## _wp15278 - References .............................................................................................................

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---

### I. INTRODUCTION — Key findings and context
- Fiscal consolidation over the past five years has reduced Lithuania’s public expenditure as a share of GDP to among the lowest in the region.
- Prior to the 2008/09 financial crisis, Lithuania’s public spending was already well below the European average.
- Expenditure measures accounted for approximately two-thirds of the overall consolidation effort.
- Public spending fell from a peak of 45 percent of GDP in 2009 to around 35 percent of GDP in 2013.
- Current spending accounted for the bulk of the spending adjustment, with reductions in social benefits and public sector wages contributing the most.
- In functional terms, social protection, education, and health contributed most to the spending reduction.
- Four main sources of future spending pressures identified:
  - Low-quality consolidation measures (e.g., postponed capital spending, untargeted across-the-board freezes and cuts) tend to unwind.
  - Social demand for higher spending if outcomes compare unfavorably to other European countries.
  - Population ageing: projected annual public pension and health spending to increase by 3.9 percent of GDP by 2050.
  - The demand for public services tends to rise with growing incomes; absent revenue increases, additional expenditure consolidation will be needed to reach medium-term fiscal objectives and to offset committed increases in defense spending.
- Benchmarking scope: 31 European countries (EU-28 plus Iceland, Norway, and Switzerland). Lithuania’s spending compared with the EU average controlled for GDP per capita.

### II. PUBLIC SPENDING BY ECONOMIC CLASSIFICATION — Findings
- Lithuania largely resisted fiscal consolidation at the expense of investment:
  - Capital spending as a share of GDP has fallen slightly since the 2008/09 crisis but was a less important source of consolidation than in other countries.
  - Government decision to shield EU-funded projects from cuts led to capital spending exceeding the European average in the last five years.
- Lithuania’s comparatively low stock of public capital motivated relatively higher public capital spending.
- Wage bill reductions contributed significantly to consolidation:
  - The public sector wage bill increased sharply prior to 2009 — by 50 percent in real terms between 2005 and 2008, including by nearly 20 percent in 2008 alone.
  - Medical doctors and judges’ real wages doubled over 2005–2008.
  - Consolidation measures targeted the wage bill: employment and nominal wage freezes and reductions, elimination of unfilled vacancies, suspension of bonuses and promotions.
- Size and composition of the wage bill:
  - Wage bill at 9.6 percent of GDP in 2013.
  - General government employment levels consistently exceeded the EU median of around 17 percent of the labor force over the last decade, despite recent decreases.
  - The education sector appears chiefly responsible for relatively high employment; health and “other” employment components also contribute.
  - Relatively high employment is associated with relatively low average wages, potentially challenging the public sector’s ability to attract and retain qualified staff and possibly increasing future wage pressures.
- Recommended direction: focus on structural measures to reform the public sector wage bill rather than relying on blunt short-term measures.

### II.A Box 1 — Wage Bill Consolidation Measures in Lithuania Since 2009 (measures and impacts)
- Measures introduced in 2009:
  - Hiring freeze introduced; existing 600 public administration vacancies eliminated. The freeze is still in effect.
  - Parametric changes of the wage system:
    - From January, civil service base wage decreased from LTL 490 to LTL 475 (a 3 percent reduction) and in August to LTL 450 (a 8 percent cumulative reduction).
    - Bonus payments decreased in August from 15, 30 and 50 percent of service pay to 10, 15, and 30 percent—this expired on October 1, 2013.
    - In May, a progressive downward adjustment in base wages led to an average 25 percent gross cut for high-paid civil servants (excluding teachers, police and medical workers). These disproportionate cuts were reversed on October 1, 2013, to comply with a Constitutional Court ruling of July 2013.
  - Further reduction of overall wage bill by 12 percent:
    - Number of full-time civil service positions cut by 4,000 (approximately 6,700 civil servants) in October; managers given discretion to meet reduction targets by cutting working days.
    - Bonuses and promotions suspended.
- Measures introduced after 2009:
  - 2010: further reduction of the wage bill of about 0.6 percent of GDP achieved through a 10 percent wage bill cut for civil servants, a 2 percent cut for statutory civil servants and a 5 percent cut for cultural and social workers and teachers.
  - Public sector wages frozen during 2011–13, delivering annual budget savings of 0.3-0.5 percent of GDP.
- Impact notes:
  - Consolidation measures in 2009 delivered an estimated full-year savings of 1.5 percent of GDP, though some measures were introduced later in the year and did not yield full impact in 2009.
  - Teachers’ wages increased by 18 percent because teaching hours were increased (despite a decline in basic wage in September 2009 from LTL 128 to LTL 122).
  - These factors, coupled with a dip in GDP, meant the total public wage bill still increased by 2 percentage points of GDP from 2008 to 2009.

### II.B Policy implications and recommendations (economic classification)
- Short-term blunt measures (freezes, cuts) can be effective but risk inefficiencies and unsustainability as skill composition becomes unbalanced.
- Structural reforms recommended:
  - Link public sector pay to productivity.
  - Improve hiring processes.
  - Improve service efficiency.
- Reducing employment levels may require time and possibly short-term additional spending (e.g., severance).
- Enhance incentives for reform by linking future wage increases to the adoption of structural measures.
- Promote social dialogue and public support to improve the chances for successful reform.

