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European Commission
assessment of the 2008
update of the Lithuanian
convergence programme
Vilnius, 1 April 2009
Ralph Wilkinson
Directorate Member States II
DG ECFIN, European Commission
The EU fiscal rules in
a nutshell - I

The Treaty rules (Article 104)


deficit < 3% of GDP, unless it has declined and reached a
level close to 3% or the excess is small, exceptional
(‘severe economic downturn’) and temporary
debt < 60% of GDP, or should be on a decreasing trend
and approaching 60% at a satisfactory pace
The EU fiscal rules in a
nutshell - II
The Stability and Growth Pact
(Regulations 1466/97 and 1467/97, amended in 2005 and
complemented by improved fiscal and statistical governance )


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Preventive arm: Pursuit of medium-term budgetary objectives
(MTOs)
Stability and convergence programmes and annual updates
Early warning mechanism
Corrective arm: Specifies the steps of the excessive deficit
procedure (EDP)
Sets up a timetable for the correction of excessive deficits
Economic analysis in the application of the rules
The 2005 SGP reform
- salient features
Preventive arm of the SGP
 Country-specific medium-term budgetary objectives
 Larger fiscal consolidation efforts required in ‘good times’
 Incentives for structural reforms, emphasis on sustainability
Corrective arm of the SGP
 3% and 60 % remain the anchors of the system
 More economic analysis in the application of the rules
 Minimum fiscal effort, possibility to extend deadlines
Improved fiscal and statistical governance
 Recognition of the role of national rules and institutions
 Focus on the importance of high quality and reliable statistics
Lithuania’s convergence
programme assessment procedures

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
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Lithuania submitted the updated
convergence programme 2008-2011 on 23
January 2009
The European Commission assessed the
programme and adopted a recommendation
for a Council Opinion on 25 February 2009
It was discussed at the Economic and
Financial Committee (EFC)
The Council adopted its Opinion on 10
March 2009
Lithuanian economy scene setting



Overheating pressures: wages, inflation,
current account deficit soaring; external
competitiveness weakening
Weak policy response – expansionary and procyclical fiscal policy, measures supporting credit
growth, high public sector wage growth
Previous Commission and Council advice (but
not followed): Stronger policy response needed
to correct internal and external imbalances and
maintain macroeconomic stability
The underlying economic
assumptions
CP Jan 2009
COM Jan 2009
CP Dec 2007
CP Jan 2009
HICP inflation
COM Jan 2009
(%)
CP Dec 2007
CP Jan 2009
Output gap1
COM Jan 20092
(% of potential GDP)
CP Dec 2007
Net lending/borrowing CP Jan 2009
vis-à-vis the rest of the COM Jan 2009
world
CP Dec 2007
Real GDP
(% change)
2007
8.9
8.9
9.8
5.8
5.8
5.8
7.1
7.7
3.3
-12.7
-13.2
-12.5
2008
3.5
3.4
5.3
11.2
11.1
6.5
5.4
6.6
1.5
-10.2
-10.7
-12.7
2009
-4.8
-4.0
4.5
5.4
5.6
5.1
-2.8
-0.5
-0.4
-1.8
-4.8
-14.5
2010
-0.2
-2.6
5.2
3.6
4.8
3.6
-5.7
-4.8
-1.3
-4.7
-4.7
-15.4
2011
4.5
n.a.
n.a.
-0.1
n.a.
n.a.
-4.0
n.a.
n.a.
-5.7
n.a.
n.a.
Notes:
Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission
Source :
Convergence programme (CP); Commission services’ January 2009 interim forecasts (COM); Commission
1
Medium-term budgetary
strategy
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The main goal of the medium-term
budgetary strategy: the general government
structural deficit of 1% by 2010
Headline deficit to narrow to 1% in 2010
and to be in balance in 2011
Mainly to be achieved through revenue-toGDP ratio and a modest reduction in the
expenditure ratio
Medium-term budgetary
strategy
General government
revenue
(% of GDP)
General government
expenditure
(% of GDP)
General government
balance
(% of GDP)
Structural balance3
(% of GDP)
Government gross debt
(% of GDP)
CP Jan 2009
COM Jan 2009
CP Dec 2007
CP Jan 2009
COM Jan 2009
CP Dec 2007
CP Jan 2009
COM Jan 2009
CP Dec 2007
CP Jan 2009
COM Jan 2009
CP Dec 2007
CP Jan 2009
COM Jan 2009
CP Dec 2007
2007
33.9
33.9
35.5
35.2
35.2
36.4
-1.2
-1.2
-0.9
-2.6
-2.7
-1.2
17.0
17.0
17.6
2008
33.8
33.9
37.4
36.7
36.8
37.9
-2.9
-2.9
-0.5
-4.9
-4.6
-0.9
15.3
17.1
17.2
2009
35.8
34.8
38.6
37.8
37.8
38.5
-2.1
-3.0
0.2
-1.8
-2.9
0.3
16.9
20.0
15.0
2010
37.3
36.0
39.4
38.3
39.4
38.6
-1.0
-3.4
0.8
0.1
-2.1
1.1
18.1
23.3
14.0
2011
36.4
n.a.
n.a.
36.4
n.a.
n.a.
0.0
n.a.
n.a.
1.1
n.a.
n.a.
17.1
n.a.
n.a.
Notes:
Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary
Source :
Convergence programme (CP); Commission services’ January 2009 interim forecasts (COM); Commission
3
Policy measures to
achieve the programme
objectives
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With the 2009 budget, a fiscal consolidation
package adopted aimed at restoring market
confidence and limiting financing needs
A comprehensive tax reform introduced with the
2009 budget
Significant expenditure cuts, including public sector
wages (3%), current expenditure and investment
But some measures underpinning the budget
rejected and have to be replaced by new measures
Are the adopted measures sufficient to achieve the
medium-term budgetary strategy?
Risk assessment

