Opinion on the Annual Progress Report 2026

Public finances met EU requirements in 2025, but Lithuania may find it more difficult to comply with fiscal discipline rules from 2026 onwards, warns the independent fiscal institution. Unless decisions are taken on additional sustainable sources of revenue, a choice may have to be made in the future between defence funding and other public services.
  
The National Audit Office, as an independent fiscal institution (IFI), has assessed the fiscal part of the 2026 Annual Progress Report. The report provides information on the implementation of Lithuania’s medium-term fiscal structural plan in 2025.
  
In 2025, a medium-term fiscal structural plan was endorsed, aimed at ensuring sustainable public finances. In the plan, Lithuania committed to adhering to the set limits on general government expenditure* growth for 2025–2029, which average 5% per year. For 2025–2028, Lithuania is also subject to a defence expenditure clause, allowing for a deviation of up to 1.5% of GDP from these limits.
  
The 2025 budget complied with EU fiscal discipline rules, but challenges lie ahead
  
Although actual general government expenditure in 2025 was higher than planned in the Budget Law, the IFI assesses that, taking into account the applicable flexibility mechanisms, its growth still complied with EU requirements. Nevertheless, fiscal pressure will increase in the near future.
  
“As early as 2026, we see a risk that fiscal discipline rules may be breached, as expenditure growth could exceed the permitted limit. Due to faster-than-expected growth in 2025, fiscal space is tighter this year. To ensure compliance with the rules, expenditure this year should be lower than forecast. Fiscal discipline is not a bureaucratic rule for its own sake – it is the state’s promise to citizens that tomorrow we will have the resources to ensure both security and the availability of other public services. By delaying decisions on sustainable revenue today, we are setting ourselves up for painful choices in the future,” notes Auditor General Irena Segalovičienė.
  
The projections for the general government deficit in 2026–2027 presented by the IFI and those set out in the Annual Progress Report do not differ significantly. However, the IFI sees greater pressure on public finances in later years, whilst the Annual Progress Report forecasts the deficit to remain at 2.6% of GDP.
  
In the IFI’s assessment, taking into account the usual decisions to raise the tax-exempt amount of income threshold, pensions and other expenditure, the general government deficit could reach around 3% of GDP in 2028 and exceed this threshold in 2029. Increased defence spending is placing additional pressure on public finances. It should be noted that the deficit is significantly influenced by the accounting peculiarities of defence expenditure – advance payments are already increasing debt, but will only be reflected in the deficit in the future, once the equipment has been delivered to Lithuania.
  
As fiscal pressure intensifies, a choice may have to be made in the future between defence funding and cutting other expenditure
  
The IFI projects that between 2026 and 2029, general government debt will rise from 45% to 55.3% of GDP, while interest expenditure will increase from EUR 1.1 billion to EUR 1.8 billion. This means there will be less and less room to respond to new economic or geopolitical challenges.
  
“Fiscal pressure will only intensify in the coming years. Defence expenditure has increased, and the escape clause for it will apply until 2028. Without sustainable sources of revenue, it will be difficult to adhere to fiscal discipline rules without reducing access to public services. If we do not resolve the issue of additional revenue in time, we will have to choose in the future between funding defence or cutting other expenditure,” emphasises Jurga Rukšėnaitė, Head of the Fiscal Monitoring Centre.
  
Revenue from pension funds will boost SODRA’s reserves, but not fiscal space
  
The IFI also assessed the compliance of social security funds budgets with the national fiscal discipline rules in force until the end of 2025. The State Social Insurance Fund’s budget complied with the rule, whereas the Compulsory Health Insurance Fund’s budget did not. This is likely to indicate a funding shortfall. An assessment of the compliance of municipal budgets will be presented in June.
  
The IFI notes that, over the next few years, the SODRA reserve will be significantly bolstered by contributions from SODRA and the state budget received from second-pillar pension funds, which will become pension accounting units. This means that these financial resources create long-term liabilities and are therefore not considered additional revenue and should not be spent on increasing the current level of benefits. With nearly 40% of participants leaving the funds in the first quarter of this year, approximately EUR 1.3 billion was transferred to SODRA.
  
Decisions on additional sustainable sources of revenue are inevitable
  
In order to maintain fiscal discipline, it is important to increase general government revenue and identify new long-term sources of revenue. The level of general government revenue in Lithuania remains low compared to other EU countries. In 2024, revenue from taxes and social contributions in Lithuania amounted to 33.3% of GDP, compared to nearly 40.4% of GDP in the EU. The European Council recommends that Lithuania ensure adequate funding for healthcare, social security and other public services, improve tax collection and broaden the tax base. The IFI notes that not only revenue measures are needed, but also structural reforms, particularly those promoting labour productivity and sustainable economic growth.