               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 406 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Estoniaand delivering a Council opinion on the 2018 Stability Programme of Estonia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Estonia

                  and delivering a Council opinion on the 2018 Stability Programme of Estonia

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Estonia as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Estonia should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in the recommendations below, in particular (1).

               (3)The 2018 country report for Estonia
                  4
                was published on 7 March 2018. It assessed Estonia’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Estonia's progress towards its national Europe 2020 targets. The Commission’s analysis leads it to conclude that Estonia is not experiencing macroeconomic imbalances.

               (4)On 26 April 2018, Estonia submitted its 2018 National Reform Programme and its 2018 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance
                  6
               .

               (6)Estonia is currently in the preventive arm of the Stability and Growth Pact. The government plans to move from a general government deficit of 0.3 % of GDP in 2017 to a surplus of 0.2 % of GDP in 2018, 0.5 % of GDP in 2019 and move towards a balanced budget thereafter. Its medium-term budgetary objective is a structural deficit of 0.5 % of GDP. According to the 2018 Stability Programme, the recalculated
                  7
                structural deficit is projected to amount to 0.8 % of GDP in 2018, 0.4 % of GDP in 2019 and remaining in a slight deficit thereafter. The general government debt-to-GDP ratio is projected to remain below 9 % of GDP in 2018 and 2019, declining to 5.3 % of GDP by 2022. The macroeconomic scenario underpinning those budgetary projections is favourable. Negative risks for the revenue yield assumptions primarily relate to some of the measures which are not well specified, affecting all years of the programme horizon.

               (7)For 2018, Estonia was recommended to remain at the medium-term budgetary objective. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  8
                of 6.1 %, corresponding to an allowed deterioration in the structural balance by 0.2 % of GDP.  Based on the Commission 2018 spring forecast there is a risk of some deviation from that requirement in 2018. In 2019, in view of Estonia's projected output gap of 2.7 % and with projected GDP growth below to the estimated potential growth rate, the nominal growth rate of net primary government expenditure should not exceed 4.1 %, in line with the structural adjustment of 0.6 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Based on the Commission 2018 spring forecast under unchanged policies, there is a risk of some deviation from that requirement in 2019 and over 2018 and 2019 taken together. Overall, the Council is of the opinion that Estonia needs to stand ready to take further measures to ensure compliance in 2018 and 2019.

               (8)Providing a more adequate social safety net supported by better service provision remains a major challenge for Estonia. Estonia spends less on social protection (around 16 % of GDP) than the European Union average (around 28 % of GDP). The impact of social transfers on reducing poverty is improving but still weak and below the European Union average. Estonia still has a high at-risk-of-poverty rate, particularly for people with disabilities, jobless households and older people, especially those living alone. Income inequality at 5.6 % in 2016 remains higher than the European Union average (5.2 % in 2016) despite recent improvements. Some steps are being taken to provide adequate family benefits for larger families, which has further reduced relative poverty among children. The level of minimum income benefit was increased, accompanied by incentives to return to work. The payment of an allowance of EUR 115 to persons with low pensions and living alone was the first step in addressing the very high at-risk-of-poverty rate of this group. The at-risk-of-poverty-or-social-exclusion gap between people with disabilities and those without (20.9 % in 2016) was also higher than the European Union average (10.1 %). Financing of long-term care services does not match the needs of the ageing population. The impact of ongoing administrative reform on the delivery of high quality services remains to be seen.

               (9)The gender pay gap remains one of the highest in the European Union at 25.3 % although it is reducing. Work-life balance is being promoted by the recent changes to the parental leave and benefit system. These changes are expected to give women an incentive to return to work earlier and thereby contribute to lowering Estonia’s gender pay gap.  The changes will be implemented between 2018 and 2020. The proposal on the second stage of parental leave reform is being discussed. Continued engagement with social partners and strengthening their capacity, in light of very low membership rates, remain important in this context and beyond. Amendments to the Gender Equality Act to improve wage transparency have yet to be adopted and, once adopted, will only apply to the public sector entities. A tool to analyse wage differences between genders is not expected to be developed before 2019.

               (10)Estonia’s slow productivity growth is linked to its moderate performance on research, technology and innovation. With less than 0.5 % of Estonian companies reporting research activities in 2016, business research and development intensity is only 0.7 % of GDP — half the EU average of 1.3 %. In addition, several indicators measuring innovation — such as small and medium-sized companies creating new products and processes or innovating in-house — have declined significantly in recent years. While the economy has some high value added and knowledge-intensive activities, business research and development intensity, science-business links, and companies’ innovation and technological capacity remain low. Public sector expenditure on research, technology and innovation has traditionally been above the European Union average. However, insufficient priority-setting in public research poses challenges. Estonia has put in place several measures to boost the economy’s research and innovation performance, but it is a challenge to maximise their impact.

               (11)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Estonia’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Estonia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Estonia but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (12)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  9
                is reflected in particular in recommendation 1 below.

