Assessment of the fiscal part of Lithuania's medium-term Fiscal-Structural Plan

• Lithuania's medium-term fiscal-structural plan is in line with the new EU rules on fiscal discipline.
• Given usual budgetary decisions, NAO FI projects, that the general government deficit in 2026–2028 will be close to the Maastricht criterion threshold.
• Measures that increase general government revenues are needed to increase defence expenditure without reducing the quantity and quality of public services.
• According to the NAO FI's assessment, general government debt will grow faster in the period 2025–2028 than presented in the medium-term plan
• In 2024, general government budgets adhered to the national fiscal discipline rules.

The National Audit Office, implementing the function of the fiscal institution, has carried out an assessment of the fiscal part of Lithuania's medium-term fiscal-structural plan (MTP) for 2025–2029.
  
The new European Union (EU) fiscal discipline rules require each EU member state to prepare a medium-term fiscal-structural plan spanning 4–7 years. Lithuania has prepared and submitted this plan to the European Commission. It integrates fiscal policy, planned investments and reforms. A key element of the plan aimed at ensuring fiscal sustainability is a commitment related to net expenditure growth*. This commitment will need to be respected in the preparation of future government budgets.
  
"According to our assessment, the net expenditure path presented in the Lithuanian MTP is in line with the new EU rules on fiscal discipline. The net expenditure path is higher than in the European Commission guidelines but is based on appropriate macroeconomic assumptions and allows for sustainable public finances," notes Jurga Rukšėnaitė, Head of the Budget Monitoring Department.
  
This year, the NAO FI forecasts a deficit of 3% of GDP. To illustrate the pressures on public finances in 2026–2028, the NAO FI has prepared two scenarios: a baseline and an alternative. The baseline scenario includes decisions taken almost every year that increase long-term general government expenditure (public sector wage increases, additional pension indexation, etc.). Under this scenario, the deficit would be close to 3% of GDP over the period considered and net expenditure growth would exceed the MTP commitments. The fiscal commitment presented in the MTP does not reflect the expected application of national escape clause regarding defence expenditure, for which Lithuania has addressed the EU Council. Under an alternative scenario, which in addition to the assumptions of the baseline scenario includes an increase in defence expenditure from 3% to 5% of GDP and the impact of the tax proposals under consideration, the deficit would be above 4% of GDP in 2026–2028.
  
"Increasing defence expenditure without reducing the quantity and quality of public services requires structural solutions to increase budget revenues. The proposed tax changes would increase the budget's revenue and are on the right track, but they only address part of the recommendations of international institutions and leave some problems unresolved. The differentiated taxation of income by type of activity persists, and no consideration is given to abolishing the preferential corporate tax rate, which encourages companies to remain small. It is also important to note that the planned tax changes do not cover additional defence spending needs", said Auditor General Irena Segalovičienė.
  
According to the NAO FI's estimates, this year general government debt will reach 42.6% of GDP. As a result of usual budgetary decisions, debt is likely to reach 49% of GDP in 2028. This is higher than presented in the MTP (43.7% of GDP). According to the alternative scenario, it would grow even faster and exceed half of the country's GDP (53.8% of GDP).
  
In 2024, general government budgets were in line with national fiscal discipline rules. Last year, the size of the general government deficit was not restricted due to exceptional circumstances.

Net expenditure – general government expenditure net of interest expenditure, discretionary revenue measures, expenditure on programmes of the Union fully matched by revenue from Union funds, national expenditure on co-financing of programmes funded by the Union, cyclical elements of unemployment benefit expenditure, and one-offs and other temporary measures.