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The Government of the Republic of Lithuania by Resolution No 1176 of 31 October 2007 on the submission to the Seimas of the Republic of Lithuania of Draft Law Amending Articles 2, 5, 12, 13, 17, 18, 21, 22, 23, 26, 28, 30, 31, 381, 47, 50 and Supplementing Annex 3 of the Law of the Republic of Lithuania on Corporate Income Tax and the Draft Law Amending Articles 2, 5, 6, 17, 24, 27, 30, 31, 32, 33, 36 and Amending and Supplementing Annex of the Law on Personal Income Tax (Valstybės žinios (Official Gazette) No 116-4746, 2007), approved and submitted to the Seimas the Draft Law Amending and Supplementing the Law of the Republic of Lithuania on Corporate Income Tax, in an attempt to simplify recognition of allowable deductions reducing taxable profit and alleviate administrative burden as regards relevant regulation. Also, with a view to providing more favourable conditions for running small business, the said draft law proposes a higher corporate income limit which, if not exceeded, does not incur an obligation of advance income tax payment. Furthermore, the draft law seeks that certain income received by a non-profit entity from activities aimed at serving public interest should not be attributed to the category of income received from economic-commercial activities.

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Furthermore, to further encourage companies to additionally invest in R&D aimed at creation of new materials and technologies which should generate high added value, the Government of Lithuania, by Resolution No 1347 of 17 December 2007, approved the Draft Law Amending the Law on Corporate Income Tax submitted by the Ministry of Finance, which, considering the international practice in the area of respective incentives, provides for the deduction of company R&D-related costs (other than fixed asset acquisition) three times, given the fulfilment of relevant requirements. It also proposes that the price of acquisition of fixed assets used for the purpose of R&D is written-off in two years. Should the said law come into effect from 1 January 2008, the budgetary revenues of the Republic of Lithuania, received from the corporate income tax, would reduce by about LTL 2.5 m. in 2008, about LTL 85 m in 2009, and about LTL 130 m in 2010.

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74.Present and future budgetary commitments do not allow tax rates to be reduced and other tax regulations having a potential adverse effect on the budget to be amended without introducing offsetting measures. Therefore, temporary measures were foreseen in the interim period enabling implementation of PIT reform. The Temporary Law of the Republic of Lithuania on Social Tax adopted on 7 June 2005 (Valstybės žinios (Official Gazette) No 76-2739, 2005) provides for temporary social tax to be paid in tax reference periods 2006 and 2007. The temporary social tax is payable by legal persons on their taxable profits as calculated in the manner prescribed in the Law of the Republic of Lithuania on Corporate Income Tax, at the rate of 4% for the tax reference year 2006 and 3% for the tax reference year 2007. In 2006, this tax contributed with revenues of LTL 365.5 m., in 2007, it is projected to generate LTL 470 m, while in 2008, LTL 44.6 m.
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75.The Law of the Republic of Lithuania on Real Estate Tax (Valstybės žinios (Official Gazette) No 76-2741, 2005) aims at establishing a sustainable real estate taxation system, with effect from 1 January 2006, providing equal business conditions for commercial-economic entities, i.e. expands the real estate tax base to cover not only real estate owned by legal entities, but also real estate owned by natural persons and used for commercial-economic purposes, also real estate put to the disposal of legal persons for an unlimited period or for a period exceeding one month. This has brought additional governmental budgetary revenue of LTL 20 m.
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The new Law on Real Estate Tax has enabled application of principles of property valuation for tax purposes operative in the international real estate taxation market: i.e. real estate taxable value is the average market value of the property, as established by way of mass valuation (except specific cases).

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However, having regard to the fact that taxable value of property in attractive regions has increased following the application of the universally acclaimed methods of property valuation for tax purposes, and aiming at continuous encouragement of municipal financial independence, the Law Amending Articles 6, 8 and 15 of the Law on Real Estate Tax (Valstybės žinios (Official Gazette) No 65-2384, 2006) was adopted on 25 May 2006, establishing a transition period allowing for gradual approximation (through application of value reduction factor) of tax base for immovable property with new taxable value, and enabling municipal councils to set specific rate of real estate tax, within the range prescribed by the Law (from 0.3% to 1% of the taxable value of the real estate concerned).

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76.With a view to implementing the commitment to gradually raise, in the period until 31 December 2009, excises on cigarettes until they reach the minimal rate set in the EU acquis, and preventing a sharp growth of cigarette prices, as of 1 March 2007, the specific component of the excise rate on cigarettes have been raised from LTL 47.5 to LTL 66 per 1000 cigarettes, while the ad valorem component has remained at 15% (maximum retail price percentage). Actual data 2007 on excise-related revenues reveal that the increase in excise on cigarettes should generate additional revenue of LTL 65 m. in 2007. With effect from 1 March 2008, the specific component of the excise rate on cigarettes will be increased from LTL 66 to LTL 79 per 1000 cigarettes, and ad valorem component, from 15% to 20% percent. Cigarette excise increase to the said rate is projected to generate additional budgetary revenue of about LTL 71 m in 2008, with regard to possible changes in retail cigarette sales volumes as well as structure, as prompted by higher excise rate on cigarettes. During 2008-2009, the excise rate on cigarettes is to grow twice, each time by approximately 30 %, in order to reach the EU minimum of LTL 221 per 1000 cigarettes by 2010.
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Furthermore, with a view to implementing the Council Directive 2004/74/EC of 29 April 2004 amending Directive 2003/96/EC as regards the possibility for certain Member States to apply, in respect to energy products and electricity, temporary exemptions or reductions in the levels of taxation (OJ Special Edition, 2004, Volume 02, Chapter 09, p. 16), as of 1 January 2008, in Lithuania, excise rate on petrol has to be at least EUR 323, diesel fuel and kerosene – at least EUR 274 per 1000 litres; as of 1 January 2008, petrol excise rate is set to be at LTL 1116, diesel fuel and kerosene – at LTL 947 per 1000 litres. Calculations on changes in sales, prompted by higher excise rate on fuels, project additional budgetary revenues of LTL 106 m in 2008.