               HEREBY RECOMMENDS that Estonia take action in 2018 and 2019 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 4.1 % in 2019, corresponding to an annual structural adjustment of 0.6 % of GDP. Improve the adequacy of the social safety net, in particular for older people and people with disabilities. Take measures to reduce the gender pay gap, including by improving wage transparency in the private sector.

               2.Promote research and innovation, in particular by providing effective incentives for broadening the innovation base.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 406 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 205 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology

                     (8)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (9)

                        Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 417 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Maltaand delivering a Council opinion on the 2018 Stability Programme of Malta

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Malta

                  and delivering a Council opinion on the 2018 Stability Programme of Malta

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Malta as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Malta should ensure the full and timely implementation of the Recommendation on the economic policy for the euro area, as reflected in the recommendations below, in particular (1). The 2018 country report for Malta
                  4
                was published on 7 March 2018. It assessed Malta’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Malta's progress towards its national Europe 2020 targets.

               (3)On 13 April 2018, Malta submitted its 2018 National Reform Programme and its 2018 Stability programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance
                  6
               .

               (5)Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Stability Programme, the government plans to maintain a surplus in headline terms over 2018-2021. The medium-term budgetary objective — a balanced budgetary position in terms of GDP — continues to be met with a positive margin throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to remain below the 60 %-of-GDP Treaty reference value and to gradually decline from 50.8 % of GDP in 2017 to around 36 % in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible for 2018-2019 and favourable for 2020-2021. Based on the Commission 2018 spring forecast, the structural balance is forecast to register a surplus of 0.6 % of GDP in 2018 and 1.1 % of GDP in 2019, above the medium-term budgetary objective. Overall, the Council is of the opinion that Malta is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019. At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues.

               (6)As indicated in the 2018 euro area recommendation, the fight against aggressive tax planning strategies is essential to impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances. Spillover effects of taxpayers' aggressive planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) dividends, interest and royalty payments made by Malta based companies may lead to those payments avoiding tax altogether, if they are also not subject to tax in the recipient country. While Malta’s new Notional Interest Deduction regime will help to reduce the debt equity bias, insufficient anti-abuse rules, combined with a relatively high rate and a stock-based regime, may provide opportunities for tax avoidance. The existence of some provisions in bilateral tax treaties between Malta and other EU Member States, coupled with Malta’s tax system, where a company that is resident but not domiciled in Malta is taxed on source and remittance basis, may be used by companies to engage in tax avoidance practices. The Commission takes note of Malta's commitment to fight against taxpayers aggressive tax planning. Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies.

               (7)The long-term sustainability of public finances in Malta remains a challenge. This is entirely driven by the budgetary impact of ageing-related costs, such as healthcare, long-term care and pensions. The pension system faces the dual challenge of achieving sustainability while ensuring adequate retirement incomes. The long-term sustainability prospects for pension expenditure have improved, mainly thanks to a more positive assessment of Malta’s long-term growth potential. However, the measures introduced in the 2016 budget had only a limited impact on long-term sustainability of the pension system, which therefore remains a significant challenge. In addition, despite the introduction of measures to improve pension adequacy, the gender coverage gap in pensions remains high. The performance of the health system has improved and waiting times are being reduced. However, challenges remain in the redistribution of resources and activities from hospital to primary care. The institutional setting of primary healthcare provision puts pressure on both hospital and emergency care. Hospital and primary care are not well coordinated and emergency care remains inefficiently used. Access to innovative medicines remains a major challenge, also in budgetary terms. Initiatives were undertaken to cater for growing demand in the long-term care system, such as incentivising community-based and home care.

               (8)Some progress has been made in improving cross-border cooperation. However, the Malta Financial Services Authority still appears understaffed and concerns remain on its capacity to supervise a large cross-border financial system, in particular its non-bank segment. In addition, while the services sector (in particular, the online gaming industry) has significantly contributed to the country's sustained economic growth, this may create challenges to the financial system’s integrity, calling for a strong anti-money laundering framework. Malta has recently transposed the 4th Anti Money Laundering Directive; the effectiveness of its implementation remains to be assessed. In addition, following the transposition of the Directive into national law, Maltese authorities have recently presented an integrated strategy to fight money laundering and terrorist financing. Among other actions, a National Coordinating Committee on Combating Money Laundering and Funding of Terrorism, composed of representatives from Government and other relevant national authorities, will be set up. However, challenges remain on ensuring proper implementation and effective enforcement of the recently adopted regulatory framework.

               (9)In the context of strong economic growth and reforms supporting female employment and up-skilling of the workforce, Malta's labour market outcomes have further improved. However, high gender employment gaps and the low labour market participation of women above the age of thirty and people with disabilities continue to be a challenge. The design of paternity leave and parental leave remains relatively weak but is important for gender-balanced caring responsibilities and greater support for women to work. Labour shortages are growing and skills mismatches persist. A substantial share of the Maltese labour force still has low qualifications, while the reliance on foreign labour to address the labour and skills shortages is increasing. The policy initiatives being implemented in the areas of labour market, skills and social inclusion are expected to continue further, but need to be informed by outcome- based monitoring and evaluation.

