Analytics, Economics, EU – Baltic States, Financial Services, Markets and Companies, Taxation

The Commission released on Wednesday its recommendations based on a detailed analysis of the Lithuanian, Latvian and Estonian economies and on the country's national reform and stability programs.

"In order to improve the ability of the Lithuanian budget to adopt a more effective social policy and increase public investment, the European Commission recommends improving tax compliance and broadening the tax base to sources less detrimental to growth," the European Commission Representation in Lithuania said in a press release. 

Although the introduction of a new pension indexation formula in early 2018 should ensure the fiscal sustainability of the pension system, the Commission recommends that Lithuania tackle the problem of pension adequacy, which is among the lowest in the EU.

Dombrovskis said that the EC has made three recommendations to Latvia this year. The EC emphasizes the necessity to observe fiscal discipline and recommends transferring the tax burden from low income earners to other tax bases. Dombrovskis also believes that tax reforms in this area could be improved.

''The EC has recommended not just to lessen to tax burden but to transfer this to other sources of revenue, while at the same time not increasing the budget deficit,'' he said.

The second recommendation from the EC is regarding social, education and healthcare matters. The EC recommends to lessen inequality by ensuring the education system is more in tune with what is necessary in the job market, as well as improving the availability of healthcare services.

Furthermore, the third recommendation is in connection with the effectiveness of the public administration, the prevention of conflicts of interests and strengthening the justice system. It was especially emphasized to strengthen the administration capabilities of local governments, as well as within state-owned and municipal companies.

The European Commission on Wednesday warned that due to an increased structural budget deficit, Estonia may not fulfill its budget goals, it was also noted that the country has problems with poverty as well as innovation in the private sector. Estonia's nominal budget position should remain at a small deficit, but the structural budget deficit should increase significantly more -- from last year's 1.1% to approximately 1.5% of GDP in 2018 and 2019. The nominal deficit should however remain slightly below 0.5% of GDP.

Taking into account that the European Commission believes that the structural deficit will be significantly greater, there is a risk that Estonia may not be able to fulfill its budget goals and the ability to withstand the economy's cyclical factors may be reduced, the European Commission said in its country-specific recommendation for Estonia published on Wednesday.

Even though steps have been taken to ensure more sufficient pensions, subsistence benefits and larger family benefits, the number of people living in relative poverty has nevertheless increased and inequality is not significantly reduced by tax cuts for people with a lower income, the Commission said, noting that there is especially a problem with pensions that have not grown at a sufficient enough tempo.

The Commission also said that regardless of the fact that there are some knowledge-intensive sectors with high value added, business research and development intensity, science-business links, and companies' innovation and technological capacity remain low. In order to increase growth potential, the Commission said that it might be of primary importance for Estonia to focus on human capital and skills.