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The Seimas of the Republic of Lithuania adopted the Law Amending Articles 8, 9, 11, 21, 22, 23, 24, 28, 33, 34, 35 of the Law on Excise Duty (Valstybės žinios (Official Gazette) No 132-5358, 2007). It lays down the amendments to the Law on Excise Duty (Valstybės žinios (Official Gazette) No 98-3482; No 26-802, 2004) providing for an increase in the rate of excise duty on ethyl alcohol and alcoholic beverages, with effect from 1 January 2008: beer (1hl of product) – from LTL 7 to LTL 7.7 for 1% of actual alcoholic strength by volume); wines and other fermented beverages, having an actual alcoholic strength (in case of other fermented beverages achieved by way of fermentation) by volume of 8.5% or more and where fermented drink constitutes 100% by volume – from LTL 150 to LTL 180 ( 8,5 % and less – from LTL 40 to LTL 48) for product hectolitre ; intermediate products, having actual alcoholic strength by volume of 15% and more – from LTL 230 to LTL 276 ( 15% and less – from LTL 150 to LTL 180 ) per hectolitre. ethyl alcohol – from LTL 3200 to LTL 3840 per hectolitre of pure ethyl alcohol.

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An increased rate of excise duty on ethyl alcohol and alcoholic beverages is projected to generate additional budgetary revenues of LTL 190 m in 2008.

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77.The Law on Tax Administration (Valstybės žinios (Official Gazette) No 63-2243, 2004), with effect from 3 July 2007, provides for optimization and better regulation as regards tax administration as well as lower administrative burden for tax payers: through consistent explanation and application of tax laws; expanded basis for tax payer exemption from sanctions; legal preconditions allowing to expand the list of circumstances exempting the tax payer from filing a tax return or other documents; reduced customs clearance.
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78.State land lease calculation procedure. With regard to the decision No 25 of 16 October 2007 by the Strategic Planning Committee of the Government of the Republic of Lithuania, providing for a change in state land lease calculation procedure, resolutions of the Government of the Republic of Lithuania regulating the above procedure will have to be amended accordingly: a proposal will be made for the state land lease fee calculations to be based on average land market value as established by way of mass valuation, from 2009. Also, with a view to possible future drastic changes in land lease fee, a proposal will be put forward regarding transition period for the application of the average land market value as established by way of mass valuation and expansion of the range of land lease fee (from 0.1% to 4%) enabling municipalities to establish specific rates, within these limits, taking into account their social and economic situation and strategic goals.
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Once the transition is made to the state land lease fee calculation based on the average land market value as established by way of mass valuation, a possibility of calculating land tax based on average land market value will be discussed.

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79.In 2006 and on, both direct and indirect taxation policies have been and will be pursued taking account of the actual economic and social environment in Lithuania, primary goals of Lithuania’s tax system, developments in the EU tax policies, court practice of the European Court of Justice, results of activities of the European Commission’s working groups, and the worlds’ best practice in the field of taxation. This tax policy will guarantee that taxes in Lithuania are calculated in accordance with universal taxation principles that are equally interpreted both in Lithuania and other Member States, which will help to create more uniform conditions for business (as far as taxes are concerned), thus making a positive impact on the competitive environment.
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VI. SUSTAINABILITY OF PUBLIC FINANCES 80. In the long term, sustainability of public finances will be influenced by changes in the demographic structure of population. In 2005, Lithuania prepared an integrated budgetary projection of sustainability of public finances (hereinafter referred to as the Projection) that makes it possible to assess the impact of demographic developments on the long-term sustainability of the pension system, health care system, and education system, and to provide for appropriate actions ensuring the stability of these systems in the future.

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The Projection is based on the demographic projection for Lithuania for the period until 2050, done by Eurostat in 2004. According to this Projection, Lithuania's population is to shrink to 2.9 million or by 16.4% in the period 2004-2050. The number of people aged between 0 and 14 will drop from 17.7% to 13.7%, and the number of people of working age (aged 15–64) from 67.3% to 59.6%, whereas the number of elderly people (aged 65+) will grow from 15% to 26.7%.