               (10)At 18.6 % in 2017, the early school leaving rate remains the highest in the EU and with little improvement compared to the previous year. Malta also has the highest early school leaving rate for people with disabilities, which is at 50 %, double the EU average. Moreover, learning outcomes are strongly influenced by socioeconomic background, type of school and disability status. The gap in science performance between students from the bottom versus the top performing schools is among the highest in the EU and 1.5 times the average of the Organisation for Economic Co-operation and Development. The share of low achievers in maths, science and reading is the fourth highest in the EU. A comprehensive strategy to improve educational quality and reduce inequalities in educational outcomes between social groups and different school types is missing.

               (11)Robust economic growth has increased pressure on infrastructure and natural resources. In particular, the road transport sector faces major infrastructure and long term sustainability challenges. Insufficient transport infrastructure and rising congestion costs are a barrier to investment. The increase in the number of vehicles and in traffic leads to rising greenhouse gas emissions and negatively affects air quality. They may also negatively impact tourism, which represents an important pillar of Malta's economy. Therefore, the need to tackle the infrastructure gap goes hand in hand with the need for clean transport solutions. In 2016, the government adopted a National Transport Strategy with a 2050 horizon and an Operational Transport Master Plan to 2025. It also announced a EUR 700 million project to upgrade the road network. Together, these measures are expected to reduce the economic costs of congestions by less than 20 %. Increasing economic activity may exacerbate existing infrastructure bottlenecks, putting even more pressure on environmental resources. In addition, the plan fails to set a clear target for the reduction of greenhouse gas emissions from transport and does not propose an effective monitoring system for implementation of the measures reported (besides a five-year review cycle). It is thus important to set targets and implement measures to substantially reduce congestion and greenhouse emissions from transport by 2025, allowing for periodic monitoring of progress.

               (12)The challenges created by the country’s size and island status make the need to move towards a more circular economy particularly compelling. Smart investment can help to reduce pressure on the island's vulnerable natural resources. For instance, if not addressed, difficulties with disposal of construction and demolition waste might reduce the quality of environment and the country's attractiveness as a tourist destination. While Malta has remained in the bottom group for eco-innovation performance (26th in the EU in 2016 from 18th in 2013, according to the Eco-innovation index), it has the potential to mobilise investment to generate or adopt innovative solutions to improve resource and energy efficiency in construction, as well as the management of waste and waste water. In particular, improvements are needed in the management of waste alongside investment in recycling facilities for construction and demolition waste and the implementation of controls to prevent illegal landfill or dumping at sea of construction and demolition waste.

               (13)The justice system continues to face challenges with regards to its efficiency and a strengthened legal and institutional framework to fight corruption is necessary to ensure a high quality business environment. Governance shortcomings in the anti-corruption framework may adversely affect the business climate and weigh negatively on investment. The effectiveness of Malta’s efforts to fight corruption needs to be further improved, especially with regards to the investigation and prosecution of corruption. Improving the governance framework is crucial to preserving Malta’s reputation and attractiveness as an international investment destination

               (14)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Malta’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Malta in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Malta, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (15)In the light of this assessment, the Council has examined the 2018 Stability Programme and is of the opinion that Malta is expected to comply with the Stability and Growth Pact.

               HEREBY RECOMMENDS that Malta take action in 2018 and 2019 to:

               1.Strengthen the overall governance framework by enhancing the national supervision of internationally oriented financial businesses licensed in Malta, by ensuring the effective enforcement of the Anti-Money Laundering framework and by continuing to step up the fight against corruption.

               2.Ensure the sustainability of the health care and the pension systems, including by increasing the statutory retirement age and by restricting early retirement.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 417 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 216 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 413 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Latviaand delivering a Council opinion on the 2018 Stability Programme of Latvia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Latvia

                  and delivering a Council opinion on the 2018 Stability Programme of Latvia

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Latvia as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Latvia should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in recommendations below, in particular (1) and (2).

               (3)The 2018 country report for Latvia
                  4
                was published on 7 March 2018. It assessed Latvia’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Latvia's progress towards its national Europe 2020 targets.

               (4)On 11 April 2018, Latvia submitted its 2018 National Reform Programme and on 16 April its 2018 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance
                  6
               .

