Minority status complicates policy plans
Following the recent party leadership election, the Social Democratic Party of Lithuania voted to leave the ruling coalition. However, most members of the party’s parliamentary group decided to stay in the coalition. One minister delegated by the Social Democratic Party resigned from the cabinet, while two other ministers decided to continue their work in the government. Although the Lithuanian Farmers and Greens Union is expected to continue cooperating with eight former Social Democratic Party members of parliament, the current government is balanced on the verge of a minority government. To remain in power, the government will require political backing from other parliamentary groups, which will complicate the implementation of the government program, especially the adoption of structural reforms. However, the adoption of the 2018 budget indicates that the current minority government arrangement is able to gather enough parliamentary support for major political decisions. This might change if some political actors decide to shift their position with a view to the forthcoming presidential elections in 2019, but it is possible that this situation could continue until the next scheduled parliamentary elections in 2020.
Consensus possible for
To address key policy priorities (e.g., education, innovation, taxation and pension reforms), consensus between the government, president and parliament is needed. The commitment to increase defense spending to 2% of GDP by 2018 demonstrates that consensus can be achieved in the context of geopolitical tensions. In addition, policy implementation and institutional reform must be given sufficient attention. The successful development of a new liquified natural gas terminal in Klaipėda, an electricity network linking Lithuania, Poland and Sweden, and the adoption of the euro in 2015 demonstrate the country’s capacity to complete major political projects. During the spring 2017 parliamentary session, the Skvernelis government was able to push through several important reforms (including the adoption of a new labor code, optimization of the network of state universities, merger of state-owned forestry companies and amendments to the Alcohol Control Law). However, it is not clear if the current government will be able to sustain this reform momentum due to its diminished parliamentary majority following the split within the Social Democratic Party.
Numerous long-term challenges. Restructuring needed in health care, education
Key challenges to long-term economic competitiveness include negative demographic developments, labor-market deficiencies, persistently high emigration rates, rising levels of poverty and social exclusion, inadequate physical infrastructure (particularly in the energy system), relatively high income tax rates, a large shadow economy, low energy efficiency (especially in buildings), low R&D spending, and weak innovation. To address these challenges, the new government should continue reforming the labor market, higher education sector, social-inclusion policy and energy sector. Furthermore, as a small and open economy dependent on exports, Lithuania is particularly sensitive to external shocks. To reduce the economy’s exposure to external shocks, the government must improve the national regulatory environment and increase business flexibility to reorient market activities. The performance of the country’s schools and higher education institutions should be improved through structural reforms, a greater focus on results and institutional capacity-building. For instance, poorly performing universities should be merged or closed, and the government’s limited resources distributed to the best performing universities to invest in R&D and improve the quality of study programs. The restructuring of the health care sector should also be continued. Given the declining population, the size of the country’s public administration needs to be reduced (in terms of the number of public administration institutions and staff employed) and made more efficient.
Fiscal challenges will
rise with time
rise with time
Although Lithuania’s public finances are solid, fiscal challenges are set to become more difficult in the medium term due to the declining population and increasing dependency ratios. The complex causes of structural unemployment, persistent emigration, rising poverty and social exclusion should be urgently addressed. A mix of government interventions is needed to mitigate these social problems, including general improvements to the business environment, effective active labor-market measures, an increase in the flexibility of labor-market regulation, improvements in education and training, cash-based social assistance, and other social services targeted at vulnerable groups. The government’s new “social model,” which contains proposals to liberalize labor relations and improve the sustainability of the social-insurance system, entered into force in mid-2017.
EU funds cannot be allowed to distort
The European Union’s 2014 to 2020 financial-assistance program for Lithuania is expected to total about €13 billion. The key goal of the program is to promote economic competitiveness in Lithuania. However, funding should target economic sectors with high potential growth, while being careful not to distort markets or fund corruption. Better policy implementation in line with strategic priorities set out in, for example, Lithuania 2030 and the Partnership Agreement with the European Commission (i.e., Europe 2020 strategy) would improve the effectiveness and sustainability of policy developments, and quality of governance. In addition, the Lithuanian authorities should improve the result-orientation of EU funds while maintaining a high rate of financial absorption.
Benefits from strengthening,
Democracy and governance arrangements could be improved by strengthening some legislation (e.g., media-ownership transparency), while enforcing other legislation more strictly (e.g., anti-discrimination rules). Collaboration between central government, local governments and civil society actors could be improved by encouraging citizen participation, making wider use of existing impact assessment processes and stricter adherence to the principle of proportionality.
Corruption in key sectors must be curbed
Corruption in the health care sector, parliament, court system, police and local authorities must be tackled by enforcing anti-corruption regulations more effectively. The professionalism of the civil service must be maintained, while integrating modern policymaking practices (e.g., strategic oversight, evidence-based policymaking and inter-institutional coordination), improving policy delivery, and ensuring that senior appointments in the civil service and state-owned companies are not politicized.