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81.Table 13 below gives projections on long-term sustainability of public finances (pensions, health care and education systems) for the period until 2050. The projections have been made using preliminary statistical data for 2005 and the economic and employment projections for the period 2010-2050 provided by the Economic and Financial Affairs Directorate-General of the European Commission. Spending on health protection and on long-term health care as well as on education have been projected applying the methodology used by the Ageing Working Group (AWG) of the Economic and Financial Affairs Directorate-General of the European Commission in making analogical projections for EU-15 in 2001 (The 2005 EPC projections of age-related spending (2004-2050) for the EU-25 Member States: underlying assumptions and projection methodologies; European Economy, Special Report No 4, 2005). The projection of spending on unemployment benefits included in Table 13 under “Other age-related spending” has been calculated using the methodology employed for analogical projections for EU-15 in 2003.
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Table 13 Long-term sustainability of public finances Indicator % of GDP 2000 2005 2010 2020 2030 2050 1. Total expenditure 39,13 33,64 38,62 38,24 39,59 41,65 of which: age-related expenditure 13,73 16,8 15,98 15,6 16,95 19,01 Pension expenditure 7,8 6,67 5,99 6,37 7,22 8,65 Social security pensions 7,8 6,67 5,99 6,37 7,22 8,65 Old-age and early pensions 6,9 5,7 5,04 5,42 6,28 7,66 Other pensions (disability, survivors) 0,94 0,98 0,95 0,95 0,94 0,99 Occupational pensions (if in general government) – – – – – – Health care 4,26 4,47 4,67 4,86 5,24 Long-term care 0,54 0,55 0,55 0,63 0,86 Education expenditure* 5,7 5,25 4,88 3,88 4,11 4,12 Other age-related expenditure** 0,19 0,09 0,09 0,13 0,13 0,13 Interest expenditure 1,74 0,82 0,52 0,34 0,44 1,8 2. Total revenue 35,58 33,13 39,41 39,41 39,41 39,41 of which: property income 1,16 0,76 0,6 0,6 0,6 0,6 of which: from pensions contributions (or social contributions if appropriate) 7,09 7,02 7,22 7,29 7,27 7,06 Pension reserve fund assets 0,24 1,71 N.A.

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N.A.

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N.A.

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N.A. of which: consolidated public pension fund assets (assets other than government liabilities)*** 0 0,48 4,05 11,62 20,13 36,64 3. Assumptions Labour productivity growth 9,7 7,1 5,2 3,6 2,7 1,7 Real GDP growth 4,1 7,9 5,3 3 1,9 0,4 Participation rate males (aged 20-64) 82,1 81,5 85,6 87,6 88 86,3 Participation rate females (aged 20-64) 73,4 72,7 77,8 81,4 82,2 79,7 Total participation rate (aged 20-64) 77,6 76,9 81,5 84,4 85 83 Unemployment rate**** 16,4 8,3 5,1 7 7 7 Population aged 65+ over total population (beginning of the year) 13,7 15,1 16,1 17,5 21,4 26,7 Sources: Statistics Lithuania, Ministry of Finance, Ministry of Social Security and Labour, Ministry of Health, Ministry of Education and Science *Excluding spending on payments to households and private entities and direct capital spending on education establishments. **Unemployment benefits. ***Financial assets in private pension funds of Pillar II of Tier of I of the pension system. ****if the level of labour force activity and migration change according to observed recent trends, unemployment rate should be down in 2010.

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Table 13 gives expenditure on social security pensions: social insurance pensions and state pensions (including social benefits and excluding private pension funds administered by pension accumulation companies), and revenues from social insurance contributions.