               (6)Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Stability Programme, the government plans a deterioration of the headline balance from a deficit of 0.5 % of GDP in 2017 to a deficit of 0.9 % of GDP in both 2018 and 2019 before improving to 0.4 % of GDP in 2020 and 2021. This path is expected to be consistent with the medium-term budgetary objective of a structural deficit of 1 % of GDP and the allowed deviations based on the pension reform and the structural reform clause for the healthcare sector. The recalculated[1] structural balance deficit is estimated to increase from -1.2 % of GDP in 2017 to -1.7 % of GDP in 2018 and then decrease to -1.5 % of GDP in 2019. According to the 2018 Stability Programme, the general government debt-to-GDP ratio is expected to decrease from 40.1 % of GDP in 2017 to 36 % of GDP by 2021. The Programme’s GDP growth projections appear to be markedly favourable for 2018 and plausible for 2019, as compared to the Commission forecast. Risks to the budgetary position are tilted to the downside linked to the optimistic forecast of the yield of tax compliance-improving measures.

               (7)On 11 July 2017, the Council recommended Latvia to achieve its medium-term budgetary objective in 2018, taking into account the allowances linked to the implementation of the systemic pension reform and of the structural reforms for which a temporary deviation is granted. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  7
                of 6.0 % in 2018, corresponding to an allowed deterioration in the structural balance by 0.3 % of GDP. Based on the Commission 2018 spring forecast, there is a risk of a significant deviation from the medium-term budgetary objective in 2018. However, as a result of the better-than-expected outcome for 2017, such risk may be lower in 2018. At the same time, the plausibility tool based on the Commission 2018 spring forecast indicates a high degree of uncertainty surrounding the estimate of output gap for Latvia based on the common methodology. If confirmed, these factors will be considered in the ex post assessment for 2018 in spring 2019.

               (8)In 2019, Latvia should achieve its medium-term budgetary objective, taking into account the temporary allowance related to the implementation of the structural reform in the healthcare sector granted for 2017-2019. This is consistent with a maximum nominal growth rate of net primary government expenditure of 4.3 % in 2019, which corresponds to a required improvement in the structural balance of 0.4 % of GDP. Based on the Commission 2018 forecast, there is a risk of a significant deviation from that requirement in 2019 and over 2018 and 2019 taken together. Overall, the Council is of the opinion that the necessary measures should be taken as of 2018 to comply with the provisions of the Stability and Growth Pact.

               (9)Income inequality in Latvia is high. The ratio of incomes of the richest 20 % of households to that of the poorest 20 % stood at 6.3 in 2017, among the highest in the EU, as the redistribution through the tax-benefit system is lower. Latvia's tax system has been overhauled and personal income tax progressivity increased; however, the tax wedge on low-wage earners remains relatively high and discourages formal employment. The tax reform is limited in terms of shifting taxation to sources less detrimental to growth and achieving the stated policy objective of increasing the tax revenue share in GDP. The low share of tax revenue in GDP limits the resources for sustainable delivery of public services and social inclusion. The revenue potential of property and capital taxation is underused relative to other EU countries. Despite some progress in fighting tax evasion, tax compliance remains a serious challenge.

               (10)Weaknesses in the social safety net are reflected in the high proportion of people at risk of poverty or social exclusion and indicate challenges on minimum income, pensions and the inclusion of people with disabilities. Poverty rates among people with disabilities and the elderly have been increasing in recent years and are among the highest in Europe. The minimum income level reform, announced in 2014, has not been implemented which negatively affects the poorest households. The adequacy of social assistance benefits increased only slightly and remains low. Minimum old-age pensions have not been increased since 2006. The share of people facing severe housing deprivation is among the highest in Europe and social housing is scarce.

               (11)The labour market is tightening due to adverse demographic developments and emigration. While employment growth is becoming constrained by falling labour supply, employment opportunities vary between regions and skill levels. Curriculum reform in vocational education and training aimed at aligning education with contemporary skills requirements has progressed. However, further efforts are needed to fully implement the reform and increase participation in both initial and continuous vocational education and training. The implementation of the new work-based learning approach has started, with the involvement of social partners and companies. However, few students are enrolled in the scheme. Adult participation in learning has increased only slightly and the involvement of the unemployed in active labour market measures is lower than in most other Member States. This is of concern in the context of a high unemployment rate among the low-skilled. In a broader context, strengthening social partners' capacity is important to foster their engagement.

               (12)Reforms have been taking place in the health system. The increased funding for healthcare is expected to address some access restrictions linked to the annual service limits and long waiting times. However, public financing for healthcare remains well below the EU average and efficiency-increasing measures are still to be implemented, including effective prevention measures, streamlining of the hospital sector, strengthening primary care and targeting quality management. Health outcomes are relatively poor and timely access to affordable healthcare for everyone remains a concern. The high out-of-pocket payments and the division of health services into two baskets ("full" and "minimum") risks lowering access for some groups and leading to adverse health outcomes.

               (13)Weaknesses in regulatory quality and low public administration efficiency and effectiveness are detrimental to the business environment. In 2016 the government presented an ambitious reform plan for a leaner and more professional public sector, aiming to improve efficiency through reductions in staff and centralisation of support functions, while strengthening performance-based payment and increasing transparency. This plan is however limited to the central administration, despite the fact that significant efficiency gains could also be achieved at municipality level. State-owned enterprises, which account for a sizeable share of the economy, are coordinated at government level. While companies owned by central government are subject to centralised corporate governance framework, ports and enterprises owned by municipalities remain outside this mechanism.

