OECD Review of Lithuania’s Independent Fiscal Institution 2025

2. A new fiscal framework

2.1. Context

The EU’s fiscal framework has long shaped national budgetary governance in EU countries including Lithuania, with the Stability and Growth Pact (SGP) and subsequent reforms driving the creation and development of independent fiscal institutions (IFIs). Regulation 473/2013 in particular established the minimum standards for IFIs in the Member States of the Monetary Union - such as autonomy, adequate resources, and timely public communication - and assigned them key roles in endorsing forecasts and monitoring compliance with fiscal rules. These requirements provided the foundation for the BMD being established as Lithuania’s IFI.

The 2024 reform of the EU’s Economic Governance framework gives IFIs a stronger legal status and an expanded role in supporting sustainable public finances. This section revisits whether the BMD is fit for purpose in this new context, assessing how it can adapt to the new fiscal framework while safeguarding its independence and credibility.

2.2. The 2024 European Economic Governance Review

The 2024 reform of the EU Economic Governance framework shifts the focus toward medium-term fiscal sustainability. While maintaining the 3% of GDP deficit and 60% of GDP debt reference values, it introduces National Medium-Term Fiscal-Structural Plans (MTFSPs) as the central instrument. These multi-year plans define a net expenditure path consistent with debt sustainability, anchored by safeguards to ensure deficits remain below 3% of GDP and adjustment is not backloaded.

The reform also strengthens the institutional foundations of IFIs. Directive 2024/1265 provides a dedicated legal framework for IFIs, requiring them to be structurally independent or endowed with functional autonomy, established in national law, and protected from political instruction. It sets minimum standards for resources, access to information, transparency in appointments, capacity to communicate publicly, and periodic external evaluations. These provisions aim to safeguard IFIs’ independence and credibility while ensuring permanence within national systems.

Alongside institutional requirements, the Directive expands the core and optional functions of IFIs. Mandatory tasks include endorsing or producing macroeconomic forecasts and monitoring compliance with fiscal rules, while new responsibilities cover assessing the consistency and quality of the national budgetary framework and engaging systematically with parliaments. Optional tasks include providing opinions on the forecasts underpinning MTFSPs - mandatory from 2032 - and assessing annual progress reports or deficit-correction measures. The Directive also introduces the “comply or explain” principle, obliging governments to either follow IFI assessments or publicly justify deviations. Table 2 summarises the main changes for IFIs introduced in the revised framework compared with the previous EU Economic Governance Framework.

The effectiveness of the new framework will hinge on faithful implementation at the national level. To succeed, Member States such as Lithuania must ensure credible medium-term plans, robust follow-up, and, crucially, adequate resourcing and institutional protections for IFIs. If these conditions are met, the reform offers the potential to strengthen fiscal discipline, accountability, and ownership across the EU; if not, longstanding weaknesses of the fiscal framework may persist, with potential negative consequences for fiscal sustainability in Lithuania. The transposition of the EU Directive into Lithuania’s national law is currently underway, as the Government has submitted draft legislation to the Seimas to amend the Constitutional Law on the Implementation of the Fiscal Treaty, the Law on the NAO, and the Fiscal Discipline Law. The draft legislation designates the NAO as the IFI and defines its functions accordingly (see Box 3).

Box 3. Draft legislation to reform Lithuania’s national fiscal framework

In October 2025, the Lithuanian Government submitted a draft legislative package to the Seimas to align the national fiscal framework with the new EU Economic Governance framework and transpose Directive 2024/1265. The reform significantly changes the role of the BMD.

The package revises three key laws: the Constitutional Law on the Implementation of the Fiscal Treaty, the Law on the National Audit Office (NAO), and the Fiscal Discipline Law (to become the Law on Fiscal Governance).

The draft Constitutional Law introduces a new fiscal rule based on net expenditure, in line with EU Regulation 2024/1263, but does not define the role of the IFI. Currently, the BMD’s mandate is set in the Constitutional Law, which requires a reinforced majority for amendment.

The Law on the NAO is amended to establish a dual mandate: the NAO becomes both the Supreme Audit Institution and the IFI. Fiscal monitoring is now a core statutory function of the NAO, and all references to the BMD are removed. To strengthen implementation, the draft law requires separate external evaluations of audit and IFI functions every five years, following OECD Principles for IFIs and EU IFI standards. It also introduces competency requirements for IFI staff, including expertise in macroeconomics and public finance, while the Auditor General’s qualifications remain unchanged.

Under the new Law on Fiscal Governance, the IFI must approve or disapprove the government’s economic scenarios and provide conclusions on macroeconomic assumptions underpinning the Medium-Term Fiscal-Structural Plan.

