Navigating minefields and headwinds: National security, demographic shifts, climate change and fiscal policy in Lithuania

Abstract Lithuania has experienced significant growth since gaining independence, reaching the upper echelons of the European Union (EU). However, continuing this rapid income growth in the future will be increasingly challenging due to rising fiscal pressures and a shrinking and aging population. This paper analyzes key fiscal challenges and explores policy options to address them. While immediate risks include military spending and higher borrowing costs, these concerns are overshadowed by long-term pressures associated with climate change and demographic shifts. Lithuania's population is rapidly declining, and the old-age dependency ratio is projected to more than double over the next two decades and half. As a result, long-term spending pressures could amount to 11.2 percent of GDP by 2050, which is about one-third of the current level of government spending. Concerns about debt sustainability prevent the option of financing additional expenditures through increased debt. Therefore, a comprehensive strategy is necessary to tackle these long-term fiscal challenges. This strategy should include changes to tax policy aimed at raising additional revenue while primarily focusing on reducing expenditure through reforms in the pension and healthcare systems.