               (14)Corruption continues to hamper Latvia’s business environment, and the prevention of conflicts of interest remains rigid and formalistic. The delay in legislating on whistleblower protection is detrimental to the accountability and efficiency of public administration. Regulation of the insolvency process has been significantly strengthened over the recent years, limiting the opportunities for abuses. However, the Council for the Judiciary encouraged investigating accusations of past abuses in the insolvency system by reviewing certain cases. It has recommended improving the judges' qualifications assessment and reviewing the available disciplinary measures.

               (15)Latvian banks serving non-resident clients are exposed to high risk of involvement in money laundering. This creates challenges to the integrity of the financial system, can damage its reputation and negatively affect investment and economic growth. The anti-money laundering framework has recently been strengthened; continuous efforts would be needed to achieve sustainable improvement. Latvia has recently adopted a law aimed at significantly limiting the exposure of the Latvian financial sector to money-laundering risks. Key elements are enhancing the exchange of information between financial institutions and law enforcement agencies and curbing transactions with shell companies. The consequences of the law and its effectiveness will need to be monitored.

               (16)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Latvia’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Latvia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Latvia but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (17)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  8
                is reflected in particular in recommendation 1.

               HEREBY RECOMMENDS that Latvia take action in 2018 and 2019 to:

               1.Achieve the medium-term budgetary objective in 2019, taking into account the allowances linked to the implementation of the structural reforms for which a temporary deviation is granted. Reduce taxation for low-income earners by shifting it to other sources, particularly capital and property, and by improving tax compliance.

               2.Improve the adequacy of minimum income benefits, minimum old-age pensions and income support for people with disabilities. Increase the labour market relevance of vocational education and training, and foster upskilling of low-skilled workers and jobseekers. Increase the accessibility, quality and cost-effectiveness of the healthcare system.

               3.Strengthen the efficiency of the public sector, in particular with regard to local authorities and state-owned enterprises. Strengthen the accountability of public administration by protecting whistle-blowers, preventing conflicts of interest and following-up on the results of the ongoing assessment of past insolvency proceedings.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 413 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 212 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (8)

                        Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 419 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Austriaand delivering a Council opinion on the 2018 Stability Programme of Austria

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Austria

                  and delivering a Council opinion on the 2018 Stability Programme of Austria

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Austria as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Austria should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in recommendations (1) to (2) below.

               (3)The 2018 country report for Austria
                  4
                was published on 7 March 2018. It assessed Austria’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Austria's progress towards its national Europe 2020 targets.

               (4)On 25 April 2018, Austria submitted its 2018 National Reform Programme and on 21 March 2018, Austria submitted its 2018 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance
                  6
               .

               (6)Austria is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2018 Stability Programme, the government expects that the headline balance will improve from a deficit of 0.7 % of GDP in 2017 to a surplus of 0.4 % of GDP in 2022. The medium-term budgetary objective — a structural deficit of 0.5 % of GDP as of 2017 — is projected to be met in 2019. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline from 78.1 % of GDP in 2017 to 62.2 % of GDP in 2022. The macroeconomic scenario underpinning those budgetary projections is favourable for 2018 and plausible afterwards. The main risks underlying the medium-term budgetary planning are discretionary policy measures envisaged as of 2020, such as the announced reform of the personal income tax, whose net budgetary effects are not yet fully specified.

               (7)The Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees and security- related measures is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2017 amounted to 0.03 % of GDP for the exceptional inflow of refugees while no further cost was incurred for security-related measures. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees as well as the severity of the terrorist threat are unusual events, their impact on Austria’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2017 has been reduced to take into account additional refugee-related costs.

               (8)On 11 July 2017, the Council recommended Austria to ensure that the deviation from the medium-term budgetary objective in 2018 is limited to the allowance linked to the budgetary impact of the exceptional inflow of refugees and security-related measures. This is consistent with a maximum nominal growth rate of net primary government expenditure of 3.3 % in 2018, corresponding to an allowed deterioration in the structural balance by 0.2 % of GDP. Taking into account the granted allowances, the Commission 2018 spring forecast points to a risk of some deviation from that requirement in 2018 and over 2017 and 2018 taken together.

               (9)In 2019, Austria should achieve its medium-term budgetary objective, taking into account the allowance linked to unusual events for which a temporary deviation is granted. This is consistent with a maximum nominal growth rate of net primary government expenditure of 2.9 %, corresponding to an improvement in the structural balance by 0.3 % of GDP. Based on the Commission 2018 spring forecast, under unchanged policies, Austria would be at risk of a significant deviation from the requirement in 2019, due to the deviation over 2018 and 2019 taken together. At the same time, Austria is projected to be within a distance of 0.1 % of GDP from its medium-term objective in 2019. In addition, Austria is forecast to comply with the debt rule in 2018 and 2019. Overall, the Council is of the opinion that Austria needs to stand ready to take further measures to ensure compliance in 2018 and that the necessary measures should be taken in 2019 to comply with the provisions of the Stability and Growth Pact.

