Lithuania risks breaching EU fiscal rules as defence spending mounts

Lithuania met European Union fiscal requirements last year, but maintaining that discipline may become increasingly difficult, the National Audit Office has warned on Monday.

Auditor General Irena Segalovičienė said expenditure growth could exceed permitted limits as early as this year, as fiscal space has narrowed due to rapid increases in spending. Without further policy decisions, the country may eventually face a choice between funding national defence and maintaining other public services.

The audit office estimates, considering standard decisions to raise the tax-exempt income threshold, pensions and other costs, that the general government deficit could reach around 3% of GDP by 2028 and breach that threshold the following year. Public debt, meanwhile, is projected to rise from 45% to 55.3% of GDP between 2026 and 2029, with interest costs climbing from €1.1bn to €1.8bn over the same period.

Rising defence expenditure is a significant driver of the pressure. Advance payments for military equipment are already adding to public debt, though they will only be reflected in the deficit once the equipment is delivered to Lithuania.

Jurga Rukšėnaitė, head of the Fiscal Monitoring Centre at the audit office, said the pressure would only intensify in the coming years. Without additional revenue sources, she warned, it would be difficult to preserve fiscal discipline without reducing access to public services.

The audit office also flagged concerns over health funding, noting that while the social security fund met national fiscal rules last year, the Compulsory Health Insurance Fund did not, pointing to a potential funding gap.

It also noted that Sodra, Lithuania's state social insurance fund, would see its reserves boosted in the coming years by transfers from second-pillar pension funds – though these would be recorded as long-term liabilities rather than counted as additional revenue.

Lithuania remains among EU countries with relatively low levels of public revenue. The European Council has recommended strengthening funding for health and social protection while broadening the tax base. Lithuania has committed to expenditure growth limits for 2025–2029, though a temporary exemption for defence spending applies until 2028.