From the 1st of January 2024 the minimal wage amount in Latvia will grow to EUR 700. This also means an increase of the mandatory social insurance minimum. BNN and President of Latvian Employers’ Confederation (LDDK), board member of Karavela LLC Andris Bite discuss the consequences of raising the minimum wage for businesses, potential growth of competitiveness, reduction of the burden of bureaucracy and what entrepreneurs expect from the government.
Employers seem happy about the growth of minimal wages. What does this mean for the employers that are now expected to pay these wages?
The problem in the private sector is smaller because in most cases employees in this sector are paid more than the minimal wage. Increase of wages will be necessary for a relatively small number of workers. Our objections against this one-sided minimal wage increase were mainly related to the lack of discussions or agreements with employers and employees, which is required by the format of the National Council for Trilateral Cooperation (NTSP). LDDK’s main objection is that this decision does not go together with changes for the labour force tax. It’s not secret that Latvia has the biggest labour force tax in the Baltic region. This means each euro paid to our employees costs us more than our colleagues in Lithuania and Estonia. This has an impact on various businesses’ competitiveness and on lower net wages, which residents are paid.
The biggest influence from the increase of minimal wages will be on state and municipal budgets, because for some of the people employed in the public sector wages are tied to the minimal wage and then multiplied using specific coefficients.
When transitioning to a EUR 620 minimal wage it was estimated that it would cost municipalities EUR 35 million. However, municipalities need to get this money from somewhere – someone needs to earn that money first.
Without a doubt. All of us are interested in paying people in Latvia bigger wages. But to make these decisions, three sides have to agree on them first. These sides are: the employers, the employees and the government. We cannot arbitrarily make such a decision without looking at how they will influence the costs of municipalities and employers. It’s not some separate phase, when we raise the minimal wage, but paying it is not our problem – let employers think about that. But this is exactly how it looked this and last time. If all of this was together with, say, raising the non-taxable minimum, to pay people more money, we would be all for it. However, there was no normal, open discussion or estimates as to how this would affect the economy. Lately there have been many problems with populist decisions voters and society in general like but which have dubious influence on the country’s prosperity in the future.
You’re probably right about populism. Amendments to the Labour Law were passed shortly before the 14th Saeima elections, and even then there were concerns about political promotion hiding behind them. Were there any discussions about this on the level of NTSP? The country is currently experiencing inflation and a continued growth of prices on materials and resources, and we have to think about balancing all of that.
So far, unfortunately, there have been no quality discussions on the level of NTSP. The Ministry of Finance has started actively working on the tax policy, which does touch on this topic – the review of the wage tax burden, but so far we remain at the starting stage. We bounced around from office to office with the previous government, discussing this. Now we’re starting from zero again. We hope for efforts of higher quality this time. We need better estimates and models as to how we are to tackle this issue. This isn’t just about wages. Right now we’re busy putting out a fire by reviewing or changing the budget. The budget businesses are able to generate is the one that is divided in the end. We have yet to arrive at discussions and modelling of the best ways to increase the budget and allow businesses do more and be able to produce more, export more and provide services. One of the functions of LDDK is coming together, requesting and motivating so that we arrive at ways to improve the economy, not just divide existing funds between pockets.
What to businesses expect from the government: to be more competitive and to open new businesses instead of closing existing ones?
The keyword here is “competitive environment”. Because it’s clear that everyone should do their jobs, and the government should not engage in business operations. As I usually say, compared to my company, in order to be successful in exporting to global markets, my product must be good, good-looking, tasty and priced appropriately. Competitive price and with appropriate service. The country is in the same situation in terms of business. Lithuania, Estonia, Poland and other countries compete with us. The state needs to provide an environment for enterprises to grow and develop. This is a garden or the soil, which is sufficiently competitive here. State services, costs and taxes are part of this as well. It is the burden of the state public sector on the budget, it is the level of bureaucracy, the availability of finance. The state should ensure that it is as comfortable or even more comfortable here, and it would not be more expensive to develop and work with neighbors. That is, the country must be as competitive in its sector, competing with other countries as with entrepreneurs, working in its sectors.