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82.According to the projections, as the number of children and working-age people decreases and the number of elderly people increases, general government budgetary expenditure on pensions and health care, as a share of GDP, will go up and expenditure on education will come down: in 2005-2050; expenditure on pensions will grow by 1.98% GDP, health care 1% GDP, while education expenditure is to come down by 1.12% GDP. Unemployment benefit expenditure is most likely to follow the current trend. In general, population ageing-related expenditure will account for 2.21% GDP.
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83.Pension expenditure is most likely to show the fastest growth, for this reason, a pension reform was launched in 2004, setting up Tier II of pension system – a subsystem of voluntary pension accumulation (Pillar II of Tier I of state social insurance pension system), where part of mandatory state social insurance contributions are shifted to private pension funds. The first pension accumulation contracts were concluded back in 2003. Due to successful implementation of the reform, in 2006, 63% (785 thousand) of insured by state social insurance participated in pension accumulation system. In 2007, another 95 thousand concluded pension accumulation contracts, and almost 880 thousand is projected to participate in pension accumulation in 2008, which will account for 69% of all insured by state social insurance.
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84.A share of state social insurance contributions shifted to private funds has been growing rapidly. It is expected to reach 0.81% of GDP in 2007. Faster than projected growth in salary and employment and increased participation by the insured in choosing pension accumulation system, have been constantly adjusting these projections. According to the projection of long-term sustainability of the pension system for the period 2050, the share of revenues allocated to pension reform will reach 0.84% GDP in 2008, 0.87% in 2009, and 0.89% in 2010. Costs related to the transition period of the pension reform, which will reach the maximum of 1%GDP around 2010, will be funded from the surplus accrued in social insurance sector due to interim demographic and economic recovery, as well as from privatisation proceeds, the state budget of the Republic of Lithuania, and other funding sources. The costs are expected to come down around 2030, when about half of the retired are put on reduced state social insurance pensions of old age (supplementary part of old-age pension is reduced in proportion to accumulated contribution) together with annuities, accrued from accumulated pension.
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85.The Lithuanian National Report on the Strategy for Sufficiency and Stability of Pensions 2005, approved by the Government of the Republic of Lithuania on 11 July 2005, and submitted to the European Commission on 15 July 2005, envisages measures to be taken by the Government of the Republic of Lithuania, which would allow for the relative size of pensions to be raised and financial sustainability of the pensions system to be ensured. It is planned that social insurance pensions will be raised gradually during the period 2005-2015, in such a manner that (gross) replacement rate grows continuously from 31.3% to 42% and that the retirement age is increased, over 2012-2026, by 4 months a year for women and 2 months a year for men, until the retirement age reaches 65 years for both men and women in 2026. With the retirement age being increased, additional employment promotion measures must be introduced to allow older people remain active in the labour market.
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86.Due to demographic developments, spending on education is projected to come down to 4.1% GDP in 2050. The risk, however, exists that the implementation of political goals of the National Education Strategy might result in education spending increase to 6.7% (GDP) in 2050.
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87.Over the period covered, the total general government expenditure will increase by 8 percentage points of GDP, from 33.64% of GDP in 2005 to 41.65% of GDP in 2050. Non-age-related expenditure, which was fixed at the 2010 level and treated as constant, will grow by 5.8 percentage points of GDP. General government budgetary revenue will grow by 6.28 percentage points of GDP, from 33.13% to 39.41% of GDP. If non-age-related expenditure had not been fixed at the 2010 level and account would be taken of later dynamics of the GDP share of investment and revenue, the projections for long-term financial sustainability would be more favourable.
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88.If the projections took into account the planned increase in the retirement age to 65 years for men and women as provided for in Lithuania’s National Strategy Report on Adequate and Sustainable Pensions of 2005, the primary surplus target which is currently set at about 1.8% of GDP to be achieved in order to ensure general government sustainability would be significantly lower. As calculated by the European Commission, general government debt would come close to 114% of GDP in 2050, unless the planned fiscal policies are tightened or the consequences of the problem of ageing population for government finances are dealt with. Successful implementation of the measures envisaged in Lithuania’s National Strategy Report on Adequate and Sustainable Pensions of 2005 would help to ensure financial sustainability of general government.
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Table 14. Ratio of pension recipients and contributors Indicator 2006 2010 2020 2030 2050 Ratio of pension recipients and contributors, if the retirement age is 60/62,5* years 1,67 1,81 1,61 1,34 1,07 Ratio of pension recipients and contributors, if the retirement age is 65/65* years 1,67 1,81 1,77 1,54 1,24 Source: Ministry of Social Security and Labour * The first figure indicates the retirement age for women, the second one – for men.

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VII. INSTITUTIONAL IMPROVEMENT OF GENERAL GOVERNMENT FINANCES 89. Private–public partnerships (PPP). To ensure a more efficient use of state budget and EU funds, efforts must be made to create legal, institutional, and administrative conditions for promoting private-public partnerships as an additional source of financing for state and municipal investment projects.

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90.Audit. The National Audit Office of Lithuania (NAOL) is the supreme public audit institution. Its main function is to supervise the lawfulness and effectiveness of the management and use of the state property and the implementation of the state budget. NAOL carries audits of the following areas: state budget implementation; use of state funds; management, use and disposal of the state property; implementation of the budget of the state Social insurance Fund and the Compulsory Health Insurance Fund; use of state budget funds allocated to municipal budgets; use by respective fund management institutions and beneficiaries of funds of the European Union allocated to the Republic of Lithuania and implementation of programmes in which Lithuania participates.
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NAOL, in its Audit Report on Programme Budget System No VA-60-1P-1 of 30 March 2007, evaluated whether principles of the structure of the programme budget had been applied efficiently. In view of this, Action Plan approved by the Government meeting of 11 June 2007 (Minutes No 36) has been drafted, which has provided for the specific measures regarding optimisation of the number of appropriations managers and the programmes they implement, continuous evaluation of the programmes, and estimation of the expenditure efficiency.

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91.Improvement of strategic planning. According to the Strategic Planning Methodology approved by Resolution No 827 of 6 June 2002 of the Government of the Republic of Lithuania (Valstybės žinios (Official Gazette) No 57-2312, 2002), authorities have to use, in drawing up their strategic activity plans (and programmes, where appropriate) for 2006-2008, not only product but also effect and outcome criteria. The Strategic Planning Methodology regulates drafting of strategic plans directly related to the state budgeting process. With certain amendments, the Methodology integrates into one whole the key national strategic documents (Lithuania’s Single Programming Document for 2004-2006, the National Strategy for Sustainable Development), thus contributing to the improvement of strategic planning.
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Preliminary state budget for 2007 was publicly assessed by experts of the independent Free Market Institute, universities, and commercial banks.

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VIII. STRUCTURAL REFORMS Education sector reform 92. On 14 June 2007 several political parties signed an Agreement on the principles of science and education system reform.

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The Agreement provides for the study financing, which is comprised from a share funded by the state, a student’s personal contribution (tuition fee) and funding from other sources. Higher education institutions will establish the level of tuition fees, within the limits established by the state, themselves.

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During the period of 2008-2006 (the first stage of the reform), it is planned to directly distribute the funding provided by the state to higher education institutions, as a basic financing, in accordance with the agreement obligated to be drafted by a higher education institution, which shall provide for the minimum number of students.

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It is planned to pilot state funding for study programmes with especially high demand under a principle of a study basket (i. e. state funding follows a student). By 2013 (the second stage), this principle will be gradually introduced into all study programmes.