### III. PUBLIC SPENDING BY FUNCTIONAL CLASSIFICATION — Key observations
- At 36 percent of GDP in 2012, Lithuania’s total spending was 7 percentage points below the EU average of 43 percent of GDP.
- Spending lower than EU average in most functional categories, with exceptions:
  - Education spending substantially above the EU average.
  - Health spending slightly above the EU average.
- The analysis focuses on social protection, education, and health, which together account for about two-thirds of total spending.

### III.A Social Protection — Findings and concerns
- Social protection spending in Lithuania was 12.1 percent of GDP in 2012, below the European average of 14.9 percent.
- Social protection spending decreased by 4.7 percentage points of GDP since 2009.
- Low social protection spending is primarily driven by low pension spending.
- Within the pension and social protection envelope, spending on sickness and disability is 22 percent above the EU average.

### Box 2. Disability Benefits in Lithuania — Spending levels and composition
- In 2012, sickness and disability spending stood at 3 percent of GDP compared to an EU average of 2.5 percent of GDP.
- Disabled and old-age pensioners are also eligible for other subsidies, e.g., transport subsidies administered by the Ministry of Transportation.
- The disabled can be eligible for special needs covering: (i) constant care, (ii) constant nursing, (iii) assistance, (iv) compensation of transport expenses, or (v) compensation of expenses on purchase of a passenger car.

### Box 2. Disability Benefits in Lithuania — Coverage and disability rates
- High spending partly reflects high disability rates, especially among the working-age population above 45 years of age.
- Approximately a quarter of the population aged 55 to 59 years is receiving disability benefits.
- According to World Bank (2009), the number of claims for special needs more than doubles immediately after reaching retirement age.

### Box 2. Disability Benefits in Lithuania — Institutional changes and certification reforms
- The certification process has undergone substantial reform since 2005, with the introduction of an Agency for the Assessment of Loss of Working Capacity.
- The Agency has expanded the criteria for determining disability and the capacity to work to include social as well as physical factors.
- New entrants into the system are subjected to the new criteria, while existing entitlements and benefit flows were grandfathered.
- The assessment of special needs has been centralized in the same agency since July 2009.
- Nonetheless, the number of beneficiaries of disability pensions has continued to increase after 2009, suggesting that an evaluation of the effectiveness of these changes is warranted.

### Box 2. Disability Benefits in Lithuania — Policy implications and recommended measures
- Increased use of means-testing of social assistance:
  - The share of social assistance spending that is means tested is currently low across CESEE countries compared to many other European countries.
  - Careful design of means-tested benefits is necessary to avoid disincentives to work and welfare dependency; this can be achieved through greater use of in-work benefits and by expanding the role of active labor market programs (ALMPs).
  - Lithuania’s public spending on ALMPs was only one fifth of the EU average in 2012.
- Pension measures that protect the poor:
  - The EC 2012 Ageing Report projects that population ageing will increase pension spending as a percent of GDP in Lithuania by 3.4 percentage points by 2050.
  - The pension replacement rate (average pension divided by average wage) is 33.6 percent in Lithuania compared to an average of 46.4 percent for the EU and 56.7 percent for the euro area.
  - From 2012, Lithuania started to gradually increase its statutory retirement age to 65 years by 2026 for both men and women, from 62.5 and 60 years, respectively.
  - To be effective, increases in official retirement ages should be accompanied by complementary measures such as tightening opportunities for early retirement, including for disability benefits, and enhancing the employment prospects of older workers.
  - Adopting a built-in mechanism to deal with ageing, such as automatically linking the official retirement age to life expectancy, will help protect these gains over the longer term.
- Taxation and pension design:
  - Subjecting pension benefits to progressive income taxation could help lower inequality and strengthen the pension system’s social sustainability.
  - Currently social security contributions are calculated as a uniform uncapped proportion of wage while pension benefits are capped at around 1.7 times the average net wage.
  - Income from interest and capital gains over 10,000 LTL (2,896 EUR) have been subject to PIT starting January 2014.