A competitive environment is the key issue to make sure investors come and build their factories here. Perhaps all this sounds very simple, but until there is an understanding on all societal levels about teachers’ and medical workers’ wages directly depend on the number of businesses in their city and country, how much they can produce, sell and bring in money, we won’t get anywhere.
Of course, this climate starts with the government, but this simple truth should be understood on the level of ministries, municipalities and society in general. Here’s an example. When businesses come with an initiative to build a factory in one municipality or the other, the usual reaction from local residents is this: we need this factory, but not in our backyard! Look for a different place. The most dangerous thing is that we do not understand this connection as to how and where the money in society’s pocket comes from. As long as this illness exists, we will continue running in circles and we will lag behind our neighbours even more.
The one positive is that there is an opportunity to change this, because society in general is not stupid. But we still need to promote this knowledge.
Is part of the problem, however, not related to the fact that a large part of the public still does not understand what taxpayers’ money really means? Could this be one of the reasons why people calmly look at cases of public money being wasted?
Yes, I will agree here. I tell my colleagues the same – that we need to promote awareness and point at all levels the various cases in municipalities or in the public sector where the money that we earned through hard work and brought from the world back here is being spent pointlessly or counter-productively. If we managed our businesses appropriately and spent money in a way the public sector does, two-thirds of us would gone bankrupt by now. And this isn’t just about corruption or theft, just purely wasting of money on decisions that either contribute nothing or are counter-productive. It’s not just that we treat state budget money this way, we also treat European Union money, which is big enough for public spending, as if it does not apply to us. The most typical case is [previous Latvian Prime Minister Krišjānis] Kariņš ‘flights, where there was an argument – it is already European money! But European money is also our money, which we earned with our hard work, taxes and our people who travel to Europe and generate money there.
We have a lot of work to do. On the one hand, there are discussions, and this is the case, of huge geopolitical challenges, and on the other hand, we can well see how this money is inefficiently used on a huge scale both between different institutions in the creation of uncoordinated systems and in many other things. There is still a lot of work to be done to really manage this process more efficiently.
It’s positive the Minister of Finance is open to this. However, we have to keep in mind that the opposition from the remaining public sector against the public austerity process will still be enormous. Because it affects a large portion of society that lives comfortably enough from these finances.
Unfortunately, the situation in Latvia is such that some officials consider themselves a big managers that are eligible to business-class flights, luxury class cars and other bonuses, but the entrepreneurs that provide them with these benefits are frequently bounced around from one office to another without any support whatsoever. What should be done to change this situation?
If there was a remedy, we would have used it already. Every society needs to deal with their respective governments’ desire to spend excessively, but it is our duty to point out without hesitation that every cent paid in taxes, especially the money that comes from the private sector and is earned outside Latvia, is meant to satisfy the needs of the whole society. As for flying in business class, the majority of entrepreneurs who can afford it financially don’t do it. Recently I’ve heard one businessman, when asked why he flies in economy class, say: I’m wealthy enough to become modest as well.
It seems that civil servants have the same preservation mechanism, thanks to which each bureaucracy reduction plan leads to its multiplication. Is there a chance of us living to see the moment when bureaucracy is finally put within reasonable borders?
The biggest mistake that can be made in this process is entrusting the reduction of bureaucracy to officials themselves. This is a process doomed to fail. We offered not to try again horizontally on the whole front, in all ministries, to make a plan on how to do it, but to take one or two ministries with all the institutions and agencies under their control, and consider small cuts – which control functions to entrust to the entrepreneurs themselves, which functions are not needed at all and which can be combined. On the basis of one ministry, we can show that this can be done, and it costs the state less, even if the remaining employees are paid respectable salaries, but they are more employed and able to perform their functions efficiently. So far, not a single brave minister has come forward to say, okay, let’s start with my ministry! But we are working intensely to promote this topic. Because reduction of bureaucracy would make it easier for the overall business environment and help save state funding. But this should be done by someone from the side. It would be naive to entrust this to officials and expect them to cut their own wings.
