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Latvia is a land of extremes. In a country where 42% of children live at risk of poverty and social exclusion, the state can afford to pay 142,000 euros in paternity benefits for one child, and 200,000 euros in unemployment benefits. The Latvian system of taxes and benefits supports its rich more than the poor, leading to the highest income inequality in the EU. Re:Baltica investigates – how did Latvia get there?

Social worker Ieva Apfelberga (36) with her husband, who works as a teacher, and their four children live in a rented three-room apartment in Cesvaine. Politician Inese Slesere and her husband, businessman Ainars Slesers, and their four sons live in a large apartment in the wealthy “quiet centre” of Riga, and are also building a house in the expensive seaside town of Jurmala. Both are large families and both pay taxes. But the tax system built up over many years in Latvia is much more favourable to the wealthy Slesers family than it is to the Apfelbergs.

The most recent examples are the changes to the law which were adopted in September, which will provide a 50% real estate tax discount to large families. At first glance the idea seems very good, but looking at it more deeply, the Slesers will be the biggest winners.

According to Re:Baltica’s calculations, Slesere pays an average of 600 lats (854 euros) in real estate tax per year for her 250 square metre apartment in the centre of Riga. If Apfelberga owned her rented apartment, she would pay 13 lats (18 euros). This means that Slesere, on receiving the discount, would save 300 lats (427 euros), but Apfelberga – about 6 lats (9 euros). This comparison is a hypothetical example, since the Apfelbergs’ apartment is owned by her husband’s firm. They couldn’t buy their own apartment. “Even in the good years no bank wanted to give us a loan, because we have three children,” says Apfelberga.

Here, sceptics could object that there are very few large families in Latvia as wealthy as the Slesers, which is true. But these wealthy exceptions will receive a large chunk of the overall money planned for the tax discount. The Ministry of Finance has calculated that the average large family will save 5 lats (7 euros) per year on real estate tax. This means that one Slesers family would “take” the norm for 60 average large Latvian families. The Slesers family won’t get as much this time because, after pressure from economists and journalists while this article was being drafted, the Ministry of Finance changed its initial intentions and determined a tax discount ceiling – 110 lats (157 euros). This kind of thing happens very rarely in Latvia.

The Latvian benefits system overall works largely in favour of the wealthy, allowing them to receive huge benefits, while people on small incomes receive the minimum benefit. This is different than the tax and benefit systems in Europe, America and other economically developed countries, where social security means assistance for people in difficult circumstances and support for the needy.

Meanwhile, Latvia is taking it to extremes: in a country where 42% of children are living at risk of poverty and social exclusion, the third highest indicator in the EU, the state can afford to pay out a “paternity benefit” of 110,000 lats (156,000 euros) for one child.

No real taxes on dividends, capital gains and real estate allowed the wealthy to avoid significant tax payments for years, while the needy section of society paid the full amount. Many of the needy, unable to survive from payday to payday, left the country. In the last 20 years, about 200,000 people abandoned Latvia and only one in five of them concede that they could return within the next five years.

While Latvia’s power elite presents Latvia as a success story in the battle against the economic crisis, the numbers show something different. More and more residents of Latvia are getting poorer. Since 2004, the number of people living in poverty in Latvia has increased by 158%.

The economic policy centre BICEPS’ calculations show that the average income of the bottom 90% of households is 425 lats (605 euros), while the most wealthy one percent of households can spend on average seven times more – 3018 lats  (4299 euros) a month.

Incomes of Top1% households and bottom 90%, click on the image to view infograph. Infograph: Ivo Simsons

Since 2005, when Eurostat comparative data first became available, Latvia has always been among the European Union states with the largest difference in incomes between the poorer and the richer segments of society. The GINI coefficient measures this income inequality, and the latest data show that we are in first place by this measure.

Vjaceslavs Dombrovskis, a researcher at the Stockholm School of Economics and now a politician (Reform Party), analyzed data on motor vehicle registrations in Latvia in 2010 and demonstrated that inequality or the GINI coefficient in 2009 was even greater than as shown by traditional indicators – 55% (Eurostat – 37%) (The larger the sum, the greater the inequality).

