businesses. In 2013, priority will be given to the consolidation of business
supervisory bodies. The reform is planned to be completed by 2014. Current plans to standardise enforcement tools of
administrative bodies that monitor and impose sanctions on businesses have to
allow for specificities of competition procedures to maintain their
effectiveness. The government’s intention to review access restrictions in relation
to regulated professions is welcome and could have positive effects on
employment and competition.

Lithuania’s R&D
intensity increased substantially in 2011 after five years of relative
stagnation, yet it is still largely below its target for 2020.[24] Most of the increase in 2011 was due to progress in implementing
research and innovation-related projects in the public sector financed by EU
Structural Funds. Additional government support for investment in R&D and
in new technologies by enterprises is provided through R&D tax incentives. The
impact on business R&D intensity has however been limited, and levels
remain almost unchanged since 2006. The current research and innovation system is characterised by a poorly performing
science base with limited international orientation, dispersed investment, weak
market orientation of research, insufficient marketing and commercialisation of
R&I results, and low participation of enterprises in the international
market. Recently, initiatives
have been launched to strengthen knowledge transfer and boost the exploitation
of research results. Seed and venture capital funds and mentoring schemes have
been set up to finance and support the creation and growth of innovative firms.
In addition, new legislation and guidelines are being drawn up to develop
public procurement of innovative products and services. The development of
innovation and entrepreneurial culture and skills, in particular through the
formal education system, is key to the success of these initiatives. In
addition, the efficient use of the new research infrastructure in the Valleys
remains a major challenge, in particular concerning the management and financing
for their regular operation and attracting highly qualified staff. Focusing resources
on science and technology areas where Lithuania could be internationally
competitive could help increase their scientific, technological and economic
impact.

While Lithuania remains
one of the most energy and CO2‑intensive economies in the EU,
it is well on track to meet its total renewable energy target for 2020, but
might miss the greenhouse gas (GHG) emissions target. The energy intensity level of the Lithuanian economy is more than
twice the EU average and considerable efforts are still needed in respect of
energy efficiency. In 2010, Lithuania’s renewable energy share was well above
its overall interim 2011/2012 target (16.6%). However, preliminary data point
to a significant decrease for 2011 (from 19.7% in 2010 to 18.6% in 2011). Progress on renewable energy use in the
transport sector is not satisfactory and has dropped to 2007 levels (3.6% in
2010). Progress on non-cost barriers to large-scale
development of renewable energy is relatively slow with improvements needed
particularly in the electricity sector, where the highest growth is expected. Based
on recent data, Lithuania might fail to limit the increase in GHG emissions in
sectors not covered by the Emissions Trading System to 15% (compared to 2005)
by 2020. According to the latest national projections based on existing
measures, emissions will increase by 20% in 2020 compared to 2005.

Waste management
remains heavily dependent on landfilling and recycling levels are among the
lowest in the EU (6% in 2010), far below the 2020 target of 50% for municipal waste. Limited alternative waste treatment infrastructure and low resource
efficiency place Lithuania among the five Member States with the largest
implementation gaps. In 2012, the Parliament amended the Law on Waste
Management. However, to reach EU targets and reap economic gains from using
waste as a resource, it is crucial to create further economic incentives via
landfill taxes and fees and plough investments into the waste management infrastructure,
other than landfills. Similarly, separate collection, sorting and recycling
could be improved through a better design of producer responsibility schemes
and by providing targeted incentives for municipalities and households. In the
water and waste water sector, insufficient cost-recovery limits the scope for
long-term investments. Consolidation of water utilities could reduce costs for
consumers.

3.5.
Modernisation of public administration

Concrete steps to
further improve the efficiency of public administration are lacking and dependent
on the implementation of the civil service reform. Lithuania
plans to introduce systemic changes in its administration through implementing
the Public Management Development Programme for 2012‑20 adopted in
February 2012. Additionally, the government has announced that it will continue
improving the efficiency of public administration and its citizen orientation,
to improve impact assessment and public financial management, simplify
administrative procedures for citizens and businesses and increase public
involvement in decision-making processes. The civil service reform will include
a partially centralised selection procedure and is aimed at improving performance
assessment and career planning tools and reorganising the remuneration of civil
servants. Ambition and credibility of these reforms will depend on the action
plan which is currently being drafted. Furthermore, extra efforts are necessary
to tackle corruption, including in public procurement, as surveys and
indicators continue to suggest corruption levels above the EU average.[25]