### Education — structure, capacity, and outcomes
- Current and projected staffing and infrastructure imbalances:
  - Title finding: "8.5 percent fewer educators in general education and 12.9 percent fewer in tertiary education than is currently the case."
  - Class sizes in general education are small and have been decreasing over time; class sizes are currently below the EU average, especially in primary education.
  - Lithuania has a very large number of higher-education institutions for its population of just three million: 14 state universities and 13 state colleges.
  - The tertiary-age population (population aged 19–22) has declined sharply after 2009 and is projected to continue to decline over the next decades.
  - The expected continued decline in the school-age population by 6.5 percent over the next two decades reinforces the need for action.
- Oversupply and incentives in tertiary education:
  - Enrollment ratio in tertiary education is higher than in any other European country.
  - Higher education institutions became autonomous in 2009 and have financial incentives to admit self-paying students; tuition costs are standardized by study area.
  - In 2014/15, 58 percent of self-paying students majored in social science while only 29 percent of students receiving state funding chose to study social science.
  - The 2008/09 tertiary reform tied state funding to students (funding going to state institutions and programs chosen by enrolling students) rather than institutions, contributing to mismatch between course provision and market needs.
- Employment, wages, and work patterns in education:
  - Education wage bill: 3.7 percent of GDP in 2012 vs European average of 3.2 percent.
  - High employment levels in education contribute to the above-average wage bill.
  - Those aged 50 years and above account for nearly half of total teachers.
  - Average hours worked have declined to an average of just 25.8 hours per week.
  - High severance payments for older teachers create incentives to retain existing staff, impeding adjustment.
- Education outcomes and labor market mismatch:
  - PISA scores in mathematics, science, and reading are all below EU averages.
  - Despite the large number of universities, none of Lithuania’s universities is in the top 500 best universities in world rankings.
  - Compared with best European performers in youth employment, Lithuania produces a significantly larger share of tertiary graduates in social sciences, business and law, and fewer graduates in physical sciences.
  - The education-occupation mismatch (persons aged 25–34 employed in a field they did not graduate in) appears more severe in Lithuania than in the comparator group.

### Education — Policy recommendations (measures and trade-offs)
- Reduction in the number of teachers:
  - Channels: attrition, redundancies, early or mandatory retirement.
  - Trade-offs: early/mandatory retirement can involve up-front severance payments and transfer costs (e.g., pension spending).
  - Complementary measures: link number of teachers to number of students through careful projection and workforce planning; strengthen spending norms; adjust financing formulas to reflect lower target student-teacher ratios and class sizes; reform teaching loads and support multi-grade classrooms.
- Consolidation of school infrastructure:
  - Potential to reduce operating and capital costs and enable cost-effective upgrading (technology, internet).
  - Trade-offs: may require increased spending on transport (especially primary).
  - Progress to date: number of general schools cut by 48 percent since 2000, but largely via mergers rather than closures so infrastructure and teacher numbers remain high.
- Decentralization of decision-making and increased choice:
  - Give higher-performing schools more autonomy and expand student choice to promote competition.
  - Require increased transparency, accountability, publication of school performance indicators, and linkage of decentralization to education performance to improve spending efficiency.
- Review higher education incentives, standards, and guidance:
  - Undertake an in-depth review of the nexus between the large number of universities, financial incentives, quality standards, and student guidance.
  - Quick measures: improve information collection and dissemination on labor market needs and university graduate job placement to better guide study-field choices.
- Link education resources to demographics and performance:
  - Tie resources to school-age population and education performance so spending and quality can adjust automatically to demographic norms.

### Health sector summary and interaction with social spending
- Public health spending in 2012: 5.9 percent of GDP vs EU average of 5.8 percent.
- Projected increase in old-age dependency ratio from 23 percent to 44 percent by 2050.
- Health spending projected to increase by over 4 percentage points of GDP by 2050, with about one fifth attributable to ageing alone.
- Composition and inefficiencies:
  - Health wage bill: 2.1 percent of GDP in 2012 vs EU average of 1.7 percent.
  - Lithuania has a large number of doctors, especially specialist doctors working in hospitals; the number of hospitals and physicians working in hospitals per capita and inpatient admission rates are among the highest in the EU.
  - Nurses per physician: 1.9 in Lithuania (benchmarks noted: 2 is considered minimum, 4 a cost-effective benchmark, OECD average above 3).
  - Pharmaceutical expenditure as share of total health spending is higher than EU average; scope exists to incentivize greater use of generic drugs by differentiating copayment percentages.
- Health outcomes:
  - Health-Adjusted Life Expectancy (HALE): 63 years in Lithuania vs EU average of over 70 years.
  - Age-standardized mortality from all causes was the second highest among the EU in 2013.
  - Incidence of tuberculosis is 70 percent above the regional average (World Bank, 2009).
  - Mortality from circulatory diseases (especially ischemic heart disease), external causes, and suicide is among the highest in the EU.
  - Alcohol- and smoking-related mortalities are more than twice their EU averages.
  - IMF study finding: average loss in HALE due to health system inefficiencies in Lithuania was 2.16 years; increasing total health spending by 50 percent would increase HALE by only 1 year.

### Health — Policy recommendations for efficiency
- Expand and strengthen primary and preventive care:
  - Shift services from hospitals to outpatient/primary care where cost-effective; deepen recent reforms (primary care strengthening, decentralization, same-day surgery, hospital consolidation).
  - Address unequal geographic distribution of medical personnel and low nurse-to-physician ratio.
- Develop efficient provider payment systems:
  - Move from fee-for-service toward case-based payments backed by appropriate costing systems and competition among insurers/providers.
  - Improve accuracy of administrative prices in case-based systems to prevent hospitals “playing the system.”
  - For primary care, design payments linked to treatments and outcomes rather than narrow age-based capitation.
- Appropriate use of copayments:
  - Design copayment system to prevent overuse and steer patients to cost-effective treatments (outpatient care, generics).
  - Current features: no copayment for primary care and hospital services on the positive list; preferential copayment rates for certain groups; no preferential copayment to promote generics.
- Invest in health information systems and HTA:
  - Collect, store, and process provider cost, service quality, and outcome data to support case-based payments, clinical guidelines, and monitoring.
  - Systematic application of health technology assessment (HTA) is currently lacking; EU-funded projects (starting 2013) aim to develop an HTA strategy.
- Develop effective global expenditure ceilings:
  - Use health expenditure ceilings for providers linked to a well-defined benefits package and appropriate costing; link budgets to local and regional health risks (age, income, gender, location).