It is true that during a crisis the numbers of poor increase in all countries. But statistics show that income inequality in Latvia was increasing even when the economy was booming. During this time, the top end of society and the middle class benefited more than the poor.

“We’ve talked about the fact that we haven’t felt the crisis. Our income has been pretty much the same all the time,” relates social worker Ieva Apfelberga from the small city Cesvaine. With husband Maris, who works in the local “Grasi” Children’s Home and at the Cesvaine Music and Art School, they together earn an average of 500 lats (712 euros) per month. This means that each family member receives 80 lats (114 euros) on average, and that Ieva could even register herself for the status of a poor person to receive state benefits. But as a social worker who has to grant benefits to local people, Ieva won’t do this. It would be “unethical. I’m not the worst off,” explains Ieva. She talks about some of her colleagues who are raising three children by themselves and who also won’t apply for benefits.

Ieva and Maris Apfelbergi, Cesvaine in eastern Latvia. In a family with four children, both work, but their incomes are so modest that they qualify for social welfare benefits. She does not claim the benefits as she herself is a social worker. Photo: Kristīne Vilciņa

During the crisis the difference in incomes between Ieva Apfelberga and the richest segment became smaller, because the incomes of the wealthy fell by almost one-third, while those of the poor fell by nine percent. One must add, however, that during the period from 2004 to 2008, the household incomes of the rich rose two and half times, while the incomes of the poor rose slightly more than two times.

The incomes of the wealthiest Latvians declined more rapidly due to the diminishing opportunities of earning from investment funds and due to the real estate bubble bursting. But the experience of the US economy shows that rich people tend to recover more quickly from a crisis than the needy. And there are already signs of this happening in Latvia too.

The economy is slowly recovering, and conditions will get easier for many residents, but not for all. With the current tax policy, more money will stay in the wallets of families like that of the business entrepreneur Slesers than that of the social worker Ieva Apfelberga.

‘’We have a middle class, which feels sufficiently solid, there’s the prosperous class and the poor. Something else is worrying – that the difference between the first and the bottom ten per cent [in terms of income] is 70-80%,” noted the former DNB Bank President, Andris Ozolins, this summer in an interview on Latvijas Radio. His view was that “There is a lack of a sensible Social Democratic position in Latvia, and it’s surprising that it’s not the government that’s talking about it, but the International Monetary Fund.”

As a result of the pressures from international lenders, the government did express a desire to protect people with lower incomes during the crisis, but these ideas didn’t translate into government actions.

A good example is the Tax Strategy for 2011-2015 developed by the Ministry of Finance. In this document from 2010, the Ministry indicated that a large proportion of residents were unable to pay for “even the basic necessities, which (…) creates a perception in society that the tax system is unjust and inequitable.” Therefore, officials called for more “social justice” and “to reduce taxes on low wages and increase taxes on luxury properties”.

The Ministry proposed four changes to the taxation legislation to enable this to happen. Using special simulation models, economist Alfs Vanags and his colleagues from BICEPS showed that the proposed tax changes would again increase the burden on people with low wages. At the moment the government is still following its plan.

How Did Latvia Get Here?

Because it benefits the rich. In 2006, the commentator on economics for the Diena newspaper and now the DNB Bank economist, Peteris Strautins wrote: the ideology which was promulgated in the Soviet times–that everybody pays the same taxes equally–is convenient for the power elite in Latvia.

The seeds of inequality already appeared in Latvia during the restoration of independence in the ‘90s with the beginning of privatization. Estonia was the only one of the Baltic states which allowed its companies to be privatized through money purchases or investment. As a result, the companies ended up in the hands of foreign investors who introduced industrial innovations and opened up new markets. From 1993-1995, 366 million dollars of foreign investment flooded into Estonia, while for Latvia it was 143 million and Lithuania – 42 million.

