For the first time since 1995, investment as a share of the economy is higher in Lithuania than in Estonia. According to Eurostat, gross fixed capital formation in Lithuania amounted to 22.1% of GDP in the first quarter of 2026, while in Estonia it fell to 21.7%. Lithuania remained ahead in the second quarter, with investment reaching 22.4% of GDP, compared with 22.1% in Estonia.
A higher share of investment means that more resources are being directed towards productive assets, technology and higher productivity. This makes it possible to create more value with the same resources and supports faster long-term economic growth. A higher level of investment also reflects confidence in a country’s business environment and its future. Estonia’s experience, however, shows that this confidence – and an investment lead built over many years – can be lost quickly.
Estonia’s Success Was Built on Economic Freedom
Historically, Estonia consistently outperformed Lithuania in terms of investment, helping to support faster economic growth. One key factor behind this lead was Estonia’s greater economic freedom. After regaining independence from the Soviet Union, Estonia transitioned to a market economy more quickly than its neighbors and became one of the most economically free countries in the world.
For many years, Estonia’s model was based on relatively low and easy-to-administer taxes, a lighter regulatory burden on businesses and low public debt. A clear example of its competitive tax system is its treatment of reinvested corporate profits, which are not taxed. In other words, if profits remain in the company and are used for expansion, investment or the creation of new jobs, corporate income tax is payable only when those profits are distributed to owners.
Estonia’s success is also reflected in the annual Index of Economic Freedom published by the US-based Heritage Foundation. Estonia crossed the 70-point threshold as early as 1998, effectively reaching the status of a free economy. To this day, Estonia’s level of economic freedom remains higher than Lithuania’s: in 2026, Estonia scored 78.7 points, compared with Lithuania’s 75.3.
Greater economic freedom created more favorable conditions for investment, entrepreneurship and economic growth in Estonia. Businesses and individuals had greater freedom to pursue opportunities, create value and innovate. As a result, until the economic downturn that began in 2023, Estonia was rapidly converging with wealthier European countries: in 2022, GDP per capita stood at 75.4% of the EU average.
Lithuania: A Slower Start, But a Consistent Direction
How did Lithuania compare over the same period? In terms of economic freedom, Lithuania spent many years catching up with Estonia and did not cross the same 70-point threshold until 2004 – six years later. The difference in economic development was also clear: in 2022, Lithuania’s GDP per capita stood at 65.6% of the EU average, 10 percentage points lower than Estonia’s.
Over the longer term, however, Lithuania developed a clear and consistent trend: investment grew faster than GDP and therefore accounted for a growing share of the economy. Investment stood at 19.6% of GDP in 2015 and had risen to 22.9% by 2025. This sustained increase in investment strengthened Lithuania’s capacity to create more value and, over time, catch up with wealthier countries.
What Went Wrong in Estonia?
The situation changed significantly during Estonia’s economic downturn in 2023–2024. At first, the main causes were external: energy prices rose sharply following Russia’s full-scale invasion of Ukraine, while exports to Nordic and German markets declined as industrial activity in those economies weakened. Although Lithuania was also affected by the energy price shock and weaker demand in export markets, Estonia’s economic difficulties lasted much longer.
Estonian government policies also contributed significantly to the slow recovery, particularly through the tax reforms introduced in 2024–2025. These reforms substantially increased the tax burden: the standard value-added tax (VAT) rate rose from 20% to 24%, while personal income tax and the tax on distributed profits increased from 20% to 22%. Although plans for further tax increases were later abandoned, these changes, together with a new car tax and other regulatory measures, significantly raised the cost of doing business.
These measures changed a business environment that had previously been regarded as highly market-oriented and weakened business expectations. For example, Eurostat’s industrial confidence indicator for Estonia stood at –10.3 in April 2026, compared with –4.8 in Lithuania. As a result, Lithuania has nearly caught up with Estonia in terms of GDP per capita: in 2025, Estonia’s GDP per capita was 72.9% of the EU average, while Lithuania had reached 70.0%.
What Can Lithuania Learn from Estonia?
It is important to emphasize that Estonia remains one of the most economically free countries in the world. It ranks 9th in the Index of Economic Freedom, compared with Lithuania’s 15th place, and Estonia is expected to recover gradually and return to a path of sustainable long-term growth.
Nevertheless, the economic data and established economic principles indicate that tax increases and other regulatory changes significantly slowed Estonia’s recovery from the downturn. This created an opportunity for Lithuania not only to catch up with Estonia, but also to overtake it in terms of investment as a share of GDP. The economic gap between the two countries is expected to narrow further this year, as Lithuania’s GDP is projected to grow by around 3% in 2026, compared with only around 1.6% in Estonia.
The main lesson for Lithuania is clear: if the country wants to remain among the fastest-growing economies in the EU over the long term, it must preserve its status as a free economy, follow Estonia’s earlier successful path and avoid its more recent mistakes.
The risk of Lithuania moving in the opposite direction is nevertheless real. A recently implemented tax reform has already increased the overall tax burden, while Lithuania’s National Audit Office estimates that public debt could rise by 74% between 2025 and 2029 and that annual interest expenditure could more than double, from EUR 0.8 billion to EUR 1.8 billion. This points to the need for greater efficiency in public spending – starting with the elimination of unnecessary and overlapping functions in the public sector. Lithuania can sustain further progress only by improving its tax and regulatory environment, rather than by raising taxes and expanding the state apparatus.