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The party Agreement declares that an effective loan system is going to be created, which will cover the tuition fee and, partly, other study expenses. This loan will be interest-free. The parties have agreed that the loan will be started to be repaid once the income of the graduate reaches a level that had been established. An employer or other natural and legal persons will be able to repay the loan or to support the rights and obligations established in the loan contract. In order to ensure free education guaranteed by the Constitution of the Republic of Lithuania, academically talented students will be exempt from tuition fees or the obligation to repay the loan.

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The party agreement states that the range (limits) of a tuition fee shall be established by the state, while the level of the fee, within these limits, shall be established by higher education institutions themselves. Higher education institutions shall also be free to establish the number of students to be admitted. The agreement states that autonomy shall be guaranteed to the higher education institutions.

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93.On 26 October 2007, the Strategic Planning Committee of the Government of the Republic of Lithuania approved the Guidelines for the reform of the system of science and education. This approval of the Committee is important with a view to achieve further goals related to the reform.
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The aim of the reform of science and education system is to achieve that the system of higher education and scientific research meets the needs of the country’s economy, society, and a person, and that it ensures the state’s sustainable development and international competitiveness.

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The major areas of the reform are as follows: improvement of the quality of studies, reorganisation of the study funding and financial support for students as well as funding for scientific research, strengthening of the autonomy and accountability of science and education institutions, improvement of the internal management, streamlining of the infrastructure of these institutions, and human recourses development in the science and education system.

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The Government of the Republic of Lithuania has approved the provision in the Guidelines for the reform of the science and education system to markedly increase the state funding with a view to improve the quality of studies and promote the development of the scientific research.

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In order to improve the quality of studies, internal quality assurance mechanisms are going to be created and external assessment of study programmes and implementation thereof is going to be improved.

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In the area of science, attention is going to be focused on the development of the programme competitive funding as well as the streamlining of the science and education infrastructure. The basic funding for higher education and scientific research institutions is going to be reformed.

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The first stage of the science and education system reform starts as of the beginning of 2008; it is planned to increase salaries for teachers and researches by 20 percent and to create better working conditions for them. Special support measures are going to be arranged for raising teacher qualifications. Additional funding is going to be granted for the Study Loan and Bursary Fund. It will allow to increase support for the socially disadvantaged students and to encourage academically talented students.

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The Strategic Planning Committee of the Government of the Republic of Lithuania has endorsed the proposal to postpone the introduction of the economically reasoned and socially just tuition fees for the next stage of the reform of science and education system.

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Health-care sector reform 94. In order to develop the health-care system (covering health improvement, disease prevention, timely diagnosis, and treatment, as well as medical and social rehabilitation of patients) and to raise public awareness regarding preservation and improvement of health as the main precondition for a full social life, the following priorities have been set:

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94.1. to develop the health insurance system;

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94.2. to accelerate restructuring of personal and public health-care institutions and services.

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95.The development of the health insurance system must aim at improving the quality of health-care services and access thereto for everybody, enhancing the efficiency of the health system, and introducing more efficient forms of use of the resources allocated for this purpose.
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96.It has been estimated that the state budget expenditure of the Republic of Lithuania on insurance contributions for persons insured at the state’s cost will total LTL 781.618 m in 2008, which is 15,95% more than in 2007 (a contribution per person will increase from LTL 353.2 in 2007 to LTL 428.1 in 2008).
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Table 15. The projected budget income and expenditure of the Mandatory Health Insurance Fund (hereinafter in the table referred to as MHIF), 2006-2010 Indicator 2006 2007 2008 2009 2010 MHIF, m LTL % of GDP MHIF, m LTL % of GDP MHIF, m LTL % of GDP MHIF, m LTL % of GDP MHIF, m LTL % of GDP 1. Income 3032 3,7 3620,4 3,9 4366,8 4,1 4658 4 5057,1 4,1 2. Expenditure 3090,5 3,8 3620,4 4 4366,8 4,1 4658 4 5057,1 4,1 Source: Ministry of Health.

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97.One of the key elements of the health system reform is the restructuring of personal and public health care, to be achieved by upgrading the network of health-care institutions and streamlining the structure of services, ensuring a better response to health-related needs of the public, improving the quality, safety and accessibility of services, and ensuring a more efficient use of resources. The problem of the increasing funding requirement in the field of health-care is being addressed. The future growth of the funding requirement will be a consequence of ageing, rising prices of medicines and medical equipment, growing need for renovations in health-care institutions and modernisation of their equipment, and the necessity to increase wages in the health-care sector.
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98.The reform of the public health system is aimed at modernising the infrastructure of the national public health-care system thereby facilitating better access for the community to public health care, streamlining the scope and structure of public health-care services, developing a common model of personal and public health-care services on the primary healthcare level, responding rapidly to health threats, and performing public health monitoring.
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99.To accelerate the process of restructuring of personal health care institutions, the Government of the Republic of Lithuania approved, by Resolution No 335 of 18 March 2003 (Valstybės žinios (Official Gazette) No 28-1147, 2003), the Healthcare Institutions Restructuring Strategy, which is being implemented in two stages, first stage covering the period 2003-2005, and the second stage covering the period 2006-2008. Taking the results of the first stage into account, the second stage was started and proceeded in 2006, by implementing the Healthcare Institutions Restructuring Strategy approved by Government Resolution No 647 of 29 June 2006 (Valstybės žinios (Official Gazette) No 74-2827, 2006).
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Measures of the second stage include further development of the primary level of health care, by shifting most of the services over to family physicians who have contracts with territorial patients’ funds; treatment of widespread diseases in health care institutions that are closer to people, with the most advanced technologies being concentrated in university hospitals or largest hospitals that have the largest number of patients; development of the system of medical nursing and long-term palliative treatment services, by integrating these services into general hospitals and starting to provide them together with care services; improvement of the quality and speed of first medical aid, by integrating dispatcher services into the Emergency Response Centre that operates within the system of the Ministry of the Interior and by renewing, from time to time, the ambulance fleet.