### Overarching fiscal and social policy conclusions
- Deeper expenditure policy reforms are required to sustain recent consolidation achievements and contain future spending pressures driven by rising incomes, population ageing, and societal demands for higher social outcomes.
- Key cross-cutting reform priorities:
  - Link public sector pay reforms to productivity and service efficiency rather than blunt wage cuts.
  - Better target social protection spending (including increased use of means-testing) and pursue pension reforms that protect the poor.
  - Improve efficiency in education and health to deliver better outcomes without unsustainable spending increases.
  - Ensure incentives and budgeting rules align spending with demographic realities and performance metrics.

### Appendix Table 1. Expenditure Consolidation Measures — Measures by Economic Classification (selected items and impacts)
- Across the board cut in government spending 2011 0.5
- Across the board cut in government spending 2012 0.6

Current Expenditure
- 15 percent reduction in government current expenditure 2009 0.8
- 2009 1.0

Wage
- 12 percent reduction of wage bill 2009 1.0
- 2009 0.2
- 2009 0.2
- 2010 0.6
- Wage Freeze 2011-13 0.3-0.5

Expenditure on G&S
- Reduction in immediate government consumption 2010 1.1

Subsidies
- Cut in transportation subsidies to municipal budget 2009 0.1
- Reduction in subsidies for agriculture and spending on land reform 2009 0.3

Social benefits
- Lowered social spending and transfers on childcare, including school lunch payments 2009 0.1
- 2009 0.4
- 2010 1.0
- 2010 0.4
- 2010 0.1
- 2011 0.4
- 2012 0.5
- 2012 0.1

Capital expenditure
- 2009 1.5

- Total savings from all expenditure measures in the reform year 11.2-11.4

Policy details and specific measures (as listed)
- Reduction in social benefits, mainly health care and maternity benefits
- Increase in retirement age for both men and women to 65
- Cancelling or scaling back of state investment project (part of it to be replaced by EU funds)
- Reduction of wage bill (10% civil servants, 2% statutory civil servants, 5% cultural and social workers and teachers)
- 25 percent cut on average for high paid civil servants including SoDRA payments and via adjustments in base wage coefficients (excluding teachers, police, medical workers etc.), with inproportional cuts in base wage coefficient restored on Oct 1, 2013
- Reduction of current expenditure of municipalities and state budget (further cut in May supplement budget)
- Reform of sickness payments to lower state share of payment in first 3 days, and savings on medical services, investment and purchases. (SoDRA 170 (sickness payments) + HIF 298.6 (medical services 200, investment and purchases 98.6))
- Progressive reduction of social benefits, including old age pensions, state pensions; disproportional part restored in 2012.
- Cut in Child benefits: Eligibility reduced from 18 to 7 years, more comprehensive move towards means-testing. Duplication with maternity benefits removed.
- Cut in maternity benefits: Compensated wage shares reduced from 100 to 90 for the first year and 85 to 75 for the second year, with reduction of ceiling from 5 to 4 times the insurable
- Further Maternity/parental benefits' cuts (Compensated wage shares reduced from 90 to 70 for the first year and 75 to 40 for the second year. Reform takes effect from July 1, 2011 and affects both old and new beneficiaries.)
- Parametric changes in civil servants wage system through 8 percent cut in base wage and adjustment in bonus payment categories

Key statistics and fiscal impacts (selected)
- Across the board cut in government spending 2011 0.5
- Across the board cut in government spending 2012 0.6
- 15 percent reduction in government current expenditure 2009 0.8
- 2009 1.0
- 12 percent reduction of wage bill 2009 1.0
- 2009 0.2
- 2009 0.2
- 2010 0.6
- Wage Freeze 2011-13 0.3-0.5
- Reduction in immediate government consumption 2010 1.1
- Cut in transportation subsidies to municipal budget 2009 0.1
- Reduction in subsidies for agriculture and spending on land reform 2009 0.3
- Lowered social spending and transfers on childcare, including school lunch payments 2009 0.1; 2009 0.4; 2010 1.0; 2010 0.4; 2010 0.1; 2011 0.4; 2012 0.5; 2012 0.1
- Capital expenditure 2009 1.5
- Total savings from all expenditure measures in the reform year 11.2-11.4

*Source: Excerpts from the content unit _wp15278 - References .............................................................................................................*

### References .............................................................................................................

### _wp15278 - References .............................................................................................................