Due to the interests of various economic groups, privatization in Latvia dragged on, right up until 1998, putting the brakes on entrepreneurial development. Those who succeeded in the privatization battle were those who were close to ministries in various fields. Academics point out that delayed privatization leads to the creation of so-called oligarchs. As a result, a large part of society’s common property ends up in the hands of just a few people. Fair competition gets restricted.

During the period of privatization Latvia ended up with two very visible oligarchs. Nearly all of the largest state food companies ended up in the care of former Ministry of Agriculture employee Andris Skele. There were also fierce battles in the lucrative bank and transit areas, from which Latvia got its second most visible oligarch – Aivars Lembergs. Business ties were very closely intertwined with politics. Skele created his own party – the People’s Party, and Lembergs his own – the Greens and Farmers Union.

Meanwhile, Parex Bank expanded in the banking sector and was a significant source of funding for a number of political parties, through which the bank realized its interests.

Ivars Godmanis’ government rejected the requests of bank regulators to limit the withdrawals of money from Parex Bank before its collapse. As a consequence 298 million lats (428 million euros) were removed from the bank. Photo: Nekā Personīga, TV3

The close ties of Parex with politics became obvious during the bank’s takeover by the government after the bank crashed in November 2008. Despite the Latvian bank regulator’s numerous requests to place restrictions on the withdrawal of funds from Parex, the government led by Ivars Godmanis (LFP/LW) rejected them. As a result, 294 million lats (418 mil. euros) disappeared from the bank in less than a month.

Later it also transpired that the Parex takeover agreement, which in Godmanis’ words was “beneficial” to the state, allowed the bank’s former owners and their relatives to continue to receive interest from investments.

Aigars Kalvitis, Prime Minister during the boom years, ignored the recommendations of economists to impose higher taxes on real estate. It was easier for the state treasury to tax consumer spending. Photo:

This was 4,7 million lats (6,7 mil. euros) in 2010, from a bank which was already owned by the state. These interest payments continue to be made.

Some of the most influential economists in Russia, Sergei Guriev and his colleague Andrei Rachinsky, explain that the development of oligarchs also has a positive side. As businessmen, the oligarchs were interested in a developing, organized country so they could continue to earn. During the period when Skele was Prime Minister, Latvia moved strongly in the direction of joining NATO and the EU, and toward the development of a stable currency. The World Bank Economist Karlis Smits says that this is when the so-called “first generation” reforms were implemented.

Around the beginning of 2000 there was another turning point when “the second generation” reforms were emerging – for a more open economy and more competition, which for the old economic guard meant a certain loss of their slice of the “cake.” As a result, the oligarchs were using their influence to keep others from the “cake,” including making decisions that were benefiting them, such as adjusting the tax system to their advantage.

Latvia is the only Baltic nation, where for an extended period, one didn’t have to pay taxes from capital gains and dividends. The most popular excuse at the time was that these taxes would scare away foreign investment. This argument continues to be used in the adoption of various government decisions. Economists say that this is not true.

“Those who could take out these dividends from companies at that time weren’t a part of the economic elite who created value,” says former Diena commentator Peteris Strautins. “For example, Normunds Bergs [who works in the information technology field] is very rich, but he didn’t take out billions from his businesses in dividends, whereas people who had simply grabbed shares, who earn directly due to their strategic placement, are the ones who take out millions irrespective of company profits.”

One of the people who earned from his “strategic placement”, was Aivars Lembergs. Re:Baltica calculated: in the last ten years earlier Lembergs earned 14,8 million lats (21 mil. euros) from dividends and bank deposits. If the dividend tax which was introduced during the crisis had been introduced ten year earlier, Lembergs would have had to pay nearly 1,5 million lats (2,1 mil. euros) in tax. This amount would have paid the annual wages for 250 teachers.

Politicians who didn’t have companies like Lembergs that earned dividends “made a killing” in the real estate business. This was convenient as the land tax was inadequately low. The law also allowed ways of avoiding a range of other taxes.

