Key Challenges

Status quo likely
until new elections
Although the Lithuanian Farmers and Greens Union, the leading party in the governing coalition, has a relatively stable parliamentary group, it requires political backing from other parliamentary groups. The adoption of structural reforms and the 2020 budget demonstrated that the ruling majority was able to gather enough parliamentary support for major political decisions. However, the ruling majority lost its momentum toward the end of the 2016 – 2020 political term. The status quo is likely to continue until the next parliamentary elections scheduled for 2020.
Key priorities demand broad consensus; reforms passed but remain unimplemented
To address key policy priorities (e.g., education, healthcare and innovation reforms), consensus between the government, president and parliament is needed. The commitment to increase defense spending to 2.5% of GDP by 2030 demonstrates that consensus can be achieved in the context of geopolitical tensions and confrontational parliamentary politics. Likewise, policy implementation and institutional reform must be prioritized. The successful development of a new liquefied-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. The process of OECD accession created incentives for the reform of state-owned enterprises, and led to additional emphasis on the prevention of corruption. While the Skvernelis government has pushed through several important reforms, most have yet to be implemented and enforced. It is doubtful whether the current government will be able to sustain this reform momentum in the context of the approaching 2020 elections. Instead, it has begun to issue frequent rhetorical pronouncements on issues of importance to voters (e.g., high inflation, low wages). This has further exposed the lack of impact assessments for new legislative initiatives, especially with regard to the parliamentary debates over the 2020 state budget for 2020 and related changes to the tax code.
Challenges to long-term growth looming; external shocks a particular risk
Key challenges to long-term economic competitiveness include negative demographic trends, labor market deficiencies, inadequacies in education and healthcare systems, rising poverty and social exclusion rates, a lack of public trust, a lack of 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 feeble innovation. To address these challenges, Lithuanian authorities should continue reforming the labor market, the higher-education system, the country’s social-inclusion policy and the 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 in this regard, the government must improve the national regulatory environment and increase business flexibility so as to reorient market activities. The performance of the country’s schools and higher-education institutions should be improved through structural reforms, innovations in the public sector and institutional capacity-building.
Long-term public-sector wage strategy
After the public protests by school teachers at the end of 2018, the government established a special commission tasked with developing a strategy for making sustainable increases in the wages of public sector employees by 2025. This long-term strategy was announced in March 2019, proposing differentiated salary increases in various public sectors. It will be difficult to achieve these goals, given the low government expenditure as a share of GDP (33.1% in 2017, the second-lowest such value in the EU-28). Instead of pursuing further structural reforms in the country’s public sector, the Skvernelis government intends to generate additional income for the state budget through a combination of (higher or new) taxes, as well as through additional revenue derived from economic growth. Renewed public protests by teachers, lecturers, doctors, fire fighters and members of other professions during the debates surrounding the 2020 state budget indicate growing pressure for wage increases. However, there is potential for more efficiency in the allocation of resources within these systems if structural reforms were to be implemented.
Population declines
a fiscal threat
Although Lithuania’s public finances are currently solid, fiscal challenges will 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 must be urgently addressed. A combination of government interventions is needed to mitigate these social problems, including general improvements to the business environment, effective active labor market measures, more flexible labor market regulation, improvements in education and training, and cash-based social assistance and other social services targeting vulnerable groups.
EU fund absorption
a critical goal
The EU’s 2014 – 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. This funding is meant to target economic sectors with high potential for growth, while avoiding the creation of market distortions and any funding of corruption. Lithuanian authorities should continue to improve the country’s capacity to absorb these EU funds, while maintaining an orientation toward results when making these investments. In addition, the Lithuanian authorities should adequately prepare for the new (2021 – 2027) programming period, when EU investments in the country are likely to decrease by about 25% compared to the current period. Moreover, the rate of national co-financing will increase from 55% to 85%. These changes will generate increased fiscal pressure on the state budget from 2021 onward.
Bringing citizens into governance
Democracy and governance arrangements could be improved by strengthening existing laws (e.g., media-ownership transparency) and enforcing other laws more strictly (e.g., anti-discrimination rules and the independence of the public broadcaster). Collaboration between the central government, local governments and civil society actors could be improved by encouraging citizen participation, by making wider use of impact assessments and through stricter adherence to the principle of proportionality within lawmaking processes.

Party Polarization

Medium level of polarization
According to the index of ideological polarization in party systems (Wagschal 2018), Lithuania had a medium-sized level of party polarization (4.31 out of 10) in 2018. Previous research found that the polarization and distrust between the two Lithuanian parliamentary blocs, the Homeland Union – Christian Democrats (conservatives) and the Social Democratic party, complicated the implementation of major policy reforms between 2008 and 2012. Additional efforts were often required to mobilize support within competing coalitions organized around conservatives and social democrats, making reforms more difficult.
Polarization is major obstacle to agreement; public clashes used to mobilize voters
Party polarization remains a major obstacle to finding cross-party agreements in policymaking. The fact that the Lithuanian Farmers and Greens Union became the leading party of the new governing coalition (with the Social Democratic Labor party) has not reduced the scope of divisive politics in the Seimas. On the one hand, the parliamentary group of the Lithuanian Farmers and Greens Union launched several politically motivated parliamentary inquiry commissions to scrutinize the performance of the government led by conservative Prime Minister Andrius Kubilius during the financial crisis and its management (2008 – 2012). On the other hand, the parliamentary group of the conservatives did not support most of the incremental structural reforms initiated by the 2016 – 2020 government headed by Saulius Skvernelis, one of the leaders of the Lithuanian Farmers and Greens Union, with the exception of a reform of the state-forest management system. It appears that both parties often clash publicly on issues in order to mobilize their voters, reducing the space for potential cross-party agreement on long-term reforms. This type of conflictual behavior became increasingly visible during the 2019 election campaigns.
Agreement possible
on some issues
Despite confrontational politics in the Lithuanian parliament, all political parties represented in the Seimas (except the parliamentary group of the Social Democratic party) signed a new accord on guidelines for Lithuanian defense policy. This agreement foresees that government spending on defense will be gradually increased to reach at least 2.5% of GDP by 2030. This demonstrates that on some issues (e.g., national security) broad cross-party agreement can be mobilized. Similarly, no parliamentary party questions country’s membership in the EU and NATO. (Score: 5)
Vitalis Nakrošis, Ramūnas Vilpišauskas and Egidijus Barcevičius, Making change happen: policy dynamics in the adoption of major reforms in Lithuania, Public Policy and Administration, 34 (4), 2019, p. 431–452.
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