President Nausėda, Ministers, esteemed guests,
It is my pleasure to present the 2020 Economic Survey of Lithuania. I would like to thank the government for the excellent co-operation during the preparation of this Survey.
Before the pandemic, Lithuania’s economic performance was strong. Yet, as elsewhere, COVID-19 has cast a cloud over the outlook. Thanks to effective containment measures and a well-functioning health system, the initial crisis in Lithuania was contained, but like in the rest of Europe, a second wave now threatens. The downturn in the first half of 2020 was smaller than in most other OECD countries, and economic activity is recovering well. The Survey projects a decline in GDP of 2% this year, with growth of 2.7% in 2021, which would make Lithuania one of the rare countries where GDP will be higher in 2021 than in 2019.
The negative impact of the pandemic has been mitigated by the government’s swift provision of emergency funds for health-care, as well as support to households and firms through short-term work schemes and additional unemployment benefits. Support to households and firms this year will have amounted to around 10% of GDP.
The government is also boosting public investment to ensure sustainable growth after the pandemic. The “DNA Plan for the Future” will put an additional 4% of GDP into education, innovation, digital transformation and climate action.
While there is no shortage of achievements and reasons for optimism to point to, the Survey also identifies a number of important policy challenges. Let me highlight a few which we consider crucial.
First, gross public debt is rising sharply with the fiscal policy response to the crisis. As a small open economy, Lithuania is vulnerable to external shocks. Bold policy steps will be required to stabilise debt ratios and restore fiscal buffers. The government should set a long-term numerical debt target and establish a credible debt reduction path but only once the recovery is well on its way. It should also prioritise reforms that help both reduce deficits and increase the effectiveness of spending and taxation.
Second, Lithuania’s fiscal framework is the most centralised in the OECD. Municipalities have little of their own tax revenue and local fiscal rules are tight, limiting capacity to invest. Access to own-source revenue such as property taxation should be strengthened. Adapting fiscal rules would also help increase local investment while maintaining sustainability of the public finances.
Third, state-owned enterprises (SOE) are widespread, and their governance remains weak, which weighs on efficiency. Many SOEs do not reach the targets the government sets for them. All SOEs should be subjected to the same laws, regulations and market constraints as private companies. In the absence of compelling reasons to maintain public ownership, SOEs privatisation could be considered.
Fourth, while Lithuania’s environmental performance has improved since the mid-2000s, more needs to be done to make growth greener. The country has the highest welfare cost from exposure to fine particles (PM2.5) in the OECD. To reach the government’s ambitious 2030 climate targets, a carbon tax should be introduced and fossil-fuel subsidies reduced.
Fifth, prosperity continues to be unevenly distributed. Poverty is high – especially among the unemployed, the less educated, single parents and the elderly – while the tax-benefit system is not sufficiently redistributive and its size remains below the OECD average. The government should focus on increasing social support while preserving work incentives.
Last but not least, regional disparities keep increasing. Investment in peripheral regions remains low and labour mobility towards economically strong areas is insufficient. Productivity differences between core and peripheral regions are also rising. To address these challenges, the government should continue investing in peripheral areas while facilitating migration to more prosperous regions.
Lithuania’s impressive reform efforts of recent years have strengthened the economy and allowed it to weather the COVID-19 crisis well so far. Lithuania needs to stay the reform course and keep expanding opportunities for its people.
The OECD stands ready to work with -- and for -- you to design, develop and deliver better policies for better lives in Lithuania.