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At the same time, efforts will be made to develop ambulatory rehabilitation, improve the system of prices of health care services and asset management of health care institutions, and develop and promote supplementary (voluntary) health insurance. Aiming at implementation of these goals, the second stage Restructuring Strategy plans for district health-care institutions have been harmonised with regional development councils and approved by the orders of the Minister of Health.

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Furthermore, with the view to initiate a coherent and purposeful health system reform, create a more viable and more competitive health system, by following the major state objectives that had been formulated through the mission, vision, and major principles of the health system, a draft Framework for Health Care System Development 2007-2015 has been drafted, which outlines the principal directions for the development of the health system of Lithuania as well as the implementation strategy thereof.

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100.In 2004-2006, the Structural Funds assistance for health-care was provided in accordance with the Single Programming Document of Lithuania 2004-2006 endorsed by the European Commission Decision C(2004)2120 of 18 June 2004. Assistance was provided for two types of activities: strengthening and development of cardiac health-care services and development and modernisation of infrastructure of family physicians’ services. EU Structural Funds assistance in the current programming period amounts to EUR 34.3 m. Projects, financed in accordance with the Single Programming Document of Lithuania for 2004-2006 must to be completed by the end of 2008. In accordance with the Strategy for the Use of European Union Structural Funds of Lithuania for 2007-2013, EU Structural Funds assistance will be further used for investment in infrastructure modernisation of the health care institutions. The EU financial assistance will be provided in accordance with the Cohesion Promotion Action Programme for 2007-2013 for the following areas: reduction of cardiovascular disease morbidity and mortality, early diagnosis of oncological diseases and proper treatment thereof, reduction of external-cause (related to trauma and other causes) mortality and disability, streamlining of mental health care service infrastructure, continuation of the health care system reform, and streamlining of the health care infrastructure.
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Public capital investments are used to implement continued and new health programmes, to introduce new medical technologies, to renovate health-care institutions, and to develop the national e-health system. Budget of the Mandatory Health Insurance Fund is drawn on to finance national and municipal projects aimed at restructuring health-care institutions.

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Housing renovation programme 101. Housing renovation programme was approved by Resolution No 1213 of 23 September 2004 of the Government of the Republic of Lithuania (Valstybės Žinios (Official Gazette) No 143-5232; 2005, No 78-2839). It takes account of the EU directives directly related with the increase of energy consumption efficiency in buildings: Council Directive 93/76/EEC of 13 September 1993 to limit carbon dioxide emissions by improving energy efficiency (SAVE) (OJ 2004 Special Edition: Chapter 12, Volume 1, P. 163) and Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the energy performance of buildings (OJ 2004 Special Edition: Chapter 12, Volume 2, P. 168). Housing renovation programme works towards implementation of the goal established in the Lithuanian Housing Strategy, approved by the Resolution No 60 of 21 January 2004 of the Government of the Republic of Lithuania (Valstybės Žinios (Official Gazette) No 13-387; 2004), namely, to ensure the efficient use, maintenance, renovation and modernization of the existing housing, as well as energy efficiency. The implementation period of the above-mentioned Programme is 2005-2020.

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102.The Lithuanian Housing Strategy establishes that by 2020 multi-apartment buildings and heating systems thereof that had been constructed on the basis of the construction permits issued by 1993 will be renovated and, based on the potential and economic expedience, modernised. It is planned to decrease the costs in relation to heat energy and fuel ratio by at least 30 percent for approximately 70 percent of multi-apartment buildings.
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The major goal of the Housing renovation programme is to create favourable conditions for the complex modernisation of multi-apartment buildings and residential areas (quarters) aiming at the improvement in quality of life and rational use of energy resources.

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103.Since the stock of the residential housing has been deteriorating and the price for energy resources has been rising, the issue of rational energy consumption is becoming ever more topical, with separate apartment owners being unable to tackle it. Legal acts passed in 2004 provide for a possibility, by making use of funding provided by commercial banks and the state, support from the state budget of the Republic of Lithuania for low-income families (individuals), as well as own funds of the residents, to modernise residential buildings and thereby increase the energy consumption efficiency. With lower energy consumption, less funding from the state budget for payments covering heating and hot water expenses for low-income families (individuals) will be required, and this will have a direct impact on the current account deficit.
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104.Major repairs or reconstruction of heating facilities and heating systems, replacement of windows and entrance doors, renovation of roof structures by additional insulation, including construction of the new pitched roofs (except for the construction of premises in an attic), balcony (loggia) glazing in accordance with the common project, and insulation of the external walls are covered by the state-aid measures for multi-apartment building modernisation. According to the programme, state support is going to be provided for the owners of multi-apartment buildings: up to 50 percent of investment, covered by the state-aid measures, that had been used for the modernisation of these buildings will be reimbursed on the basis of the energy efficiency of the investment project. It is planned to provide additional support for low-income families (individuals): to cover the major part of expenses related therewith.
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105.Funds for the modernisation of a multi-apartment building are comprised from the own funds of the multi-apartment building owners, long-term credits extended by commercial banks, municipality funds, targeted state-aid, and other funds.
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The multi-apartment building owners, pursuing investment projects in accordance with the Housing renovation programme, must pay an initial contribution of at least 5 percent from the sum of the planned investment. Banks offer credits for the implementation of investment projects.