               (10)According to the 2018 Ageing Report, the projected increase in pension, health care and long term care expenditures points to a medium risk to fiscal sustainability in the medium and long term. Austria’s public expenditure on pensions is above the EU average (13.8 % compared to 11.2 % of GDP in 2016) and expected to increase further by 2070 (0.5 % compared to -0.2 % of GDP). Although recent reforms have successfully provided incentives to retire later, the further accumulation of benefit entitlements during the extended working lifetime does not improve long-term sustainability. At 60, the statutory retirement age of women is among the lowest in the EU. The statutory retirement age of women will only gradually adjust as of 2024, achieving harmonisation with the male statutory retirement age only as of 2033. Overall, increasing the statutory retirement age and restricting early retirement would contribute to pension sustainability in an ageing demographic context.

               (11)Public health care expenditure is above the EU average (7 % compared to 6.8 % of GDP in 2016) and expected to increase more than the EU average (1.3 % versus 0.9 % of GDP), which would raise public health care expenditure to 8.3 % of GDP by 2070. Expenditure on long-term care is projected to double from 1.9 % to 3.8 % of GDP by 2070. The introduction of expenditure ceilings through the 2017 Financial Equalisation Law and the reform strengthening primary health care and reducing the reliance on the hospital sector have started to address the sustainability issue. The persistently high number of health insurance agencies provides an indication of potential further savings in governance and administrative costs. In addition, more effective public procurement (e.g. EU-wide tendering, the use of award criteria other than price and cross-regional tender aggregation) would help improve quality and cost-efficiency. In the area of long-term care, recent policy measures such as the decision to abolish the recourse to private assets of people to finance inpatient long-term care are expected to increase, rather than contain, expenditure.

               (12)The 2017 Financial Equalisation Law has contributed to streamlining the fiscal relations among the different levels of government by initiating task-oriented financing, simplifying the distribution of intergovernmental transfers, and assigning an own source of revenue to the States. However, despite these reform efforts, the fiscal framework continues to be opaque and the significant mismatch between expenditure and revenue-raising responsibilities persists, providing weak incentives for budgetary discipline at subnational level.

               (13)Despite the 2016 tax reform, the tax burden on labour remains high and is set to gradually increase over time if tax brackets are not indexed to inflation. Higher income earners saw a relatively large benefit from the reform compared to lower income earners, and the tax burden for low-income earners remains high. The tax reform also benefited men more than women. Sources of revenue deemed less detrimental to growth, such as recurrent property taxes, appear to be underutilised, mainly because of a largely outdated tax base. Revenues from recurrent property taxes in Austria are low, amounting to 0.2 % of GDP compared to the EU average of 1.6 % of GDP in 2016. Shifting the tax burden from labour to less detrimental sources of revenue could help address this problem.

               (14)The labour market performs well, however challenges for specific groups (e.g. women and people with a migrant background) remain. Despite an overall high employment rate for women, labour market outcomes in terms of full-time employment remain rather poor. The rate of female part-time employment, at 47.9 % in 2016, remains one of the highest in the EU (EU average: 31.4 %). The issues related to access to formal childcare, including notably outside the urban area, contribute to this outcome. The high share of women in part-time work, which is largely the result of women performing important unpaid tasks such as caring for children and relatives, as well as lower hourly earnings, contribute to a persistently high gender pay gap. The latter has a direct impact on women's accumulation of pension rights, resulting in a large pension gap.

               (15)Learning outcomes for disadvantaged students have not improved. A wide performance gap remains between students with and without a migrant background. National testing in 2016 confirmed that more than 25 % of pupils lack basic skills in German. Recent international testing also confirmed a widening gap in reading for those from a lower socioeconomic or migrant background. Comparing the 2012 and 2015 results of the Programme for International Student Assessment (PISA), the proportion of low achievers increased in all three core areas surveyed, i.e. mathematics, reading and science. Austrian-born pupils outperform first generation migrants by a level equivalent to almost 3 years of schooling.

               (16)While productivity is high in Austria, productivity growth has been lacklustre over recent years despite Austria’s considerable efforts, such as by investing in research and development and improving the framework for start-ups. The remaining levers to support productivity growth relate to the digitalisation of businesses, company growth and competition in services. Austria has significant access barriers and restrictive rules on the exercise of business services and regulated professions. These include specific shareholding requirements, extensive reserved activities and interdisciplinary restrictions
                  7
               . Continued efforts to reduce burdens and the planned evaluation of Austria’s Trade Licence Act (Gewerbeordnung) are important instruments to address this issue.

