Lithuania has achieved rapid convergence towards OECD living standards over the past 30 years. Policies should now focus on addressing rising ageing-related costs by improving public spending efficiency, broadening the tax base and encouraging formal economic activity to ensure future fiscal sustainability, according to a new OECD report.
The latest OECD Economic Survey of Lithuania says that GDP growth is projected to reach 3.1% in 2025 and 2.8% in 2026, driven by a rebound in private consumption and a progressive increase in exports. Sustained real wage gains, a resilient labour market with unemployment below its long-term average and increasing consumer confidence are expected to support a pickup in household consumption.
However, Lithuania faces a major demographic shock, with its population both shrinking and ageing. By 2050, the working-age population is set to decline by 30% while the old-age dependency ratio is expected to exceed 50%. This will cause ageing-related spending to rise, mainly due to pensions.
"Financing increasing ageing-related costs without endangering fiscal sustainability will require creating additional fiscal space," said Isabell Koske, Deputy Director of the OECD's Economics Department, presenting the Survey in Vilnius. "This could be achieved through a mix of policies aiming at improving public spending efficiency, broadening the tax base and encouraging formal economic activity."
Helping more older workers find work would contribute to alleviating labour shortages, especially as unemployment is concentrated among older workers. Training policies should play a key role, but improvements in healthcare and promoting healthier lifestyles are needed as well.
Well-managed immigration could also help mitigate labour shortages. In addition to continuing to attract high-skill workers, population ageing will require more workers in sectors such as healthcare and long-term care. Encouraging the return of Lithuanians living abroad would help attract migrants who can integrate easily.
Stronger competition in retail energy markets, deeper domestic capital markets, and further improvements in public integrity would bolster productivity. Lithuania's regulations in the markets for goods and services are now the least restrictive in the OECD, but access to capital remains difficult and hampers enterprise growth. Fostering the development of private pension funds that can invest in the domestic economy could allow more firms to grow.
Investing more into research and development could boost innovation and productivity growth. More firms could take advantage of existing support measures through a clearer definition of eligible R&D expenditures, shorter application procedures, and a more balanced combination of tax incentives and direct support to smaller innovative firms.
Ensuring sufficient financing for renewable energy investments and reducing transport emissions will be key to reach emission targets and improve energy security. In the context of limited fiscal space, avoiding a financing gap for renewable energy will require long-term project pipelines and derisking schemes for private investors. Curbing transport emissions will necessitate increasing fuel prices while ensuring support for low-income households, expanding and electrifying the rail network, facilitating interconnections between road and rail, and limiting urban sprawl.