Aigars Stokenbergs, the People’s Party’s Economics Minister at the time, became a millionaire in 2006 in this way by selling property in Rīga for 1.9 million euros.

In 2006 Andris Skele’s daughter sold a former important sports complex in Riga. The transaction amount was estimated at 20 million lats (28,5 million euros). Photo:

At about the same time the daughter of Andris Skele (a prominent politician in the People’s Party) sold an important former sports complex in Riga. The transaction sum was estimated at about 20 million lats (28 mil. euros). Both Skele’s family, as well as Stokenbergs and his business partners completed transactions bypassing the 15% income tax on businesses. Long-term People’s Party Adviser Jurgis Liepnieks also became a millionaire in the “good years”.

Suspicions about tax evasion were raised about the former Speaker of the Saeima, Janis Straume from For Fatherland and Freedom/LNNK. In 2004, he sold his four room apartment in the old town of the capital Riga for a very low price. After media reports led to a scandal, the transaction amount shown in his income tax declaration, submitted a year later was ten times bigger. At that time, another popular scheme was not to show the full amount of the purchase sum, so that the 2% transaction levy wouldn’t have to be paid. Real estate experts estimated that the full purchase amount was shown for only about 10% of transactions made in the nation.

Another former Prime Minister and Finance Minister, Einars Repse from the New Age Party (later Unity) was active in speculation with real estate.

Former Prime Minister and former Finance Minister Einars Repse actively traded in real estate, selling eleven properties in Kaunatas district in 2005. Photo:

In 2005, Repse sold 11 parcels of real estate in Kaunata County, but the transaction sums are unknown.  Ilmars Rimsevics, the Governor of the Bank of Latvia also purchased a total of seven properties (at Jurmala, Garkalne, Ventspils) during the boom. The record holder among government officials in terms of the number of properties could be Latvia’s President Andris Berzins, who owns more than thirty. Half of these are in expensive coastal counties – at Kolka and Nitaure.

The ruling People’s Party with Prime Minister Aigars Kalvitis, Finance Ministers Oskars Spurdzins and Atis Slakteris pretended not to hear suggestions by international and local economists to put a tax on real estate to cool the overheating economy. To supplement the state treasury coffers, it was easier to take money from the social worker Apfelberga through increased sales taxes rather than getting it from expensive real estate transactions.

Ieva Apfelberga and her family couldn’t speculate on property or investments, as they didn’t have the money for that. Ieva and her husband couldn’t buy their apartment either as prices were growing astronomically. “I remember one time when I went to the bank,” remembers Maris Apfelbergs, “they looked at my income, looked at how many children we had and said: there’s no chance.”

“If we look at the taxation policy over a longer period, then we see that in individual cases [politicians] openly lie,” says Swedbank economist Martins Kazaks.“For example, at the end of 2000, before the crisis hit Latvia, there were often suggestions coming from economists for a reduction in the tax on labour and for an increase in the real estate tax, but the response from the Finance Ministry was – no, we have an absolutely perfect taxation system. There’d apparently been an assessment from the International Monetary Fund which had said the same. This assessment of the system by the IMF was obviously kept hidden. A few years later when this document became accessible, one could clearly see that the suggestion had been to reduce workforce taxes. Why were we told fibs then?” said Kazaks.

As opposed to nimble politicians and businessmen, Ieva and Maris also didn’t have a company, so that they could register their car under its name. This continues to be a popular way of “optimizing taxes”. By registering a car under a company’s name, fuel, repairs and insurance can be written off under expenses and the sales tax can be partly reclaimed.

Re:Baltica found out that of the 1,690 new BMW’s registered in Latvia in 2010, 80% were registered under company names. In 2011 the law was tightened up, introducing a new tax which has to be paid for all light vehicles owned by companies. In this case, the state has shown it has the upper hand over private businesses, as state and local council institutions don’t pay this tax. The State Revenue Service explains that employees of state institutions are not allowed to use government vehicles for private use, but journalists have proven on a number of occasions that this isn’t true.

