The Bank of Lithuania vows victory as growth has resumed, household consumption and a high level of investment are reviving the economy which has stagnated for over two years. As the demand for Lithuanian goods and services picks up in export markets along with the easing of monetary policy, this year Lithuania’s economy is projected to grow by almost 2%, before accelerating to 3.1% and 3.3% in the next two years.

Household consumption expenditure is the main driver of economic growth. In the first quarter of this year, household consumption expenditure exceeded the highest level recorded before the inflation surge. It will supposedly be supported by the rapid growth in income as well as slower price increases, improving household expectations and a favourable labour market situation for workers. Following a 1.1% decline last year, consumer expenditure is projected to increase by 3.4% this year and by 3.7% both in 2025 and 2026.

The other driver of the economy, the development of exports, will be positively impacted by the competitiveness and recovering foreign demand. In 2024–2026, foreign demand will grow slower than the long-term average, therefore, export growth should be more sluggish than before the COVID-19 pandemic. Total exports are projected to grow by 1.2% this year and by a further 3.7% next year.

Larger investments will also contribute to GDP growth. The level of investment, compared with GDP, stood at 24% last year and was the highest since the global financial crisis. Investment volumes should expand by 4.5% this year and by 4.1% next year. The increase in EU support funds will significantly contribute to their growth and they will also benefit from the economic growth in the medium term.

The labour market remains favourable for workers. Wages are expected to grow at a relatively rapid pace but slower than in the previous year. The average wage is projected to increase by 10.2% this year, while the growth will slow down to 8.5% next year. However, from a long-term perspective, even such slower wage growth is still relatively rapid.

Along with the decline in commodity prices and easing of labour market tensions, the monthly price developments will be close to the usual changes. It is projected that inflation will stand at 1.2% in 2024. As the downward effect of commodity prices has faded, inflation will rise to 2.4% in 2025 and 2026. Prices will grow at a pace that is normal for Lithuania, which is still approaching the living standard of Western European economies.

Over the 20 years of EU membership, Lithuania has significantly reduced the gap with Western Europe from 45% of the euro area average in 2004 to 83% in 2023. This is the fastest increase in the living standard among the Baltic countries. However, Lithuania will have to cope with public expenditure related to population ageing, for example, for pensions and health care. To redirect the economy towards the creation of higher value-added goods and services, investment into innovation, research and intellectual property should be doubled. Based on the current economic developments in Lithuania and the euro area, the Lithuanian population should reach the average living standard of the euro area by about 2037.

According to the IMF, the fiscal stance has contributed to the significant slowdown in inflation. Given the economic cycle, last year, the structural balance of the public sector improved, as compared to 2022, adding to a further decline in debt levels (the level of public debt decreased by 10 percentage points, as compared to the pandemic period). The IMF estimates that fiscal policy will be mildly expansionary this year. The deficit is projected to be lower than foreseen in the budget law.

The IMF also took into consideration the growing demand to increase the funding for the national defence, as well as the rising cost of debt payments. This has added to the structural long-term challenges regarding public finances, resulting from the ageing of the population and the declining birth rates. To this end, IMF experts recommend implementing a plan on public finance policies including, inter alia, decisions on additional sustainable sources of revenue.

At this point, instead of living the scene to the market, according to the IMF Lithuania could increase tax revenues while preserving a competitive fiscal environment. With around 9% of GDP, Lithuania’s tax revenue-to-GDP ratio is lower than the EU average. The IMF recommends shifting towards a more political model of the tax system, with property, capital and environmental taxes playing a more significant role.

Unfortunately, the latter measures risk to rather jeopardise all the progress mentioned above. Instead, it would be more effective to look at the Estonian neighbours and learn the lesson of real competitive taxation to consolidate the results and enhance market competitiveness.