LITHUANIA 2025
EXECUTIVE SUMMARY
March 2025
• Growth is gaining momentum and inflation has declined
• Building fiscal space to finance ageing-related expenditure
• Raising productivity and strengthening institutions
• Reducing emissions and improving energy security
• Addressing demographic challenges
2 . OECD ECONOMIC SURVEY OF SPAIN 2023 – EXECUTIVE SUMMARY
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GROWTH IS GAINING MOMENTUM AND INFLATION HAS DECLINED
After a slowdown in economic activity and a record increase in inflation in 2022-23, GDP growth has started to pick up in 2024 and is expected to continue to strengthen in 2025, driven by a rebound in private consumption and a progressive increase in investment and exports.
Over the last 30 years, Lithuania has achieved rapid convergence towards OECD living standards (Figure 1). While economic growth was initially supported by foreign credit and domestic consumption until the crisis of 2008-09, cost-competitiveness gains have reinforced the contribution of exports since then. Bold reforms in product market, insolvency and public integrity regulations have bolstered economic growth.
After a strong post-pandemic recovery, GDP growth slowed to 2.5% in 2022 and 0.3% in 2023 but rebounded to 2.7% in 2024. Russia’s war of aggression against Ukraine has contributed to higher uncertainty and inflation, which has weighed on real wages, and private consumption declined almost continuously
from mid-2022. This only reversed course in late 2023 amid improving real wages and consumer confidence. Investment supported economic activity in 2023 but declined in 2024 due to low capacity utilisation and subdued business confidence. Slowing growth in Lithuania’s main trading partners led to a decline in exports in 2023.
Inflation has cooled down after a record increase. Headline inflation peaked at 22.5% and core inflation at 12.7% in end-2022, well above the euro area average. While inflation was largely driven by external factors, strong wage growth exacerbated by labour shortages also fuelled it and has weighed on cost-competitiveness.
Figure 1. Lithuania has seen a rapid convergence of incomes towards OECD living standards
per capita (OECD = 100, current PPPs)
Table 1. Inflation has declined and growth is picking up
Annual growth rates, %, unless specified
GDP growth is projected to rebound to 3.1% in 2025 and 2.8% in 2026. Sustained real wage gains, a resilient labour market with unemployment below its longterm average and increasing consumer confidence are expected to support a pickup in household consumption. Following a rebound in late 2024, investment will
continue to support GDP growth in 2025-26. Stronger growth in Lithuania’s main trading partners is expected to lead to progressive improvements in exports. Economic activity in the euro area is a key risk for the outlook, along with global commodity prices and geopolitical tensions.
BUILDING FISCAL SPACE TO FINANCE AGEING-RELATED EXPENDITURE
Financing increasing ageing-related costs without endangering fiscal sustainability will require creating additional fiscal space. This could be achieved through a mix of policies aiming at improving public spending efficiency, broadening the tax base and encouraging formal economic activity.
Financing ageing-related public expenditure will require additional fiscal space of 3 percentage points of GDP by 2028. Ageing-related expenditure is projected to increase significantly between 2022 and 2070, mainly in relation to pensions (Figure 2). Since old-age poverty is high and life expectancy for men is low, there is limited scope to cut pensions or further increase the retirement age, at least in the short term.
Spending efficiency improvements can help to finance the cost of population ageing. Lithuania has a larger public sector than other OECD countries which pays higher wages than the private sector, but a large share of the population is dissatisfied with public services.
Demographic change provides a unique opportunity to set up spending reviews and assess which public services are most needed and how they should be organised across the country.
Increasing property taxes could raise additional revenues. Recurrent taxes on immovable property and wealth and inheritance taxes are largely underused and generate tax revenues that are 1.4% of GDP lower than in the OECD as a whole. There is room to increase such taxes which are the least detrimental to economic growth, including by broadening the base of immovable property taxes.
Source: Statistics Lithuania, OECD
Projected change in gross public expenditure related to ageing between 2022 and 2070; % of GDP
A mix of policies could help to encourage formal economic activity and raise fiscal revenues. The shadow economy represents around 20% of Lithuania’s GDP and results in significant foregone revenues. For example, the compliance gap in value-added taxes is 1% of GDP higher than in Estonia and Latvia. This could be addressed by further digitalising VAT collection,
strengthening tax administration, and increasing formal work incentives through a lower labour tax wedge for low-income workers and more progressivity in personal income taxes to ensure stable fiscal revenues. Beyond encouraging the transition to formal activity, the latter would also contribute to increase the employment rate of lower-skilled workers more generally.