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State aid is offered by the following means: by covering part of the investment for the modernisation of a multi-apartment building, on the basis of energy efficiency of the investment project; or, by covering expenses for low-income families.

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It is planned that by 2020, during the process of implementation of the Programme, at least LTL 20bn is going to be invested; out of them, up to 25-30 percent can fall on the budget of the Republic of Lithuania in order to provide the state aid in accordance with the law. The 2006 state budget of the Republic of Lithuania allocated LTL 7 m appropriations to fund the above-mentioned Programme, or 0.01 percent of GDP 2006. In 2007, LTL 15.7 m were allocated, while it is planned to allocate LTL 223.5 m over the period of 2008-2010, LTL 53.5 m, LTL 70 m, and LTL 100 m, respectfully. In future, appropriations from the state budget of the Republic of Lithuania for the implementation of this Programme will be planned in consideration of the state’s financial capacities to satisfy the provisions set forth in the Stability and Growth Pact.

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106.Over the long-term period, Housing renovation programme will improve the sustainability of the public sector finances and will be beneficial due to the following:
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106.1. less public sector expenditure for payments covering heating expenses for the socially disadvantaged citizens in the future: more efficient use of public sector finances;

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106.2. promotion of small and medium-size construction business;

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106.3. less public expenditure on fuel (used during the heating season); as a result, reduction of current account deficit;

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106.4. favourable social (reduction of unemployment) and environmental (reduction of carbon dioxide emissions into the atmosphere) aspects;

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106.5. at the end of the medium-term period, with the completion of renovation, reduction of household heating expenses by 25-30 percent; as a result, less impact from the energy products prices on the current account deficit and demand dynamics.

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Agriculture, food industry, and rural development 107. Production volumes and productivity in the agricultural sector have been increasing in recent years, although agriculture’s share of the gross value added has been consistently decreasing (in 2002, this indicator amounted to 6.4 percent, while in 2005, 5 percent). These changes show that the structure of Lithuania’s economy has been approaching proportions characteristic of the developed countries. The value added created by the food, drinks, and tobacco industries amounted to 4 percent of the gross value added in 2006. Agriculture and food industry has become an important export sector. More active trading and larger financial support for agriculture and rural development determined the growth of income for economic entities.

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In order to ensure the implementation of the EU common agricultural policy, to develop a competitive agricultural and food sector, and to promote sustainable economic and social development of rural areas, the following actions are taken:

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107.1. measures aimed at securing income for entities engaged in agricultural activities, and market regulation measures (one-off payments for crop areas, systems of quotas, intervention procurements, private storage, import/export mechanisms, standards for supply of products to the market, etc.) are being implemented;

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107.2. measures set forth in the Rural Development Plan 2004-2004 approved by the Commission Decision No C(2004)2949 of 3 August 2004, rural development measures, and Priority “Rural Development and Fisheries” of the Single Programming Document of Lithuania for 2004-2006 are continued to be financed;

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107.3. As part of implementing rural development policy in 2007-2013, the following key goals will be pursued: to ensure growth by enhancing competitiveness of the agricultural, food and forestry sectors, creating opportunities for diversification of economic activities and for enhancement of the quality of life in rural areas, and by upholding, at the same time, the existing environmental, human and other values, as well as reducing disparities between urban and rural areas and among individual regions.

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Strategic documents that will serve as a basis for the absorption of funds from the European Agricultural Fund for Rural Development give much attention to the achievement of Lisbon Strategy goals (promotion of competitiveness and employment, improvement of the quality of life) and other initiatives (ecological farming, use of renewable energy resources, preservation of forests and biological diversity, mitigation of climate change, etc.).

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Rural Development Plan for Lithuania 2007-2003 was approved by the European Commission Decision C(2007)5076 of the 19 January 2007. The Decision fixes the largest allocations for the following areas: 41.15 percent, for the development of modern and competitive agri-food and forestry sectors, 36.48 percent, for the improvement of environment and landscape, 12.19 percent, for the improvement of the quality of life and increase the employment of rural population in rural areas;

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107.4. state aid measures harmonised with the European Commission are being applied (support for acquisition of breeding animals and certified propagating material of plants, animal breeding, compensation of credit interest and insurance premiums, development of production of quality products and the system of quality testing, research, training and advisory services to farmers, disposal of animal by-products, promotion of production of bio-fuels, and other measures). Risk management system for agriculture is being developed;

