2026-09-04
How can we reduce the shadow economy while simultaneously accelerating the country’s economic growth? This was the subject of a discussion today at the Presidential Palace between the Auditor General Irena Segalovičienė and the President of the Republic of Lithuania, Gitanas Nausėda, alongside the Ministers of Finance and of the Economy and Innovation, as well as the heads of the Bank of Lithuania, the Competition Council, the State Tax Inspectorate, and ILTE.
The meeting focused on measures that could help reduce the shadow economy, increase state budget revenue and, at the same time, create more favourable conditions for economic growth.
Auditor General Irena Segalovičienė pointed out that, as defence, social and other state needs grow, the question of how to ensure the sustainable revenue required to fund them is becoming increasingly important. Assessments by the National Audit Office, implementing also the function of an independent fiscal institution, show that as the state’s long-term liabilities increase, so too does the pressure on public finances. It is therefore important not only to reduce the shadow economy, but also to critically assess tax concessions and ensure sustainable sources of state revenue.
Planned new budget revenue from reducing the shadow economy must have a solid, evidence-based foundation. According to an assessment by the independent fiscal institution, with debt approaching the 60 percent of GDP threshold (by 2029, debt could reach 55.3 percent of GDP), fiscal space for future challenges is rapidly shrinking; therefore, there is simply no room for unfounded expectations.
“We cannot finance the state’s growing needs through borrowing in the long term. We must ensure stable revenue – by reducing the shadow economy, critically assessing tax concessions and, at the same time, creating the conditions for economic growth. The stronger and more productive the economy, the greater the opportunities to finance the state’s priorities in a sustainable manner,” says Auditor General Irena Segalovičienė.
Budget revenue must be sought amongst existing concessions
The Auditor General has proposed addressing the issue of the preferential corporation tax rate for turnover up to 300,000 euros. The absolute turnover threshold of 300,000 euros for small businesses, combined with a 10-percentage-point gap between the preferential (7 percent) and standard (17 per cent) rates, acts as a direct driver of the shadow economy. This encourages businesses to limit their turnover or to artificially split up companies. Tax relief must promote transparent growth, not create barriers to expansion. Such relief is detrimental to both the state budget and the economy, as it creates incentives for companies not to grow.
Economic growth – untapped potential for innovation
The Ministry of Economy and Innovation bears a particular responsibility for achieving faster economic growth in the country. GDP growth, increases in labour productivity and the development of a high value-added economy depend directly on the Ministry’s strategic leadership, the speed of its decision-making and its ambition . The Ministry’s actions and results must now be scrutinised closely – the state simply cannot afford any further procedural delays or the inefficient use of funds.
The National Audit Office’s audit, “Business Innovation Promotion System”, revealed that Lithuania is not yet realising its full innovation potential. In 2024, expenditure on research and experimental development (R&D) in Lithuania amounted to EUR 825.3 million, or 1.05 percent of GDP. Business R&D expenditure fell from 0.53 percent to 0.43 percent of GDP between 2022 and 2024.
In the first half of 2022–2025, 174 funding schemes were planned for innovation, with a total value of nearly 3 billion euros (2,982.1 million euros). However, the audit revealed that the individual schemes do not form a coherent system for promoting innovation. Therefore, in order for innovation to contribute more to economic and productivity growth, it is important to assess not only the volume of funding allocated, but also the results generated by these investments.
To improve the efficiency of innovation policy implementation, the Ministry must implement the following recommendations from the National Audit Office:
- Establish funding measures based on real business needs and transition to an integrated innovation chain model – ensuring consistent continuity of support from the laboratory stage to the export of the actual product to markets.
- Simplify the administration of tax incentives (by applying standardised rates) and proactively assist businesses with patenting processes.
- Introduce effective risk-sharing mechanisms for innovative public procurement so that the public sector acts as a catalyst for innovation and is not afraid to purchase bold, cutting-edge solutions.
- Reduce the administrative burden by cutting back on excessive documentation requirements – it is essential to ensure the smooth exchange of data between institutions so that companies seeking to benefit from R&D incentives do not have to submit duplicate documents and certificates to the State Tax Inspectorate (VMI) and the Innovation Agency.
- Ensure the availability of information through a “one-stop shop” approach – businesses should not have to navigate between six different information channels.
Reducing the shadow economy can help to increase state revenue in the short term, but the state’s long-term financial prospects will also depend on faster economic and productivity growth. Therefore, to achieve sustainable public finances, solutions are needed in both areas.
Photo credit: Office of the President of the Republic of Lithuania (Robertas Dačkus)