The progress in EU fund
payments to Lithuania is very positive with nearly 77% of payments already made
by the Commission. The level of contracting is high
at more than 90% in the European Regional Development Fund and Cohesion Fund
programmes, although some sectors, such as R&D as well as railway networks,
need further attention. Funding priorities generally mirror the challenges as
identified in this SWD. With a total allocation of nearly EUR 6.8 billion in the
period 2007‑13, Lithuania continues to benefit significantly from the
cohesion policy focusing on innovation and balanced growth.

4.
Overview table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Ensure planned progress towards the timely correction of the excessive deficit. To this end, fully implement the budget for the year 2012 and achieve the structural adjustment effort specified in the Council recommendation under the Excessive Deficit Procedure. Thereafter, specify the measures necessary to ensure implementation of the budgetary strategy for the year 2013 and beyond as envisaged, ensuring an adequate structural adjustment effort to make sufficient progress towards the medium-term budgetary objective, including meeting the expenditure benchmark, while minimising cuts in growth-enhancing expenditure. In that respect, consider increasing taxes least detrimental to growth, such as housing and environmental taxation, including car taxation, while reinforcing tax compliance. Strengthen the fiscal framework, in particular by introducing enforceable and binding expenditure ceilings in the medium-term budgetary framework. || Some progress in the implementation of the CSR. The general government deficit in 2012 for EDP purposes was reduced to 3.0% when taking into account the cost of systemic pension reform. A decision on EDP abrogation is pending and the structural effort was far below requirements. While the downward trend of the structural deficit is visible, progress towards the MTO according to the latest Commission forecast is below the minimum requirement of 0.5pp for 2013. No major progress on taxation was made in 2012. An announced review of taxes in 2013 is welcome, but has yet to bring concrete results. The effect of (minor) changes in housing taxation and an extended strategy to improve tax compliance remains to be assessed by the authorities. The adoption of fiscal stability laws has been postponed and further action on the creation of credible expenditure ceilings is needed.

CSR 2: Adopt legislation on a comprehensive pension system reform. Align the statutory retirement age with life expectancy, establish clear rules for the indexation of pensions, and improve complementary savings schemes. Underpin pension reform with active ageing measures. || Limited progress in the implementation of the CSR. Legal amendments to complementary pension savings adopted in late 2012 are a step in the right direction and now need to be properly implemented. However, legislation on a more comprehensive pension system reform has yet to be introduced. Linking the statutory retirement age with life expectancy should be a priority. Issues of active ageing have not been appropriately considered.

CSR 3: Tackle high unemployment, in particular among youth, low-skilled and long-term unemployed, by focusing resources on active labour market policies while improving their efficiency. Enhance the effectiveness of apprenticeship schemes. Amend the labour legislation with regard to flexible contract agreements, dismissal provisions and flexible working time arrangements. || Limited progress in the implementation of the CSR. The government took numerous steps to tackle youth unemployment, with some positive results. ALMP measures were not refocused. The promotion of apprenticeships remains insufficient. Changes to the labour code were limited and will have no major impact. Further reforms are necessary. Initial reforms to support liberalisation of fixed-term contracts in the private sector were undertaken but are not sufficient.

CSR 4: Increase work incentives and strengthen the links between the social assistance reform and activation measures, in particular for the most vulnerable, to reduce poverty and social exclusion. || Limited progress in the implementation of the CSR. The implementation of cash social assistance reform measures has been launched. A pilot project that has led to considerable savings should, however, also focus on redirecting funds to the most needy and include activation measures. Increases in wages of social workers and the general minimum wage are the only policy actions with a potential poverty impact. There is no clear strategy or action plan to reduce poverty and social exclusion.

CSR 5: Implement all aspects of the State-Owned Enterprise reform package and in particular ensure a separation of ownership and regulatory functions and a separation of commercial and non-commercial activities. Install appropriate monitoring tools to assess the effectiveness of the reforms and ensure compliance of all State-Owned Enterprises with the requirements of the reform. || Significant progress in the implementation of the CSR. The government implemented large parts of the SOE reform. However, it still has to complete the proposed actions on the separation of commercial and non-commercial activities of SOEs, guidelines on separation of ownership and regulatory functions, and to ensure 100% compliance with reporting requirements.