### I. INTRODUCTION — Key findings and context
- Fiscal consolidation over the past five years has reduced Lithuania’s public expenditure as a share of GDP to among the lowest in the region.
- Prior to the 2008/09 financial crisis, Lithuania’s public spending was already well below the European average.
- Expenditure measures accounted for approximately two-thirds of the overall consolidation effort.
- Public spending fell from a peak of 45 percent of GDP in 2009 to around 35 percent of GDP in 2013.
- Current spending accounted for the bulk of the spending adjustment, with reductions in social benefits and public sector wages contributing the most.
- In functional terms, social protection, education, and health contributed most to the spending reduction.
- Four main sources of future spending pressures identified:
  - Low-quality consolidation measures (e.g., postponed capital spending, untargeted across-the-board freezes and cuts) tend to unwind.
  - Social demand for higher spending if outcomes compare unfavorably to other European countries.
  - Population ageing: projected annual public pension and health spending to increase by 3.9 percent of GDP by 2050.
  - The demand for public services tends to rise with growing incomes; absent revenue increases, additional expenditure consolidation will be needed to reach medium-term fiscal objectives and to offset committed increases in defense spending.
- Benchmarking scope: 31 European countries (EU-28 plus Iceland, Norway, and Switzerland). Lithuania’s spending compared with the EU average controlled for GDP per capita.

### II. PUBLIC SPENDING BY ECONOMIC CLASSIFICATION — Findings
- Lithuania largely resisted fiscal consolidation at the expense of investment:
  - Capital spending as a share of GDP has fallen slightly since the 2008/09 crisis but was a less important source of consolidation than in other countries.
  - Government decision to shield EU-funded projects from cuts led to capital spending exceeding the European average in the last five years.
- Lithuania’s comparatively low stock of public capital motivated relatively higher public capital spending.
- Wage bill reductions contributed significantly to consolidation:
  - The public sector wage bill increased sharply prior to 2009 — by 50 percent in real terms between 2005 and 2008, including by nearly 20 percent in 2008 alone.
  - Medical doctors and judges’ real wages doubled over 2005–2008.
  - Consolidation measures targeted the wage bill: employment and nominal wage freezes and reductions, elimination of unfilled vacancies, suspension of bonuses and promotions.
- Size and composition of the wage bill:
  - Wage bill at 9.6 percent of GDP in 2013.
  - General government employment levels consistently exceeded the EU median of around 17 percent of the labor force over the last decade, despite recent decreases.
  - The education sector appears chiefly responsible for relatively high employment; health and “other” employment components also contribute.
  - Relatively high employment is associated with relatively low average wages, potentially challenging the public sector’s ability to attract and retain qualified staff and possibly increasing future wage pressures.
- Recommended direction: focus on structural measures to reform the public sector wage bill rather than relying on blunt short-term measures.

### II.A Box 1 — Wage Bill Consolidation Measures in Lithuania Since 2009 (measures and impacts)
- Measures introduced in 2009:
  - Hiring freeze introduced; existing 600 public administration vacancies eliminated. The freeze is still in effect.
  - Parametric changes of the wage system:
    - From January, civil service base wage decreased from LTL 490 to LTL 475 (a 3 percent reduction) and in August to LTL 450 (a 8 percent cumulative reduction).
    - Bonus payments decreased in August from 15, 30 and 50 percent of service pay to 10, 15, and 30 percent—this expired on October 1, 2013.
    - In May, a progressive downward adjustment in base wages led to an average 25 percent gross cut for high-paid civil servants (excluding teachers, police and medical workers). These disproportionate cuts were reversed on October 1, 2013, to comply with a Constitutional Court ruling of July 2013.
  - Further reduction of overall wage bill by 12 percent:
    - Number of full-time civil service positions cut by 4,000 (approximately 6,700 civil servants) in October; managers given discretion to meet reduction targets by cutting working days.
    - Bonuses and promotions suspended.
- Measures introduced after 2009:
  - 2010: further reduction of the wage bill of about 0.6 percent of GDP achieved through a 10 percent wage bill cut for civil servants, a 2 percent cut for statutory civil servants and a 5 percent cut for cultural and social workers and teachers.
  - Public sector wages frozen during 2011–13, delivering annual budget savings of 0.3-0.5 percent of GDP.
- Impact notes:
  - Consolidation measures in 2009 delivered an estimated full-year savings of 1.5 percent of GDP, though some measures were introduced later in the year and did not yield full impact in 2009.
  - Teachers’ wages increased by 18 percent because teaching hours were increased (despite a decline in basic wage in September 2009 from LTL 128 to LTL 122).
  - These factors, coupled with a dip in GDP, meant the total public wage bill still increased by 2 percentage points of GDP from 2008 to 2009.

### II.B Policy implications and recommendations (economic classification)
- Short-term blunt measures (freezes, cuts) can be effective but risk inefficiencies and unsustainability as skill composition becomes unbalanced.
- Structural reforms recommended:
  - Link public sector pay to productivity.
  - Improve hiring processes.
  - Improve service efficiency.
- Reducing employment levels may require time and possibly short-term additional spending (e.g., severance).
- Enhance incentives for reform by linking future wage increases to the adoption of structural measures.
- Promote social dialogue and public support to improve the chances for successful reform.

### III. PUBLIC SPENDING BY FUNCTIONAL CLASSIFICATION — Key observations
- At 36 percent of GDP in 2012, Lithuania’s total spending was 7 percentage points below the EU average of 43 percent of GDP.
- Spending lower than EU average in most functional categories, with exceptions:
  - Education spending substantially above the EU average.
  - Health spending slightly above the EU average.
- The analysis focuses on social protection, education, and health, which together account for about two-thirds of total spending.