RAISING PRODUCTIVITY AND STRENGTHENING INSTITUTIONS
While Lithuania’s product market regulations and insolvency framework are among the most conducive to productivity growth in the OECD, possible ways to further support productivity growth include developing domestic capital markets and further strengthening the public integrity framework.
Lithuania is progressively catching up with Western European productivity levels, but a gap remains. Labour productivity in Lithuania’s market sectors rose from around 25% of the level of Germany in 2000 to 50% in 2022, outpacing several regional peers. While productivity growth and economic convergence slowed down significantly after the financial crisis of 2008-09, they increased again after 2016.
Product market regulations in Lithuania are now the least restrictive in the OECD but retail energy markets could benefit from further reform. The most significant reforms in recent years include the regulation of interactions with stakeholders, the governance of state-owned enterprises (SOEs), and the administrative requirements for creating businesses. While retail energy markets are formally open to competition, prices remain regulated, which prevents effective competition. Price regulation contributes to energy affordability, but the current policy is not targeted enough towards households in need and thus rather costly.
Developing deeper capital markets could alleviate firms’ financial constraints. Banks play a dominant role in the financing of Lithuanian firms while markets for alternative sources of financing are shallow and many firms are facing financial constraints (Figure 3). The development of capital markets would support productivity growth by facilitating investment in intangibles, R&D and technological innovation. This requires increasing the supply and demand of non-bank capital, including by mobilising institutional investors such as pension funds, leveraging digital financing, and listing a wider range of SOEs.
Increasing R&D spending and improving digital skills would support productivity growth. At 1.0% of GDP, overall R&D spending in 2022 was significantly below the OECD average. Business investment in R&D is especially low, which may be related to limited government support. A rebalancing of R&D support from tax incentives towards direct public funding may be helpful, especially for small innovative firms which are more likely to be financially
Proportion of financially constrained firms, 2023, %
Figure 3. Developing capital markets would help alleviate firms’ financial constraints
constrained. While Lithuania has a well-performing digital infrastructure, digital take-up is still limited, with nearly 80% of firms having low digital intensity. This can be related to the fact that only half of Lithuanians have above basic digital skills. Both initial and lifelong education can contribute to the diffusion of digital skills.
Further strengthening the public integrity framework would reinforce the business environment. Despite
significant recent improvements in the public integrity framework, perceived corruption remains high. Systematically monitoring the post-public employment activities of high-ranking public officials, expanding awareness of protection measures for whistleblowers, and reinforcing leadership support for integrity measures in public institutions would contribute to improve the situation.
REDUCING EMISSIONS AND IMPROVING ENERGY SECURITY
Gross GHG emissions have hardly declined since 2000 and energy supply is highly dependent on imports. Accelerating the green transition will be key to improve energy security and reach emission targets. This will require ensuring sufficient financing for renewable energy investments and inverting the current upward trend in transport emissions.
Gross GHG emissions have hardly decreased since the low point reached in 2000. While GHG emissions have dropped significantly in the years following independence due to structural changes in the economy, later progress has been much slower. Since 2000, the decrease in emissions from energy industries (-50%) has been offset by strong increases from transport (+87%) and the residential sector (+23%) (Figure 4).
Generating more low-carbon electricity will be key for reaching net-zero emissions and improving
energy security, not only as a substitute to current fossil fuel imports, but also to allow the electrification of other sectors. According to current plans, the domestic production of electricity will entirely be based on renewables and fully cover domestic needs by 2030.
Investments in low-carbon energy sources will be costly and require careful budget planning. Initial estimates indicate that the required capital expenditure in new energy sources would amount to around 2% of GDP per year until 2050. While EU funds are expected
Figure 4. Gross greenhouse gas emissions have hardly declined since the low point reached in 2000
to finance a quarter of this expenditure in 2025-26, this source of funding, especially the Recovery and Resilience Fund, is largely temporary. There is room to increase domestic public investment and public debt to compensate, but this will not be enough.
Attracting private investment will be key to avoid a large financing gap. The efficiency of public funds can be optimised by relying on loans, guarantees and other financial instruments rather than directly financing investment projects. Attracting private investment also requires developing project pipelines and de-risking investments in renewables to comply with the needs of risk-averse institutional investors.