CSR 6: Step up measures to improve the energy efficiency of buildings, including through removing disincentives and a rapid implementation of the Holding Fund. Promote competition in energy networks by improving interconnectivity with EU countries for both electricity and gas. || Limited progress in the implementation of the CSR On energy efficiency, steps have been taken to speed up renovations. An amendment to the Law on State Support for the Renovation (Modernisation) of Multifamily Buildings broadens the numbers of persons/entities eligible for loan financing for renovation and efficiency upgrades. While Lithuania has removed legal impediments for granting specific loans to certain categories of owners, the measures taken are not sufficient to address the overall recommendation as regards energy efficiency. On energy networks, steps have been taken but the rate of implementation remains to be seen. A feasibility study into the viability of Baltic States integration will be completed in 2013. Work on interconnections is in progress, but much remains to be done. Concerning natural gas, a regional agreement is to be achieved on infrastructure projects.

Europe 2020 (national targets and progress)

Employment rate target: 72.8% || The employment rate of the population aged 20-64 was 64.4% in 2010, 67.2% in 2011 and 68.7% in 2012. The objective of 72.8% by 2020 is ambitious. The key tools for improving employability — active labour market policies and training of employees — have contributed towards the objective, but the high number of unemployed (especially low-skilled, youth and long-term) is still a challenge. Little progress has been made towards achievement of the target.

R&D target: 1.9% || Gross domestic expenditure on R&D reached 0.92% in 2011. Thus Lithuania still has to more than double its R&D intensity to reach its national target, which remains very challenging despite a recent positive trend. Progress is particularly needed in the business sector.

Greenhouse gas emissions target: +15% compared to 2005 emissions, ETS (Emissions Trading System) emissions are not covered by this national target || Non-ETS greenhouse gas emissions were reduced by 4% between 2005 and 2011. According to the latest national projections based on existing measures, emissions will increase 20% in 2020 compared to 2005. The target is consequently expected to be missed with a 5 percentage points gap.

Renewable energy target:  23 % Share of renewable energy in the transport sector:  10 % || Share of total renewable energy in gross final energy consumption was 20.3 % in 2011 and 3.7 % in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 2009/28/EC are included).

Indicative national energy efficiency target for 2020: 17% reduction in final energy use compared to 2009 level (reduction of 740 ktoe). This implies reaching a 2020 level of 5.445 Mtoe final energy consumption. || Lithuania has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). It has provided, as required, the level final energy use and information on the basis on which data this has been calculated. However, this target is not expressed as required by Article 3 of Directive 2012/27/EU, in terms of absolute primary energy consumption..

Early school leaving target: <9% || Early leavers from education and training (percentage of population aged 18-24 with at most a lower secondary education and not in further education or training) stood at 6.6% in 2012. Lithuania’s early school leaving rate remains below the EU average and has fallen steadily over the last few years. The target has been achieved.

Tertiary education target: 40% || Tertiary attainment rate stood at 47.9% in 2012 continuing its steady rise over the last few years. The target has been achieved.

Risk of poverty or social exclusion target: 814000 || Due to the increase in the number of people who live in households with very low work intensity or are severely materially deprived, the national target has become more ambitious and difficult to reach. The number of people at risk of poverty or social exclusion increased from 985000 in 2009 (29.5% of total population) to 1080000 in 2011 (33.4% of total population). This means that no progress has been made towards achievement of the target.

5.
Annex

Table I. Macroeconomic indicators

Table II. Comparison of macroeconomic developments and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

Table V. Sustainability indicators

Table VI. Taxation indicators

Table VII. Financial market indicators

Table VIII. Labour market and social indicators

Table IX. Product market performance and policy indicators

Table X. Green Growth

[1] COM (2012) 750 final.

[2] COM (2012) 751 final.

[3] 13 in-depth reviews were published on 10 April 2013. While selected
for an in-depth review in the AMR, Cyprus was ultimately not reviewed under the
Macroeconomic Imbalance Procedure in view of the advanced preparations for a
financial assistance programme.