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Budgetary outcomes subject to significant
downside risks
In 2009, tax increase may not lead to higher
revenue and expenditure cuts may prove
difficult
2010 and 2011 consolidation base on
markedly favourable macroeconomic
assumptions
Additional measures are needed to underpin
the budgetary targets
Long-term sustainability
of public finances
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The long-term budgetary impact is lower
than the EU average due to enacted pension
reform
However, starting position worsened
considerably considering budgetary outcome
in 2008
Lithuania is at medium risk to long-term
sustainability of public finances
Achieving primary surpluses over the
medium term would help to reduce risks
Medium-term budgetary
framework
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Medium-term budgetary framework has not
succeeded in preventing expenditure
overruns
The Law on Fiscal discipline lacks necessary
forward looking medium-term planning
elements
Scope for enhancing planning and the
binding character of expenditure ceilings
Framework needs to ensure fiscal
consolidation in good times - would help
during the downturn
Fiscal response to current
downturn

All three Baltic countries embark on the fiscal
consolidation which is in line with the European
Economic Recovery Plan


“For those Member States, in particular outside the euro
area, which are facing significant external and internal
imbalances, budgetary policy should essentially aim at
correcting such imbalances.”
… and is largely driven by pragmatic
considerations


Difficulty in securing new financing at acceptable
conditions due to the market risk aversion
Euro accession as a confidence measure
ERM2 context

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“For a sustained period wage growth has
exceeded productivity growth by far, thus
weakening the country's competitiveness,
hindering prospects of export-led economic
recovery.”
In the context of ERM II membership and to
improve cost competitiveness, urgent need
to correct high wage growth
Summary
The adopted consolidation programme
is an appropriate response to needs to
correct macroeconomic imbalances
 The adjustment should be backed by
additional measures to prevent
breaching the 3% threshold in 2009
and 2010
 Need to reduce high wage growth

Policy
invitations
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Implement measures to achieve budget
target in 2009 by prioritising expenditures
and continue fiscal consolidation in the
medium-term
Implement public sector wage restraint
Strengthen public sector governance and
transparency, by enhancing the mediumterm budgetary framework and reinforce
expenditure discipline
Spring 2009 - what
now?
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Economic situation in Lithuania, Baltic
region and globally has deteriorated further
(European Commission spring economic
forecasts to be published 4 May)
Budgetary prospects weaker
Consolidation package imminent, with hints
of further action in summer
Speculation of international financing
support