Carbon prices on motor fuels have started to increase from a low base. Following recent legislative amendments, excise duties on motor fuels will increase over 2024-26, and a new carbon tax will be added and increase over 2025-30. This will bring Lithuanian carbon prices on motor fuels in 2030 slightly above the EU-wide level in 2023. The impact of these measures should be assessed. In case a stronger increase proves necessary to reach the 2030 transport emission targets, Lithuania
could consider redistributing the related fiscal revenues to minimise the impact on low-income households.
Aligning carbon prices in all sectors to those in the EU Emissions Trading Scheme (ETS) would minimise abatement costs by ensuring that no low-cost abatement opportunities are missed. To reinforce social acceptability, low-income households could be compensated with targeted transfers.
The renovation of the building stock needs to accelerate. The overall energy performance of the dwelling stock is poor and renovations are advancing at a slow pace. While heating fuels have long been untaxed, taxes have just started to increase for some fuels, but those on natural gas lag behind. In addition, before-tax retail energy prices are regulated at a low level. Ensuring that all heating fuels are equally taxed, while providing targeted cash transfers to low-income households as needed, would increase financial incentives to renovate dwellings. The homogeneity of the building stock also calls for exploring modular and industrialised solutions for large-scale building renovations.
ADDRESSING DEMOGRAPHIC CHALLENGES
Lithuania will face a major demographic shock, requiring policy responses across many areas including labour markets, pensions and health. Consolidating the recent reversal in net migration would partly alleviate labour shortages and the related impact on growth and export performance. Encouraging the use of private pension schemes, further rationalising the hospital network and promoting healthier lifestyles would help contain upward pressure on ageing-related costs.
Lithuania’s population is both shrinking and ageing. According to UN projections, Lithuania will face the 6th largest relative population decline in the world by 2050. The working-age population is set to decline by 30% (Figure 5) while the old-age dependency ratio is expected to exceed 50% by 2050. A major uncertainty in these projections relates to the evolution of net migration, which has turned positive in the late 2010s and has been reinforced by a significant influx of Ukrainian refugees since 2022.
Demographic change will reduce output and weigh on cost-competitiveness. OECD simulations show that global demographic changes are likely to reshuffle international trade, with a reduction in Lithuania’s GDP and exports by around 10% by 2050, partly related to declining labour supply and lower cost-competitiveness. The shock would particularly affect the labour-intensive manufacturing sector. The decline of the labour force could be significantly reduced if Lithuania managed to extend the recent reversal in net migration.
Immigration at different skill levels will be key to mitigate labour shortages. While attracting high-skill workers is crucial to address specific labour shortages, population ageing will also require lower-skill workers in sectors such as healthcare and long-term care, which hardly rely on immigration so far. Encouraging the return of Lithuanians living abroad would help to attract migrants that are relatively easy to integrate. Moreover, while recent changes in immigration rules should first be evaluated, Lithuania could consider making the current system of residence permits for non-EU workers more attractive by extending their standard duration and flexibility for individuals meeting certain criteria.
The projected increase in public spending on healthcare and pensions is subject to upward risks. Healthcare spending projections assume that spending as a share of GDP will remain low despite income convergence and population ageing. In addition, pension cost projections assume that the ratio of average pensions to wages will also remain low. Most likely, this will not allow addressing old-age poverty issues, which are already pressing and will become more acute as the share of old-age people will increase. Developing indicators to assess the impact of future pension reforms on old-age poverty will be key.
To limit future budgetary pressures, the use of private pension schemes should be further encouraged. Lithuania’s second pension pillar is not mandatory and
less than half of employees currently enrol. Limiting the possibility to opt out to a list of well-defined criteria and improving financial literacy and communication around expected returns would favour the development of this private pension scheme.
Further rationalising the hospital network would generate quality improvements and reduce costs. The number of hospitals has been reduced since independence, but bed occupancy remains low, and the quality of care is unequal across locations. Pursuing current plans to merge hospitals and reduce expensive inpatient services, while developing outpatient services and telemedicine, is essential for efficiency and quality improvements. They should be regularly assessed by independent auditors.
Regulations, price incentives and the promotion of healthier lifestyles would help to improve health outcomes, facilitate the employment of older workers, and contain spending pressures. Death rates from preventable diseases are high in Lithuania, especially for men. This may be partly explained by high tobacco, alcohol and sugar consumption. Policies to discourage such consumption include taxes and sales regulations, especially for young people. They should be further developed in Lithuania. Resources dedicated to preventive care and the promotion of healthy lifestyles are low in international comparison, even though such spending is effective to reduce subsequent healthcare costs.