What’s your opinion on the practice of appointing officials from different ministries to the boards and councils of different state capital companies? Their range of responsibilities in ministries, I think, is already serious enough, so the question is with how well are they able to perform their duties in several workplaces at the same time? On top of that, in each of these jobs, wages are measured in thousands of euros…
I might be wrong, but my personal opinion is that their professional contribution in boards and councils is dubious. If I have to go and work in airBaltic council, then I and my thirty years of business experience would likely cause more damage than good. I think that this is rather the misguided remuneration system for civil servants and public sector employees. It is very inflexible and the basic salary is the same for everyone. The system with councils is designed to provide these people, many of whom are really professionals in their respective fields as civil servants, with a more competitive salary relative to private business. But this causes the system to burst. In a situation where IT technologies, artificial intelligence capabilities and the like are developing very rapidly, public administration should be significantly smaller in numbers, but with much better paid specialists who do not need to look for additional earning opportunities in other positions and places. Managers in the civil service must have free hands in determining remuneration in relation to a person’s contribution. In this matter, we have a very standardised state and system. We are, however, pushing more and offering to follow this path of freedom. For example, let’s take an institution such as the Investment and Development Agency of Latvia, which should take care of attracting investments in the country. There, the level of wages for people who are entrusted to work on attracting investment, and in theory we expect it to be billions, at the lowest level is about a thousand, one and a half thousand euros. Such a wage is no enough to attract an active, motivated professional, and thus it comes as the first job for students. In general, this is not bad, but in the long run, a person cannot stay there. We say – we give the head of the institution the opportunity to build the system itself. If a man is able to bring an investment in a manufacturing, exporting industry of a hundred million, a billion, to here, let him get that million in wages. He earned that, and the contribution to the state would be enormous in this case! We’d see a different kind of motivation to run, search, negotiate and work. But we need to give heads of institutions to create such a system. The state budget would benefit from that as well. We have talked to the heads of institutions, how would it be if the institution had to perform the same functions as now for a third of the smaller budget, but the manager has full possibilities to choose what the salaries will be and how many people work. In fact, these simulations always end with, yes, higher wages, but half the number of people. Then people would also be freed to work in the private sector and not have to think so much about attracting workers from other countries. We have a catastrophic shortage of employees, but the proportion between the public sector and private-sector tax-generating workers is very unhealthy.
How do you view the past year and what do you expect from the next year, 2024?
As we usually say, from an economic and business point of view, last year was difficult, and the next one is not looking to be better (laughs). The global economy stagnates. This is the reality we have, and it will affect our economic indexes as well. While many industries worked very well in the last covid years and the year after the pandemic with all the big challenges and lockdowns, supply disruptions and huge inflation, now the party is over and the opposite effect has begun. We have to adapt to the new situation, when people and society in general are spending less money, price corrections are downward facing, demand is going down, etc. It’s the businesses’ responsibility to adapt, but it won’t be easy. But what matters right now is security and geopolitical challenges. The Russian war in Ukraine stands it right next to us all the time and has a negative impact on both overall security and the investment environment. We can only influence these things to the best of our ability by helping Ukraine hold on and win. However, we should keep in mind that this may affect our economic development in the coming years. Many foreign investors, looking at this region, also look at geopolitical risks.
One positive is that Latvia is so small – in terms of population, number of businesses and territory – global economic developments allow us to adapt and find investors more easily. Because there will always, in all circumstances, be investors who want to come. We just need to let local entrepreneurs work and help businesses grow. Even in difficult times, as individual sectors or economies, we have grown and developed, the question is whether there is ambition, will and belief that this can be done.
Also read: BNN INTERVIEW | Filips Rajevskis: Latvian corridor will be closed, but there will be other roads. This is not the way to weaken Russia
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BNN INTERVIEW | LDDK President: we don’t understand where the money in society’s pocket comes from