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107.5. the process of restitution of ownership rights to land, forest, and bodies of water is approaching the end, to be followed by the next stage of land management process associated with a promotion of an efficient use of land, by preserving the ecological stability of the landscape and by developing a required rural infrastructure. The issue of selling agricultural land to Lithuanian legal persons and foreign citizens has been solved. Favourable conditions are being created to young farmers who wish to purchase land from the state on a hire-purchase agreement;

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107.6. the development of a competitive food sector is being promoted, the food sector is being restructured, it is ensured that only safe food is supplied to the market, and food control in the whole chain “from stable to table” is being exercised;

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107.7. Making use of funds from the Financial Instrument for Fisheries Guidance, by matching fishing capacities to fisheries resources, fishing capacities have been reduced in the Baltic sea (31 fishing vessels have been scraped), aquaculture and fish-processing companies have been modernised, and fishery products auction has been established. State aid measures are being applied with a view to develop environmentally-friendly fishing and to improve wellness in the fish farms;

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107.8. Lithuania’s Fisheries Sector National Strategic Plan for 2007-2013 has been approved by Resolution No 654 of 19 June 2007 of the Government of the Republic of Lithuania, and Lithuania’s Fisheries Sector Action Plan for 2007-2013 has been drafted and submitted for the approval of the European Commission. The primary goal for 2007-2013 is the development of the fisheries sector and improvement of competitiveness in the sector, thus ensuring economic, environmental, and social sustainability, along with preservation and regeneration of fishing resources;

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107.9. administrative capacities to ensure the implementation of the EU Common Agricultural Policy are being strengthened. EU and national support absorption mechanism is being improved. By the process of decentralisation of municipal responsibilities for public agricultural functions, part of public agricultural functions have been delegated to wards, thus bringing the services closer to local communities;

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107.10. With a view to implementing strategic goals of the agricultural policy and becoming equal partners in the EU market, it is envisaged that the state budget will continue to finance national premiums of direct payments, the amount of which is set annually by the Government of the Republic of Lithuania, also fund state aid measures for agriculture approved by the European Commission, and such measures as land reform, land reclamation, market development, infrastructure, quality management, science and education, information and other needs, and that structural assistance and rural development measures will be co-financed.

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Table 16. Projected measured to achieve strategic goals of the agricultural policy Measures Funding 2006 2007 2008 2009 2010 m LTL % of GDP m LTL % of GDP m LTL % of GDP m LTL % of GDP m LTL % of GDP 1. Implementation of Common Agricultural Policy measures B. Net direct effect on the budget -399,2 -0,5 -670 -0,7 -512,5 0,5 -611,1 -0,5 -571,3 -0,5 B.1. Income 739 0,9 701,6 0,7 658,9 0,6 777,5 0,7 886,5 0,7 B.2. Expenditure 1138,2 1,4 1371,7 1,4 1171,5* 1,1 1388,6* 1,2 1457,9* 1,2 2. Restructuring of the agricultural and fisheries sectors B. Net direct effect on the budget -138,5 -0,2 -142,9 -0,1 -167,7 -0,2 -196 -0,2 -182,2 -0,1 B.1. Income 0,8 0 1 0 0,4 0 0,3 0 0,4 0 B.2. Expenditure 139,3 0,2 143,9 0,2 168 0,2 196,3 0,2 182,6 0,1 3. Land management and administration B. Net direct effect on the budget -189,4 -0,2 -226,5 -0,2 -287,6 -0,3 -99,2 -0,1 -89,2 -0,1 B.1. Income 0,1 0 0 0 0,1 0 0,1 0 0,1 0 B.2. Expenditure 189,5 0,2 226,5 0,2 287,7 0,3 99,3 0,1 89,3 0,1 4. Strengthening of institutional and administrative capacities B. Net direct effect on the budget -98,3 -0,1 -122,2 -0,1 -132,5 -0,1 -121,2 -0,1 -115,2 -0,1 B.1. Income 8 0 9,8 0 10 0 10,5 0 10,6 0 B.2. Expenditure 106,3 0,1 132 0,1 142,5 0,1 131,7 0,1 125,8 0,1 5. SAPARD B. Net direct effect on the budget -5,8 0 0 0 0 0 0 0 0 0 B.1. Income (EU funds) 12,2 0 0 0 0 0 0 0 0 0 B.2. Expenditure (EU funds and national co-financing) 18 0 0 0 0 0 0 0 0 0 6. Structural support and rural development measures B. Net direct effect on the budget -214,5 -0,3 -1294,2 -1,4 -210,7 -0,2 -279,5 -0,2 -267,2 -0,2 B.1. Income 1386,1 1,7 1040,3 1,1 902,7 0,8 853,1 0,7 887,5 0,7 B.2. Expenditure 1600,5 2 2334,5 2,4 1113,4 1 1132,6 1 1154,7 0,9 7. Total direct effect on the budget B. Net direct effect on the budget -1045,7 -1,3 -2455,7 -2,6 -1311,9 -1,2 -1306,9 -1,1 -1225,1 -1 B.1. Income 2146,1 2,6 1752,7 1,8 1572 1,5 1641,2 1,4 1784,7 1,4 B.2. Expenditure 3191,9 3,9 4208,4 4,4 2883,8 2,7 2948,1 2,6 3009,8 2,4 Source: Ministry of Agriculture * The Government of the Republic of Lithuania has not yet provided for the level of the national premiums of direct payments for 2008, 2009, and 2010. ––––––––––––––––––––

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