Assessment of the Sustainability of General Government Finances in 2025–2050

• Even if migration trends remain favourable in the long term, Lithuania's population is projected to continue to decline and the challenges of an ageing population will persist.
• Ageing costs, such as old–age pensions and healthcare expenditure, will increase pressure on general government debt and pose risks to the sustainability of the country's public finances.
• If the ageing–related liabilities were to be covered only by debt, it is projected to rise to almost 80% of GDP in 2050.
• Not raising revenues in compliance with national fiscal discipline rules would reduce the quantity and quality of public services and worsen social sustainability.
• To finance ageing–related liabilities, structural reforms are needed to boost investment, labour productivity and mitigate the impact of changing demographics.

The National Audit Office, implementing the function of the fiscal institution (NAO FI), carried out an assessment of the sustainability of Lithuania's general government finances in 2025–2050.
  
In the long term, demography is one of the most important determinants of Lithuania's economic development and general government finances. Although net migration remains positive in the long term, the already formed population structure and low fertility will lead to a declining Lithuanian population, which could reach 2.6 million in 2050. The ageing of the population will also continue during this period, with more than 3 persons of working age supporting one elderly person in 2025, and this number falling to 2 in 2050.
  
"The costs of ageing will increase pressure on public debt and pose a risk to the sustainability of the country's public finances. If ageing–related liabilities were to be covered only by debt between 2025 and 2050, this would lead to an increase of the deficit. General government debt is projected to increase from 42.9% to almost 80% of GDP over this period, and the Maastricht criterion would be breached in 2043. The projected increase in the average interest rate will raise the cost of debt management. In order to maintain sustainable public finances, it is necessary to increase general government revenues and implement structural reforms to boost investment and labour productivity", notes Jurga Rukšėnaitė, Head of the Budget Monitoring Department.
  
The share of ageing costs in GDP will grow over time and pose challenges to public finances. The NAO FI projects total ageing costs to be 18.4% of GDP in 2025, rising to 21.5% of GDP in 2050. The largest increase will be in old-age pensions, which will increase by 2.5 pps of GDP over this period. Health-related expenditure will also increase. Expenditure on education, maternity-paternity and child benefits will decline as the population ages, but this will not offset the impact of the increase in old-age pensions and health-related expenditure on general government finances.
  
If national fiscal discipline rules are enforced to contain deficits, debt is unlikely to increase in the long term. However, without increasing general government revenues, the risks of a reduction in the quantity or quality of public services and of social sustainability will increase.
  
The NAO FI's assessment assumed that defence funding would amount to at least 3% of GDP each year until 2050. If defence spending were to increase by €12 billion between 2026 and 2030, i.e. up to 5-6% of GDP annually, and only additional borrowing was used for this purpose, public debt could reach 60% of GDP in 2030.
  
In January this year, proposals were presented on how to improve second pillar pension scheme. According to the NAO FI, taking into account the changes proposed by the Ministry of Social Security and Labour of the Republic of Lithuania, the impact of this pillar on the income replacement rate at retirement is likely to decrease in future. As a result, the ageing of the population will have an even more negative impact on the social security old-age pension system and will increase the risks to the sustainability of public finances in the long term.
  
Long-term projections are subject to particularly large uncertainties. In addition to ageing challenges, climate change, macroeconomic shocks, a tense geopolitical situation and the increasing fragmentation of the global economy could pose risks to fiscal sustainability. On the other hand, faster technological progress would be more conducive to productivity and growth than projected, which would help to moderate debt growth. Moreover, over time, policymakers are likely to take into account the risks associated with demographic change, which could lead to a different trend in public finances.