Budget for the people

Rarely is a single proposal rejected so many times. It was declined by the government on July 11. It was discussed again on July 12 by the national tripartite cooperation council, which cast it off at least until 2001. It is frowned upon by the Finance Ministry, and the Bank of Latvia tiptoes around it cautiously while it is preparing a "more informed" official opinion, due to be made public in a week's time.

The proposal is to raise the minimum monthly wage by 10 lats ($16), bringing it up to 60 lats.

It all comes down to budget problems. The projected deficit for 2001 is 77.7 million lats or approximately 1.7 percent of GDP, above the 1 percent ceiling imposed on Latvia by the World Bank but way below the 3 percent ceiling demanded from the EU countries by the Maastricht Treaty. Any increase in budget deficit, according to Bank of Latvia chairman Einars Repse.

Remarkably, the gaps in Latvia's state budget are customarily reduced at the expense of the lowest income groups - pensioners last summer and now minimum wage recipients. Finance Minister Gundars Berzins claims that increasing the social budget will take money away from education, but one can easily recall numerous, and so far fruitless, demands from teachers for pay increases.

The results of such fiscal policy priorities can be seen in the increasingly unfair income distribution as clearly indicated by the steadily climbing Gini index. In 1999, the average per capita income of the lowest fifth was, at 25.10 lats, 5.4 times lower than that of the highest fifth and 3.3 times lower than the cost of living.

The Welfare Ministry's project aimed at providing a "minimum income level" for poor families is unlikely to rectify the situation too much, for the Minister of Welfare Andrejs Pozarnovs will probably choose the level which would minimize the pressure on the state budget. According to Pozarnovs, such a level is 21 lats, as in this case municipalities will not require any extra funds in order to pay the benefits.

In view of this situation, the news that the state income has in fact been growing may come as a surprise. From 1.3 billion lats in 1997, it reached 1.6 billion lats in 1998, increased further to 1.6 billion despite the Russian crisis in 1999. Expected revenue in 2000 is down to about 1.4 billion lats.

But economic growth has so far been encouraging, reaching 5.3 percent in the first quarter. The Bank of Latvia expects it to continue with only a minor slowdown until at least the end of this year, leaving every reason to believe that state revenues will increase further.

The largest beneficiary of the increases in state revenue is defense. The 2001 defense budget projects a 4.6 million lats increase, and considering the NATO requirements for defense budgets, chances are it will not be cut.

The exact effect of the minimum wage increase on the budget is not clear. It will undoubtedly mean increased government spending, since the minimum wage recipients are mostly state employees. However, it will also increase income tax and social security receipts and will most likely increase government revenues from indirect taxes such as VAT and excise duties.

The Finance Ministry estimated that the direct tax revenue increases from raising the minimum wage alone will be about 5.8 million lats, while the expenses will rise by about 1.7 million. With the minimum wage rise and all the payments linked to it, government expenses may increase by 58.8 million lats. How much of this money will return in the form of direct and indirect taxes has not been calculated.

An increase in VAT and excise receipts is indeed hard to estimate, and will depend on how much of the money given to the public will be spent rather than saved. Considering that it will go to the lowest income groups, the proportion can reasonably be expected to be very high.

Neither the government nor the central bank, however, are willing to take the risk. Repse said that a minimum wage increase is impossible if there is a chance that it raises the deficit. According to the welfare minister, the government will be working on regulations which would unlink from the size of the minimum wage all the payments currently connected to it. It will, of course, take a while.

Altogether, the efforts going into preventing the residents from getting too much money from their state are admirable. One may only wonder what could happen if the zeal was applied to a better cause.