### III.A Social Protection — Findings and concerns
- Social protection spending in Lithuania was 12.1 percent of GDP in 2012, below the European average of 14.9 percent.
- Social protection spending decreased by 4.7 percentage points of GDP since 2009.
- Low social protection spending is primarily driven by low pension spending.
- Within the pension and social protection envelope, spending on sickness and disability is 22 percent above the EU average.

*Source: Excerpts from the content unit _wp15278 - References .............................................................................................................*

### Box 2. Disability Benefits in Lithuania

### Box 2. Disability Benefits in Lithuania

### Spending levels and composition
- In 2012, sickness and disability spending stood at 3 percent of GDP compared to an EU average of 2.5 percent of GDP.
- Disabled and old-age pensioners are also eligible for other subsidies, e.g., transport subsidies administered by the Ministry of Transportation.
- The disabled can be eligible for special needs covering: (i) constant care, (ii) constant nursing, (iii) assistance, (iv) compensation of transport expenses, or (v) compensation of expenses on purchase of a passenger car.

### Coverage and disability rates
- High spending partly reflects high disability rates, especially among the working-age population above 45 years of age.
- Approximately a quarter of the population aged 55 to 59 years is receiving disability benefits.
- According to World Bank (2009), the number of claims for special needs more than doubles immediately after reaching retirement age.

### Institutional changes and certification reforms
- The certification process has undergone substantial reform since 2005, with the introduction of an Agency for the Assessment of Loss of Working Capacity.
- The Agency has expanded the criteria for determining disability and the capacity to work to include social as well as physical factors.
- New entrants into the system are subjected to the new criteria, while existing entitlements and benefit flows were grandfathered.
- The assessment of special needs has been centralized in the same agency since July 2009.
- Nonetheless, the number of beneficiaries of disability pensions has continued to increase after 2009, suggesting that an evaluation of the effectiveness of these changes is warranted.

### Policy implications and recommended measures (contextual measures in the source)
- Increased use of means-testing of social assistance:
  - The share of social assistance spending that is means tested is currently low across CESEE countries compared to many other European countries.
  - Careful design of means-tested benefits is necessary to avoid disincentives to work and welfare dependency; this can be achieved through greater use of in-work benefits and by expanding the role of active labor market programs (ALMPs).
  - Lithuania’s public spending on ALMPs was only one fifth of the EU average in 2012.
- Pension measures that protect the poor:
  - The EC 2012 Ageing Report projects that population ageing will increase pension spending as a percent of GDP in Lithuania by 3.4 percentage points by 2050.
  - The pension replacement rate (average pension divided by average wage) is 33.6 percent in Lithuania compared to an average of 46.4 percent for the EU and 56.7 percent for the euro area.
  - From 2012, Lithuania started to gradually increase its statutory retirement age to 65 years by 2026 for both men and women, from 62.5 and 60 years, respectively.
  - To be effective, increases in official retirement ages should be accompanied by complementary measures such as tightening opportunities for early retirement, including for disability benefits, and enhancing the employment prospects of older workers.
  - Adopting a built-in mechanism to deal with ageing, such as automatically linking the official retirement age to life expectancy, will help protect these gains over the longer term.
- Taxation and pension design:
  - Subjecting pension benefits to progressive income taxation could help lower inequality and strengthen the pension system’s social sustainability.
  - Currently social security contributions are calculated as a uniform uncapped proportion of wage while pension benefits are capped at around 1.7 times the average net wage.
  - Income from interest and capital gains over 10,000 LTL (2,896 EUR) have been subject to PIT starting January 2014.

*Source: _wp15278 - Box 2. Disability Benefits in Lithuania*

### 8.5 percent fewer educators in general education and 12.9 percent fewer in tertiary education

### 8.5 percent fewer educators in general education and 12.9 percent fewer in tertiary education

### Education structure and capacity
- Current and projected staffing and infrastructure imbalances:
  - Title finding: "8.5 percent fewer educators in general education and 12.9 percent fewer in tertiary education than is currently the case."
  - Class sizes in general education are small and have been decreasing over time; class sizes are currently below the EU average, especially in primary education.
  - Lithuania has a very large number of higher-education institutions for its population of just three million: 14 state universities and 13 state colleges.
  - The tertiary-age population (population aged 19–22) has declined sharply after 2009 and is projected to continue to decline over the next decades.
  - The expected continued decline in the school-age population by 6.5 percent over the next two decades reinforces the need for action.

- Oversupply and incentives in tertiary education:
  - Enrollment ratio in tertiary education is higher than in any other European country.
  - Higher education institutions became autonomous in 2009 and have financial incentives to admit self-paying students; tuition costs are standardized by study area.
  - In 2014/15, 58 percent of self-paying students majored in social science while only 29 percent of students receiving state funding chose to study social science.
  - The 2008/09 tertiary reform tied state funding to students (funding going to state institutions and programs chosen by enrolling students) rather than institutions, contributing to mismatch between course provision and market needs.