Fiscal monitoring shifts from the structural balance to the net expenditure rule. The IFI will assess compliance of the draft budget, annual progress reports, and corrective measures under the Excessive Deficit Procedure with the expenditure path. It must also conduct annual ex post evaluations to identify “significant systematic errors” in government projections.

The legislation formalises the “comply or explain” principle: if the Government or municipalities disagree with IFI conclusions, they must publicly justify their position within strict deadlines.

These reforms mark a major step towards implementing the new EU Economic Governance. Further measures could strengthen the IFI’s independence and effectiveness (see Table 4).

Table 2. A comparison of IFI provisions in previous and revised EU Economic Governance Framework

	Previous EU Economic Governance Framework	Revised EU Economic Governance Framework
Applicability	Euro area member states	All EU Member states
IFI definition	No explicit definition: Bodies structurally independent or endowed with functional autonomy underpinned by national legal provisions.	Explicit definition: Bodies structurally independent or endowed with functional autonomy established by national legal provisions.
IFI requirements	Legal basis: national laws, regulations or binding administrative provisions. Composition: members nominated on the basis of their experience and competence. Prohibition on taking instructions from budgetary authorities or any other public or private body. Capacity to communicate publicly in a timely manner. Adequate resources to carry out their mandate. Appropriate access to information to carry out their mandate.	Legal basis: national laws, regulations or binding administrative provisions. Composition: members nominated and appointed on the basis of their experience and competence in specific fields and by transparent procedures. Prohibition on taking instructions from budgetary authorities or any other public or private body. Capacity to communicate publicly about their assessments and opinions in a timely manner. Adequate and stable resources to carry out their tasks in an effective manner. Adequate and timely access to the information needed to fulfil their tasks. Subject to regular external evaluations by independent evaluator.
IFI mandatory functions	Endorsing or producing macroeconomic forecasts underpinning national medium-term fiscal plans and draft budgets. Monitoring compliance with fiscal rules: national fiscal rules and those incorporating in the national budgetary process the MTO. Assessment on the activation for the corrective mechanism for deviation from the MTO, the budgetary correction pace and the occurrence of extraordinary circumstances that justified deviation from the MTO or the adjustment path.	Producing, assessing, or endorsing annual and multiannual macroeconomic forecasts. Monitoring compliance with country-specific numerical fiscal rules. Assessing the consistency, coherence, and effectiveness of the national budgetary framework. Participating in regular hearings and discussions at the national parliament, upon invitation. From 2032, issuing an opinion on the macroeconomic forecasts and assumptions underpinning the next expenditure plan presented in the MTFSP and the revised MTFSP.

Note: Regulation (EU) No 473/2013 remains in force under the revised EU Economic Governance Framework, and the definition, institutional requirements, and additional functions for IFIs set out there continue to apply exclusively to euro area Member States.

2.3. An assessment of how the Lithuanian IFI needs to evolve to comply

The BMD was established in the context of Lithuania’s adoption of the EU Economic Governance Framework and the Fiscal Compact.1 The Constitutional Law on the Implementation of the Fiscal Treaty created a budget monitoring authority responsible for overseeing compliance with fiscal rules, a role assigned to the NAO and carried out by the BMD. Since its creation a decade ago, the BMD has performed these functions as a department within the NAO rather than as a stand-alone institution. The new governance framework provides an opportunity to revisit the BMD’s independence, institutional design, and functions to comply with new EU minimum standards for IFIs, while also bringing it closer to best European practice.

2.3.1. Independence

The revised EU framework requires IFIs to be independent or functionally autonomous, with this status clearly defined in law. Lithuania’s current framework meets part of this requirement since the NAO is defined as independent of government and accountable to the Seimas. However, the BMD’s position within the NAO means it remains subordinate to the Auditor General. While it is insulated from direct influence by budgetary authorities, it does not enjoy full autonomy within its parent institution, and its priorities can be subordinated to wider NAO interests, which are primarily focused on audit.

The BMD’s independence in practice depends heavily on the approach of the Auditor General, leaving it vulnerable to leadership changes. Management styles vary, which has led to differing levels of operational autonomy and visibility for the BMD over time.

Establishing the BMD as a fully independent institution would be the most effective way to ensure consistent independence and credibility. Its legal mandate should give the BMD full authority over leadership, staffing, and budget decisions. This would help reinforce institutional safeguards when transposing Directive 2024/1265 into Lithuanian law and ensure full compliance with EU standards.