[4] The recalculated structural balances are based on recalculated
potential output levels, which were estimated employing a different method than
the one used in the CP. The difference is to a large extent the result of a
divergent path in potential growth rates over the programme period. The CP
assumes higher potential growth rates than the Commission.

[5] In 2011 revenues from recurrent taxes on immovable property
amounted to 0.3% of GDP whereas the corresponding EU-27 weighted average was
1.3%.

[6] down from 133% in 2011.

[7] 5.4% of banking sector assets and 7.8% of deposits at the time of
closure

[8] The NRP 2013 indicates that an additional amount of LTL 100 million
(EUR 29 million) was allocated for this purpose in 2012. The total amount
earmarked for tackling youth unemployment was LTL188 million (EUR 54.4 million)
in 2012-13.

[9] Report: Youth Employment Action Teams — Update for the Spring
European Council, 14-15 March 2013.

[10] The Council Recommendation of 22 April 2013 on establishing a Youth
Guarantee (2013/C 120/01) calls for Youth Guarantee schemes that ensure that
all young people under the age of 25 years receive a good-quality offer of
employment, continued education, an apprenticeship or a traineeship within four
months of becoming unemployed or leaving formal education.

[11] According to 2010 data of the European Centre for the Development
of Vocational Training (Cedefop), 28% of Lithuanian pupils in upper
secondary education opted for a VET path, the third worst performance in the EU
(the EU average is 50%).

[12] 5.4% in Lithuania compared to 9.1% EU average in 2012.

[13] Forecast of Cedefop, (2012); EU average growth for medium-level
qualification jobs is forecast at +4.8%, high-level qualification jobs are
expected to grow by +19.7%.

[14] 78.3% in 2011 as compared to 92.3% in the EU on average.

[15] While tertiary educational attainment among
women aged 30-34 is high at 53.3% (2011, EU average 37.2%) men have a much
lower tertiary educational attainment (37.6%) and an early school leaving rate
that is twice as high (10.6% versus 5.0% for women in 2011).

[16] Contributions to the second pillar pension fund will change in 2014
(contribution of the state social insurance fund 2%, voluntary personal
contribution 1%, motivational state contribution 1%) and further in 2016
(2/2/2) and 2020 (3.5/2/2).

[17] A decision to gradually increase the retirement age to 65 years for
both men and women by 2026 was adopted in 2011. While the employment rate of
older persons (aged 50-64) in LT is slightly higher than the EU average, participation
in lifelong learning is significantly lower (1.9% as compared to an EU average
of 4.5%).

[18] Social benefit payments in the five pilot municipalities decreased
by 20.1% in 2012, while they dropped by 2.1% on average in all municipalities.
The number of recipients fell by 13.6% (-0.36% overall).

[19] 4.7% in LT in 2009 and 2010, 29.3% in EU (2009).

[20] Increased by 6% in 08/2012 and an additional 18% in 01/2013,
amounting now to LTL 1 000 (EUR 290).

[21] Such as the introduction of a tax exempt threshold for low-wage
earners, the restoration of pensions to pre-crisis levels and an increase of
social workers’ salaries.

[22] Population in the intersection of all three sub-indicators (at risk of poverty, severe material deprivation and living
in households with low work intensity) in 2011: 3.2% in LT, (EU: 1.6%); since 2008 fairly stable in the EU (+ 0.2 percentage points) compared to a
significant increase in LT (+ 1.9 percentage points).

[23] 28.7% in 2011 (EU: 23.3%).

[24] R&D intensity reached 0.92% of GDP in 2011, up from about 0.8%
in previous years. Europe 2020 target 1.9%.

[25] Lithuania ranks 79th in the 2012-13 Global
Competitiveness Report regarding the diversion of public funds (20th
among EU Member States) and 48th regarding irregular payments and
bribes (18th among EU Member States - http://reports.weforum.org/global-competitiveness-report-2012-2013/#).
In the 2011 Eurobarometer, 27% of respondents said they had been asked or expected
to pay a bribe over the previous 12 months (as opposed to an EU average of 8%);
81% said government efforts against corruption were ineffective (as opposed to
an EU average of 68%) and 52% considered that corruption is widespread among
officials awarding public tenders (EU average: 47%, http://ec.europa.eu/public\_opinion/archives/ebs/ebs\_374\_en.pdf).

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