### Employment, wages, and work patterns in education
- Wage bill and employment levels:
  - Education wage bill: 3.7 percent of GDP in 2012 vs European average of 3.2 percent (Figure 14).
  - High employment levels in education contribute to the above-average wage bill.
- Teacher demographics and hours:
  - Those aged 50 years and above account for nearly half of total teachers.
  - Average hours worked have declined to an average of just 25.8 hours per week.
  - High severance payments for older teachers create incentives to retain existing staff, impeding adjustment.
- Consequences:
  - Overstaffing and low effective teacher pay (driven by low hours) may undermine morale and make it difficult to attract young teachers, harming education quality.

### Education outcomes
- General education outcomes are below EU averages:
  - PISA scores in mathematics, science, and reading are all below EU averages (Figure 18).
- Higher education quality:
  - Despite the large number of universities, none of Lithuania’s universities is in the top 500 best universities in world rankings.
- Labor market mismatch:
  - Compared with best European performers in youth employment, Lithuania produces a significantly larger share of tertiary graduates in social sciences, business and law, and fewer graduates in physical sciences (Figure 19A).
  - The education-occupation mismatch (persons aged 25–34 employed in a field they did not graduate in) appears more severe in Lithuania than in the comparator group (Figure 19B).

### Policy recommendations for education (measures and trade-offs)
- Reduction in the number of teachers:
  - Channels: attrition, redundancies, early or mandatory retirement.
  - Trade-offs: early/mandatory retirement can involve up-front severance payments and transfer costs (e.g., pension spending).
  - Complementary measures: link number of teachers to number of students through careful projection and workforce planning; strengthen spending norms; adjust financing formulas to reflect lower target student-teacher ratios and class sizes; reform teaching loads and support multi-grade classrooms.
- Consolidation of school infrastructure:
  - Potential to reduce operating and capital costs and enable cost-effective upgrading (technology, internet).
  - Trade-offs: may require increased spending on transport (especially primary).
  - Progress to date: number of general schools cut by 48 percent since 2000, but largely via mergers rather than closures so infrastructure and teacher numbers remain high.
- Decentralization of decision-making and increased choice:
  - Give higher-performing schools more autonomy and expand student choice to promote competition.
  - Require increased transparency, accountability, publication of school performance indicators, and linkage of decentralization to education performance to improve spending efficiency.
- Review higher education incentives, standards, and guidance:
  - Undertake an in-depth review of the nexus between the large number of universities, financial incentives, quality standards, and student guidance.
  - Quick measures: improve information collection and dissemination on labor market needs and university graduate job placement to better guide study-field choices.
- Link education resources to demographics and performance:
  - Tie resources to school-age population and education performance so spending and quality can adjust automatically to demographic norms.

### Health sector summary and interaction with social spending
- Public health spending and demographic pressures:
  - Public health spending in 2012: 5.9 percent of GDP vs EU average of 5.8 percent.
  - Projected increase in old-age dependency ratio from 23 percent to 44 percent by 2050.
  - Health spending projected to increase by over 4 percentage points of GDP by 2050, with about one fifth attributable to ageing alone.
- Composition and inefficiencies:
  - Health wage bill: 2.1 percent of GDP in 2012 vs EU average of 1.7 percent.
  - Lithuania has a large number of doctors, especially specialist doctors working in hospitals; the number of hospitals and physicians working in hospitals per capita and inpatient admission rates are among the highest in the EU.
  - Nurses per physician: 1.9 in Lithuania (benchmarks noted: 2 is considered minimum, 4 a cost-effective benchmark, OECD average above 3).
  - Pharmaceutical expenditure as share of total health spending is higher than EU average; scope exists to incentivize greater use of generic drugs by differentiating copayment percentages.
- Health outcomes:
  - Health-Adjusted Life Expectancy (HALE): 63 years in Lithuania vs EU average of over 70 years.
  - Age-standardized mortality from all causes was the second highest among the EU in 2013.
  - Incidence of tuberculosis is 70 percent above the regional average (World Bank, 2009).
  - Mortality from circulatory diseases (especially ischemic heart disease), external causes, and suicide is among the highest in the EU.
  - Alcohol- and smoking-related mortalities are more than twice their EU averages.
  - IMF study finding: average loss in HALE due to health system inefficiencies in Lithuania was 2.16 years; increasing total health spending by 50 percent would increase HALE by only 1 year (Joumard, Andre, and Nicq (2010) and related studies cited).

### Policy recommendations for health efficiency
- Expand and strengthen primary and preventive care:
  - Shift services from hospitals to outpatient/primary care where cost-effective; deepen recent reforms (primary care strengthening, decentralization, same-day surgery, hospital consolidation).
  - Address unequal geographic distribution of medical personnel and low nurse-to-physician ratio.
- Develop efficient provider payment systems:
  - Move from fee-for-service toward case-based payments backed by appropriate costing systems and competition among insurers/providers.
  - Improve accuracy of administrative prices in case-based systems to prevent hospitals “playing the system.”
  - For primary care, design payments linked to treatments and outcomes rather than narrow age-based capitation.
- Appropriate use of copayments:
  - Design copayment system to prevent overuse and steer patients to cost-effective treatments (outpatient care, generics).
  - Current features: no copayment for primary care and hospital services on the positive list; preferential copayment rates for certain groups; no preferential copayment to promote generics.
- Invest in health information systems and HTA:
  - Collect, store, and process provider cost, service quality, and outcome data to support case-based payments, clinical guidelines, and monitoring.
  - Systematic application of health technology assessment (HTA) is currently lacking; EU-funded projects (starting 2013) aim to develop an HTA strategy.
- Develop effective global expenditure ceilings:
  - Use health expenditure ceilings for providers linked to a well-defined benefits package and appropriate costing; link budgets to local and regional health risks (age, income, gender, location).