2.3.2. Institutional design

The BMD’s institutional design has a legal foundation but lacks the permanence envisaged in the new EU framework. The NAO is established in the Constitution and given responsibility for supervising the execution of the State Budget, while the Constitutional Law on the Implementation of the Fiscal Treaty anchors the role of a budget policy monitoring authority. The NAO Law defines the opinions to be provided. However, the BMD itself is not explicitly established in primary law; its activities rest on NAO internal regulations that can be unilaterally amended by the Auditor General. While this arrangement does not directly breach the Directive, it weakens safeguards for permanence, transparency, and autonomy.

Current arrangements only partially meet EU standards on the composition and appointment of IFI leadership. The Auditor General is appointed under clear constitutional rules with defined experience requirements, but the Head of BMD is appointed internally under only general NAO staff criteria. There is no legal requirement for specific expertise in public finance or macroeconomics, nor a transparent, merit-based selection process. As a result, Lithuania’s framework broadly secures baseline qualifications but does not fully comply with the Directive’s standards for professional competence and transparent appointment.

Legal safeguards against political instruction are in place, but structural dependence on NAO leadership limits their effect. Both the Constitutional Law on the Implementation of the Fiscal Treaty and the Law on the NAO prohibit external instructions to the budget monitoring authority. In practice, however, the BMD remains subject to the authority of the Auditor General and Deputy Auditor General. This embedded structure blurs the separation intended by the Directive and may limit the full operationalisation of the safeguard.

The BMD faces persistent challenges in resources and communications, which weakens its capacity to meet Directive standards. Although the BMD now has seven staff2, the fact that salaries are below those of peer institutions means that the BMD can struggle to attract and retain qualified experts. Its budget remains tied to the NAO, creating instability. At the same time, its media presence and outreach remain limited, constrained by reliance on NAO communication channels, which hinders visibility as an independent fiscal voice. These challenges give further weight to the need to establish the BMD as a fully independent fiscal institution with autonomy over staffing and communications approach.

By contrast, access to information and external evaluation requirements are largely met. The Constitutional Law guarantees the BMD timely access to macroeconomic data and information from government institutions, supported by MoUs with the Bank of Lithuania, the national statistics office, and the Ministry of Finance. Regular external evaluations are also mandated by law and carried out every five years, with an OECD review completed in 2019 and this one being commissioned in 2025. These provisions broadly ensure compliance in these areas.

2.3.3. Functions

Lithuania’s legal framework already assigns the BMD core IFI functions, but gaps remain under the new EU framework. The Law on the NAO requires the budget monitoring authority to endorse the government’s macroeconomic forecasts, and the BMD issues opinions twice a year alongside the Stability Programme and the State Budget. In 2025, the BMD has already assessed the Medium-Term Fiscal Structural Plan (MTFSP), which replaced the Stability Programme under the new EU economic governance framework. The BMD will also assess the annual progress report that EU Member States are required to submit each year. During extraordinary circumstances, such as COVID-19 and Russia's aggression against Ukraine, it has produced more frequent assessments and evaluated the justification for activating escape clauses. The BMD also monitors compliance with fiscal rules, preparing opinions on structural targets and the need for corrective measures. Table 3 provides an overview of Lithuania’s fiscal rules and the specific monitoring role of the BMD under the current legal framework.

Some mandatory functions under Directive 2024/1265 are not yet embedded in Lithuania’s legal framework. The BMD is not legally tasked with assessing the coherence and effectiveness of the national budgetary framework, nor does the law provide for regular hearings in Parliament represented by the Head of BMD. As mentioned in the previous section, the BMD Head often presents opinions in parliamentary committees, but appearances remain framed through NAO leadership, limiting visibility and direct accountability.

Lithuania’s framework also omits several new or optional IFI functions, though the BMD has the technical capacity to perform them. The law does not assign the BMD responsibility for assessing the macroeconomic assumptions underpinning the new MTFSP, but the BMD issued an opinion on Lithuania’s first MTFSP in June 2025. It is also well placed to analyse deviations in annual progress reports or assess deficit-correction measures, though these roles are not yet codified. Regulation (EU) 2024/1263 makes the MTFSP assessment mandatory from 2032, but early adoption would strengthen fiscal credibility.

Other functions remain only partially aligned with Directive requirements. Similarly, the comply-or-explain principle is applied only in cases of non-compliance with structural adjustment targets, requiring explanations to the Seimas but not to the public. The Directive’s requirement for a general, public comply-or-explain obligation across all IFI assessments is not yet in place. Finally, although independent ex post evaluation of forecasts is not defined as a mandatory IFI task in the Directive, Lithuania has not yet introduced an explicit role for the BMD in independent ex post evaluation of forecasts, even though the BMD already reviews the accuracy of its own and peers’ projections.