Figure 5. Lithuania will face a major demographic shock
Source: UN World Population Prospects, 2022
■ Main findings | ● Key recommendations
MACROECONOMIC POLICY
■ The fiscal stance is expected to become more accommodative in 2025-26.
● Progressively improve the fiscal balance to prepare for higher ageing-related costs in the future and maintain a low public debt burden.
■ The public sector is large compared to other OECD countries and paying a wage premium. At the same time, a significant share of the population is dissatisfied with public services.
● Continue to conduct spending reviews and evaluations to rationalise spending on public services across regions, control the public wage bill, and accommodate public services, in particular education and health, to the needs of an ageing population.
■ Property taxes, which are among the least detrimental to economic growth, are much lower than in other OECD countries.
● Progressively increase revenues from property taxes, including by broadening the base of immovable property taxes.
■ Despite a decrease in recent years, the VAT compliance gap remains high. This reflects a large shadow economy.
● Improve tax compliance by further digitalising VAT collection and strengthening tax administration.
● Evaluate the impact of recent restrictions on cash transactions.
■ The labour tax wedge is higher than the OECD average, especially around and below the average wage. The employment rate of low- and medium-skilled workers is lower than in OECD best performing countries.
● Further reduce the tax wedge for low-income earners and consider increasing PIT progressivity to ensure stable fiscal revenues.
RAISING PRODUCTIVITY AND STRENGTHENING INSTITUTIONS
■ Capital markets are underdeveloped and a significant proportion of firms are financially constrained.
● Continue developing pension funds and consider softening their investment rules, including by allowing some investments in unlisted firms.
● Foster financing through Fintech firms by providing adequate regulations, encouraging the development of digital payments, and improving digital financial literacy.
● Consider extending the listing of SOEs.
■ Despite significant improvements in the public integrity framework, perceived corruption remains high.
● Systematically monitor the post-public employment activities of former high-ranking public officials and ensure an adequate balance between public integrity and privacy concerns.
■ Main findings | ● Key recommendations
DEVELOPING RENEWABLE ENERGY SOURCES AND CURBING EMISSIONS FROM TRANSPORT AND BUILDINGS
■ The required investment in renewable energies until 2050 will far exceed what EU funds and the government budget can directly finance.
● Encourage private investment in renewable energies by ensuring sufficient long-term project pipelines for private investors.
■ Excise duties and carbon taxes on motor fuels have started to increase from a low base and further increases are planned until 2030.
● Assess the impact of the expected increase in excise duties and carbon taxes on motor fuels. If it proves insufficient to reach the 2030 transport emission targets, consider further increases, while redistributing the additional revenues back to households.
■ Carbon prices in sectors not covered by the European Emission Trading System (EU-ETS) are substantially lower than the EU average.
● Progressively align carbon prices in sectors outside the EU emissions trading scheme to those within through tax measures, while compensating low-income households with targeted transfers.
ADDRESSING DEMOGRAPHIC CHALLENGES
■ Lithuania is projected to experience one of the steepest declines in the working age population of any OECD country. Many Lithuanians have emigrated since independence.
● Encourage return migration to mitigate the demographic shock, including through stronger support with integration into schools and childcare.
● Broaden diaspora policies beyond high-skilled to medium and low-skilled workers.
■ With a maximum length of two years and restrictive conditions to change jobs, the residence permits granted to non-EU workers do not provide long-term perspectives for settling in Lithuania.
● Evaluate the impact of recent changes in immigration provisions. Based on that evaluation, consider extending the standard duration and flexibility of residence permits for individuals meeting certain qualification, experience and integration criteria, potentially assessed through a points-based system.
■ Defined-contribution private pension schemes are underused.
● Restrict the possibility to opt out from private pension schemes to a list of well-defined criteria.
● Improve financial literacy and communication on the expected returns of private pension schemes.
■ The healthcare system is characterised by low bed occupancy in hospitals, low spending efficiency, and a varying quality of services across locations.
● Continue current reforms to merge hospitals and reduce expensive inpatient services, while developing outpatient services and telemedicine.
● Ensure that independent auditors regularly assess efficiency and quality improvements in the healthcare sector.
■ Avoidable mortality is high, particularly among men.
● Further reduce the affordability and access to alcohol, tobacco and other harmful substances, and use the additional resources raised to organise public health campaigns and strengthen preventive care.
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