### Overarching fiscal and social policy conclusions
- Deeper expenditure policy reforms are required to sustain recent consolidation achievements and contain future spending pressures driven by rising incomes, population ageing, and societal demands for higher social outcomes.
- Key cross-cutting reform priorities:
  - Link public sector pay reforms to productivity and service efficiency rather than blunt wage cuts.
  - Better target social protection spending (including increased use of means-testing) and pursue pension reforms that protect the poor.
  - Improve efficiency in education and health to deliver better outcomes without unsustainable spending increases.
  - Ensure incentives and budgeting rules align spending with demographic realities and performance metrics.

*Source: IMF working paper content unit _wp15278 - 8.5 percent fewer educators in general education and 12.9 percent fewer in tertiary education*

### Appendix Table 1. Expenditure Consolidation Measures

### Appendix Table 1. Expenditure Consolidation Measures

### Measures by Economic Classification
- Across the board cut in government spending 20110.5
- Across the board cut in government spending 20120.6

Current Expenditure
- 15 percent reduction in government current expenditure20090.8
- 20091.0

Wage
- 12 percent reduction of wage bill20091.0
- 20090.2
- 20090.2
- 20100.6
- Wage Freeze 2011-130.3-0.5

Expenditure on G&S
- Reduction in immediate government consumption20101.1

Subsidies
- Cut in transportation subsidies to municipal budget20090.1
- Reduction in subsidies for agriculture and spending on land reform20090.3

Social benefits
- Lowered social spending and transfers on childcare, including school lunch payments20090.1
- 20090.4
- 20101.0
- 20100.4
- 20100.1
- 20110.4
- 20120.5
- 20120.1

Capital expenditure
- 20091.5

Total savings from all expenditure measures in the reform year11.2-11.4

Sources: Lithuanian authorities and staff calculations.
- *The estimated full-year savings in percent of GDP is calculated based on the GDP in the year when reform was taken.*

### Policy Details and Specific Measures (as listed)
- Reduction in social benefits, mainly health care and maternatity benefits
- Increase in retirement age for both men and women to 65
- Cancelling or scaling back of state investment project (part of it to be replaced by EU funds)
- Reduction of wage bill (10% civil servants, 2% statutory civil servants, 5% cultural and social workers and teachers)
- 25 percent cut on average for high paid civil servants including SoDRA payments and via adjustments in base wage coefficients  (excluding teachers, police, medical workers etc.), with inproportional cuts in base wage coefficient restored on Oct 1, 2013
- Reduction of current expenditure of municipalities and state budget (further cut in May supplement budget)
- Reform of sickness payments to lower state share of payment in first 3 days, and savings on medical services, investment and purchases. (SoDRA 170 (sickness payments) + HIF 298.6 (medical services 200, investment and purchases 98.6))
- Progressive reduction of social benefits, including old age pensions, state pensions; disproportional part restored in 2012.
- Cut in Child benefits: Eligibility reduced from 18 to 7 years, more comprehensive move towards means-testing. Duplication with maternity benefits removed.
- Cut in maternity benefits: Compensated wage shares reduced from 100 to 90 for the first year and 85 to 75 for the second year, with reduction of ceiling from 5 to 4 times the insurable
- Further Maternity/parental benefits' cuts (Compensated wage shares reduced from 90 to 70 for the first year and 75 to 40 for the second year. Reform takes effect from July 1, 2011 and affects both old and new beneficiaries.)
- Parametric changes in civil servants wage system through 8 percent cut in base wage and adjustment in bonus payment categories

### Key Statistics and Fiscal Impacts
- Across the board cut in government spending 20110.5
- Across the board cut in government spending 20120.6
- 15 percent reduction in government current expenditure20090.8
- 20091.0
- 12 percent reduction of wage bill20091.0
- 20090.2
- 20090.2
- 20100.6
- Wage Freeze 2011-130.3-0.5
- Reduction in immediate government consumption20101.1
- Cut in transportation subsidies to municipal budget20090.1
- Reduction in subsidies for agriculture and spending on land reform20090.3
- Lowered social spending and transfers on childcare, including school lunch payments20090.1
- 20090.4
- 20101.0
- 20100.4
- 20100.1
- 20110.4
- 20120.5
- 20120.1
- Capital expenditure20091.5
- Total savings from all expenditure measures in the reform year11.2-11.4

*Source: Appendix Table 1. Expenditure Consolidation Measures (Lithuanian authorities and staff calculations).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15278.pdf_