Table 3. Overview of Lithuania’s fiscal rules and the monitoring role of the BMD

Fiscal rule	Main content	Role of the BMD in monitoring
1. Surplus General Government Sector rule (Structural balance / MTO)	Requires the general government sector to comply with one of the alternative conditions: Surplus in structural terms. Structural balance is lower than MTO in absolute terms and decreasing. Structural balance is lower than MTO in absolute terms if output gap is negative. Meeting the targeted structural adjustment. The MTO is normally a structural deficit ≤ 0.5% of GDP (or ≤ 1% if debt < 60% of GDP and low risk for long term sustainability).	Opinion on the fulfilment of the structural adjustment target for the past year. Opinion on reasons for any non-compliance with the structural target for the past year and the adequacy of corrective measures. Opinion on the structural adjustment targets and guidelines proposed by the Government to the Seimas. Opinion on the annual structural adjustment target set in the draft Budget Law and the need for additional measures.
2. Expenditure growth rule	If the 5-year average general government balance is negative, expenditure growth of large appropriations (>3% of GDP) may not exceed half of potential GDP growth (with specific exceptions).	Opinion on the annual structural adjustment target set in the draft Budget Law and the need for additional measures.
3. Rules for budgets attributable to the general government	Large budgets (appropriations >0.3% of GDP; excluding State budget and State Social Insurance Fund - SSIF): structurally balanced or in surplus. SSIF: its structural deficit may increase only in years with a negative output gap. Small budgets (appropriations ≤0.3% of GDP): balanced, but when output gap is negative, appropriations may exceed revenue by up to 1.5%.	Opinion on the annual structural adjustment target set in the draft Budget Law and need for additional measures.
4. Municipal flexibility and debt/guarantee limits	Specific rules for municipalities for complying with “Rules for budgets attributable to the general government sector”: Deduction from expenditure of EU co-financing appropriations. Addition to revenues of unused prior-year own revenues used in the current year. Debt ceiling: municipal gross debt ≤ 60% (75% for Vilnius) of municipal personal income tax forecast for the year + last year’s municipal revenues. Guarantee ceiling: ≤ 10% of municipal personal income tax forecast for the year + last year’s municipal revenues.	Opinion on the annual structural adjustment target set in the draft Budget Law and need for additional measures. Opinion on municipal compliance with fiscal rules (by June 30th).
5. Exceptional circumstances/ Escape clause	Flexibility when an “extraordinary event” or severe downturn occurs as defined by law.	Opinion on whether the situation meets the legal definition of an extraordinary event

2.3.4. Summary assessment

In sum, Lithuania needs targeted reforms to align fully with the 2024 EU framework for IFIs and to strengthen the credibility of the BMD as the national IFI. Lithuania starts from a robust legal base, anchored in the Constitutional Law and the Law on the NAO, but the BMD’s current embedding within the NAO leaves important gaps that the 2024 reform now requires be closed. Several of the core safeguards are largely in place (independence in law, access to information, external review), and the BMD already delivers the key functions of assessment of macroeconomic forecasts and monitoring compliance with fiscal rules.

Yet full alignment calls for the BMD to be established as a separate institution from the NAO. Enabling legislation for the BMD should provide for transparent and merit-based appointments, resources commensurate with an expanded mandate and a distinct communications profile. In sum, Lithuania would benefit from:

1. Establishing the BMD as an independent institution in law, with its own legal personality, mandate, and budget line.

2. Transparent, merit-based appointment procedures for BMD leadership, with explicit statutory criteria for expertise in public finance and macroeconomics, and strong tenure protections.

3. Codifying all mandatory and relevant optional functions of IFIs under the Directive, including assessment of the national budgetary framework, ex post evaluation of forecasts, and the new comply-or-explain principle, in the BMD’s enabling legislation.

4. Resources commensurate with an expanded mandate, and BMD being able to submit its own budget request to align with practices in place for other independent institutions.

5. Strengthening the BMD’s communications apparatus, including its own website, logo, and direct engagement with Seimas and the media.

Closing these gaps will be essential to reinforce the BMD’s credibility and effectiveness under the reformed EU Economic Governance Framework and bring Lithuania into full compliance. Table 4 summarises the BMD’s current institutional framework and functions against the requirements of the Directive, highlighting areas of compliance (dark green), partial compliance (light green, yellow and orange), and non-compliance (red).

Table 4. Adaptation of the BMD’s legal framework to the requirements and functions of the 2024 Directive

Notes

← 1.  Note that this assessment is based on the legislation in force as well as the draft legislation being proposed at the time the Review is being undertaken.

← 2.  One of whom is currently on parental leave.