Author: Ilona Bērziņa
At their final meeting, the 13th Saeima passed in the final reading amendments to the Labour Law. These amendments increase the minimal wage in the country to EUR 620 in 2023 and to EUR 700 in 2024. The parliament deserves praise for a job well done. However, this is not enough to raise the country’s and residents’ level of welfare. Complex measures to improve the business environment and to reduce the grey economy are still needed.
Although politicians have decided to increase the minimal wage, it remains the lowest among Baltic States. The minimal wage will be EUR 725 in Estonia and EUR 840 in Lithuania as of 1 January 2023. Are we worse than Lithuania and Estonia? As Vilis Krištopans (LPV) recently said, «did they have a different Covid and a different Putin»?
Stumbling stones – corruption and grey economy
Very interesting opinion were voiced during Atvērtie faili programme of Latvijas Radio about why Estonia and Lithuania have higher wages and a more rapidly growing economy.
Luminor Bank’s economist Pēteris Strautiņš, referencing the so-called Ridzene Hotel negotiations, which were quickly swept under the rug by the parliamentary investigative committee under Inguna Sudraba during the 12th Saeima’s term, stressed the negative effect from oligarchy in the country, which has been very widespread in recent years. Aside from direct financial losses or bloated procurement projects, he also mentioned excessive pollution of the public agenda. People who want to do something to benefit the country have all of their attention taken over by the fight to prevent the country itself from being stolen from them.
Respectively, the main reason as to why Latvia was lagging behind its neighbours is corruption and the strong and unshakable power of lying and influential politicians. During the same discussion, investment banker Ģirts Rungainis mentioned that our [Latvia’s] difference from neighbours is that Latvia had a lot more to divide. In the end, he said, ‘Latvia has gone the road close to the one followed by Russia’. The names of the major players are known to everyone, but the problem is that there are usually multiple smaller but hungry politicians waiting for their share behind decisions. This is why they are able to avoid responsibility so successfully.
This is an argument in favour of creating a new generation of politicians in the country without ties to the old political economic mafia.
The grey economy is not in decline – it is up
The damages caused by the grey economy to the state budget exceeded EUR 2.7 billion last year. This means more than a quarter (!) of the state budget. Whenever law enforcers catch envelope wage recipients proudly pat themselves on the back, but the grey zone isn’t becoming any smaller. The grey economy index in Latvia was 26.6% of GDP last year. When compared to 2020, it increased by 1.1%, according to the Grey Economy Index in Baltic States 2009-2021 from Stockholm School of Economics in Riga.
The fact that neither Lithuania nor Estonia have put an end to this problem is a calming factors of sorts for Latvia. In Estonia, for example, the grey economy was 19% of GDP (2.5% more when compared to 2020) and in Lithuania it was 23% of GDP (2.7% more). Envelope wages account for 46.2% of grey economy, unregistered employees account for 23.8%, and undeclared income account for 30%.
As should be clear, a major portion of grey economy is directly related to labour force. Considering that labour tax-wise we [Latvia] remain the most expensive country not only in the Baltic region but also Nordic countries, it should not be surprising.
Expecting tangible improvement of the business environment
As for the causes behind the grey economy, the Ministry of Finance mentioned factors like austerity measures, which normally surface at the expenses of taxes and mandatory social insurance contributions; the options provided by cash transactions and low transparency. The lack of any sense of guilt is blamed on lack of knowledge and low awareness on how taxes are used, as well as low trust in the state and official structures and the state administration’s ability to use the money received in taxes in an efficient and fair manner. Does anyone in state administration actually believe that the odd deal involving the allocation of EUR 8 million from the state budget to land owners in Biķernieki or the recent scandal at the State Revenue Service involving the fabrication of a criminal case in an attempt to extort a bribe from businessman Ramoliņš will somehow make this trust appear? Residents are well aware that «taxpayers’ money» does not grow in flower pods of the State Treasury, rather it is their hard-earned money that is paid to the state budget. At the same time, residents also hear the complaints from teachers and medical workers about low wages and how this is contrasted with continued and generous increases of wages of high-ranking officials. Is it really surprising why there is no shortage of workers who are fine with receiving much higher pay in envelopes?
Bribery still exists
When compared to 2020, bribery [in Latvia] increased by 0.9% last year, reaching 9.2%, according to SSE Riga. Researchers believe there is a link with access to EU funds. The bigger the project that can be implemented by the state and municipalities using money from Europe, the bigger the appetite from businessmen to take on such projects and get their hands on EU funds. This means a certain percentage is put in the pockets of institutions responsible for projects. Unfortunately, this is where Latvia is ahead of its neighbours – while the average percentage is 4% in Estonia and 7.7% in Lithuania, in Latvia it is 8%.
According to researchers, this percentage has increased in all three Baltic States when compared to 2020.
The only way to battle this form of corruption is a change attitude. However, as long as the approach on settling affairs remains, nothing will change. If you get a major order from the state, in a manner of speaking, be prepared to «share» with influential godfathers and godmothers for «settling formalities».
There is a way out from the grey zone
Latvia can only hope the new government with their increased wages (from 2023 onward the wage of the PM, for example, will increase by 52%, and wages of ministers will increase by 42%, the wage of the Saeima speaker will increase by 75%) will be able to fund the political will necessary to reduce the labour tax burden, because at the moment employees in Latvia cost more than they do in neighbouring countries. Of course, the increase of minimal wages will only increase these costs even more. Nevertheless, one way out is reducing labour tax at least to the levels of other Baltic States.
Reduction of the grey economy would help reduce losses from lower taxes.
In 2020 the Bank of Latvia recommended reducing state social insurance contributions by 4% (the current rate is 34.09%; employers pay 23.59% of this amount). A reduction of labour force taxes would help reduce companies’ production costs and help reduce the prices of local products. It would become more profitable to take on new workers. This measure would also serve as stimulus for many workers to exit the grey zone.
It will be interesting to observe whether the newly-elected Saeima understands this simple ABC or continues ignoring it.