               (17)More competition in the service sector would help address Austria’s challenges in spreading digital technologies and business models, notably among micro, small and medium-sized enterprises. Digitalisation of these enterprises is particularly important in Austria as they form the backbone of the Austrian economy. Initiatives such as ‘KMU Digital’ and ‘AT: net’ and the implementation of the Digital Roadmap Austria are key. A further issue concerns the scaling-up of companies and in particular of highly innovative companies. Later stage funding, such as in the forms of venture capital and access to public capital markets for scale-ups, is a bottleneck. High-growth companies are crucial for the diffusion of new technologies and business models, including digital ones, and thus for productivity growth.

               (18)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Austria’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Austria in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Austria but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (19)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  8
                is reflected in particular in recommendation 1 below.

               HEREBY RECOMMENDS that Austria take action in 2018 and 2019 to:

               1.Achieve the medium-term budgetary objective in 2019, taking into account the allowance linked to unusual events for which a temporary deviation is granted. Ensure the sustainability of the health and long-term care and the pension systems, including by increasing the statutory retirement age and by restricting early retirement. Make public services more efficient, including through aligning financing and spending responsibilities.

               2.Reduce the tax wedge, especially for low-income earners, by shifting the tax burden to sources of revenue less detrimental to growth. Improve labour market outcomes of women. Improve basic skills for disadvantaged young people and people with a migrant background. Support productivity growth by stimulating digitalisation of businesses and company growth and by reducing regulatory barriers in the service sector.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 419 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 218 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Recommendations to address these issues were made in January 2017 in COM(2016) 820 and SWD (2016)436.

                     (8)

                        Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 414 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Lithuaniaand delivering a Council opinion on the 2018 Stability Programme of Lithuania

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Lithuania

                  and delivering a Council opinion on the 2018 Stability Programme of Lithuania

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Lithuania as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Lithuania should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in the recommendations below, in particular (1).

               (3)The 2018 country report for Lithuania
                  4
                was published on 7 March 2018. It assessed Lithuania’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Lithuania's progress towards its national Europe 2020 targets.

               (4)On 26 April 2018, Lithuania submitted its 2018 National Reform Programme and on 30 April its 2018 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance
                  6
               .

               (6)Lithuania is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Stability Programme, the government plans to maintain a headline surplus of 0.6 % of GDP from 2018 to 2020, before it is projected decrease to 0.3 % of GDP in 2021. The medium-term budgetary objective — a deficit of 1 % of GDP in structural terms — is planned to be met throughout the programme period. In 2016 and 2017, Lithuania was also granted a temporary deviation linked to the implementation of the systemic pension reform and due to the structural reforms. These deviations are carried forward for a period of three years. According to the 2018 Stability Programme, the general government debt-to-GDP ratio is expected to fall from 39.7 % of GDP in 2017 to 35.3 % in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned surplus targets from 2019 onwards have not been sufficiently specified.

               (7)On 11 July 2017, for 2017 the Council recommended Lithuania to remain at its medium-term budgetary objective in 2018, taking into account the allowances linked to the implementation of the systemic pension reform and of the structural reforms for which a temporary deviation is granted. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  7
                of 6.4 % in 2018, corresponding to an allowed deterioration in the structural balance by 0.6 % of GDP. Based on the Commission 2018 spring forecast, Lithuania’s structural deficit is forecast to stand at 0.7 % of GDP in 2018 and 0.6 % of GDP in 2019. The structural balance is thus forecast to remain above the medium-term budgetary objective in both years. Overall, the Council is of the opinion that Lithuania is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019.

               (8)Revenues from environmental and recurrent property taxes remain below the EU average. Lithuania has undertaken a reform of its property tax system, which introduces an element of progressivity into the system, and abolished excise duty exemptions for coal and coke used for heating purposes. However, scope remains to broaden the tax base to sources that are less detrimental to growth. Although Lithuania has made progress in recent years on improving tax collection, its gap for the value added tax is still among the widest in the EU. Lithuania is taking further steps to combat tax evasion and improve tax compliance, and recently implemented measures are showing positive early results. Further increasing tax compliance would raise budget revenues and contribute to improving the fairness of the tax system.

               (9)With the introduction of a new pension indexation formula in 2018, which links pensions to the wage bill growth, the share of public pension expenditure in GDP is projected to stay flat until 2040. This would ensure the fiscal sustainability of the Lithuanian pension system. However, this is largely driven by a decline in the benefit ratio since the total wage bill is projected to increase at a slower pace than wages due to the rapidly shrinking working-age population. This raises concerns about pension adequacy, which is already among the lowest in the EU. It is also unclear how this reform will work in practice since the government is legally obliged to propose measures in the event of a falling replacement ratio. If the replacement ratio were kept unchanged, total pension expenditure as a share of GDP would increase by almost 45 % by the end of the 2040s, putting a strain on public finances. It is therefore important to clarify legal uncertainties over pension legislation and to ensure the long-term fiscal sustainability of the pension system while addressing its low adequacy.

               (10)The labour market is tightening quickly as a result of robust economic growth, but also due to adverse demographic developments and emigration, leading already to skills shortages. Such a situation demands an education and training system able to provide everybody with the relevant skills. While the reforms launched over the past year are a step in the right direction, it is important that Lithuania implements these reforms to improve the outcomes of its education and training system. The financing and accreditation rules in Lithuania’s tertiary education are helping to increase the number of people with tertiary education, but at the same time have contributed to concerns about its quality, fragmentation and labour market relevance. The ongoing university consolidation, if complemented with changes to accreditation and financing rules, should help address the current challenges. In addition, persistent demographic pressures have affected the efficiency of the education system and made more urgent the need to provide equitable access to quality and inclusive education. To address the below-average performance of Lithuania’s pupils in basic skills, reforms are needed in teachers’ initial training, careers and working conditions, complemented by other quality-focused reforms.

               (11)The low participation of adults in learning in Lithuania indicates that adult learning remains underdeveloped and is not enabling the economy to benefit from skills upgrading, innovation and better integration of the disadvantaged into the labour market (for example older, unemployed or inactive adults). Despite investment in infrastructure, the content of the vocational education and training curriculum is often outdated, while alignment with the needs of local and regional labour markets could be more developed. Work-based learning is still at the initial phase and could be expanded. Active labour market policy measures contain a larger training offer, but this offer could be enhanced further. The recent reforms and measures taken in this field have not had significant results so far. In a broader context, strengthening social partners' capacity is important to foster their engagement.

               (12)Challenges in healthcare outcomes persist; these are having a negative impact on productivity, competitiveness of the economy and quality of life. The delivery of health services remains too hospital-centric, leaving room for further strengthening of primary care. Further rationalisation of resources together with measures to improve quality of both hospital and primary care are key to making healthcare more effective. Disease prevention and health promotion policies should curb risk behaviours more strongly and rapidly. However, the scale of such policies remains small, while cross-sectoral collaboration is underdeveloped and accountability for results is not sufficiently embedded at municipality level. High reliance on out-of-pocket payments, a low level of health spending and an inefficient allocation of resources are limiting the efficiency of the healthcare system.

               (13)The high proportion of people at risk of poverty or social exclusion, together with high income inequality, remain major challenges for Lithuania that hinder its prospects for economic growth. They also threaten social cohesion and could fuel emigration. Despite continued economic growth, the elderly, people with disabilities, children, single-parent households and the unemployed face the highest risk of poverty and social exclusion. The corrective power of the Lithuanian tax and benefit system is one of the lowest in the EU. While some significant initial steps were taken to fight poverty and income inequality, the country still has a long way to go to converge towards the EU poverty and income inequality averages. The relatively high tax wedge on low income earners may limit their incentive to work and increase the risk of poverty and inequalities. Levels of poverty and inequality could be lowered by incentivising labour market participation, in particular among people from vulnerable groups and low income earners, and by increasing the corrective power of the tax and benefit system supported by better collection of taxes. Such measures could also increase social fairness.

               (14)After being subdued since 2012, productivity growth rebounded in 2017, alleviating pressures on cost competitiveness. However, this improvement is largely driven by the private sector. Only limited progress has been made in improving the efficiency of public investment. In particular, the efficiency of public R&D expenditure and the cooperation between businesses and science remain low. Moreover, public investment in research and development dropped significantly in 2016. Fragmented coordination and governance of research and innovation policy lead to inefficiencies and prevent businesses from fully benefiting from the variety of support schemes. Further progress in the ongoing reform of the organisation and funding of the public research sector should help achieve better use of the available resources.

               (15)Lithuania made progress in strengthening its corruption prevention framework by adopting legislation on lobbying and whistle-blower protection for both public- and private-sector workers. However, implementing the legislation remains a challenge.  Corruption in the health sector still raises concerns, despite the commendable results of the government’s ‘clean hands’ programme.

               (16)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Lithuania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Lithuania but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (17)In the light of this assessment, the Council has examined the 2018 Stability Programme and is of the opinion that Lithuania is expected to comply with the Stability and Growth Pact.

               HEREBY RECOMMENDS that Lithuania take action in 2018 and 2019 to:

               1.Improve tax compliance and broaden the tax base to sources less detrimental to growth. Ensure the long-term sustainability of the pension system while addressing the adequacy of pensions.

               2.Improve the quality, efficiency and labour market relevance of education and training, including adult learning. Improve the performance of the healthcare system by a further shift from hospital to outpatient care, strengthening disease prevention measures, including at local level, and increasing the quality and affordability of care. Improve the design of the tax and benefit system to reduce poverty and income inequality.

               3.Stimulate productivity growth by improving the efficiency of public investment, ensuring efficient governmental coordination of research and innovation policy and tackling gaps and inefficiencies in public measures supporting science-industry cooperation.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 414 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 213 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out