Politicians like to find loopholes in the law today as well. The portal revealed that the Saeima’s Unity faction leader Dzintars Zakis was driving a new Volvo, which had been purchased by his company.

Such actions by politicians in a way “legalizes” the evasion of taxes. It then leads to the dominant view in the society that if people in power don’t pay taxes, and actually use laws to avoid them, why should the average businessmen and workers do it? In Latvia about half of residents believe that some taxes don’t need to be paid. Among the Baltic nations, Latvia has the largest shadow economy – 30%.

How Are Decisions Made?

It would be an exaggeration to say that Latvia’s tax system has been deliberately constructed to favour the rich. Incompetent bureaucracy deserves some of the blame too. With some notable exceptions, institutions of higher learning in Latvia rarely contribute research that could help inform government policy. Instead, untested assumptions are often used to craft legislation.

“In my Economics Commission I have sometimes asked three civil servants to research how a problem is solved in other countries. Quite often they think we shouldn’t even pay attention to this aspect,” observes former Stockholm School of Economics economist and now politician Vjaceslavs Dombrovskis. “our problem is that academic capacity is close to zero.”  Consequently, the government often adopts decisions that haven’t been thought through and which often deform the system.

For example, Latvia is the only Baltic nation where there is no ceiling on unemployment and parental benefits. This means that people with large incomes receive huge benefits, degrading the basic principle of the system –  that benefits are meant to assist a person to make ends meet in a specific, sometimes unplanned situation in life. But the state should not have to insure a luxurious lifestyle for the rich.

Recently, the parental benefit of 55,700 lats (79,000 euros) received by The Bank of Latvia employee Raivo Vanags caused outrage in Latvia, but the record benefit was almost twice as big. It was paid out in 2011 and was 107,000 lats (152,000 euros) at an average of 11,780 lats (6,780 euros) per month. The names of the recipients of the largest benefits are not publicly available.

Currently, there is a so-called “soft ceiling,” a kind of transition period when you can’t get the full parental benefit equal to your salary as in the “good years,” but even so a maximum ceiling hasn’t been determined. Raivo Vanags received his high parental benefit after the “soft ceiling” was already in place.

In Estonia and Lithuania there was a parental benefit ceiling right from its introduction. In Estonia the maximum parental benefit is 1,500 lats (2137 euros) per month, in Lithuania 940 lats (1339 euros).

There is a similar situation with unemployment benefits. In Latvia the largest unemployment benefit paid out per month was 25,000 lats (36,000 euros), and the total amount paid out was 166,000 lats (236,000 euros). This was paid out in 2008, at the time when the state took over Parex Bank and the bank’s senior employees left their employment.

At least nine of the Parex Bank’s former council and board members received handsome compensation, including unpaid holiday pay and wages. After the government took over Parex it paid 200,000 lats (285,000 euros) to some of these individuals, with the total amount paid out exceeding 1,2 million lats (1,7 million euros). It looks like at least some of these individuals also applied for unemployment benefits. Re:Baltica has found out that Parex vice-president Martins Jaunarajs also received almost 200,000 lats (285,000 euros) in compensation. He didn’t wish to comment to Re:Baltica about the size of the compensation, nor on whether he applied for unemployment benefits. According to the information leaked in the “Neo” matter, Guntars Grinbergs, Vladislavs Skrebelis, Gene Zolotarevs, Eriks Brivmanis also received large amounts of compensation.

In addition, another myth has developed in Latvia which deforms the system: I paid a lot in taxes, and therefore I’m entitled to receive just as much back. Economists explain that this isn’t how the system works.

“It just won’t be the case that I will get back every dollar I paid,” explains economist Martins Kazaks, and “we have to take into account that a portion of these payments which we make to the state will go to other people. (…) For example, to a neighbour or a relative.”

BICEPS economist Alfs Vanags compares the payment of taxes with insurance, which we pay to insure ourselves against certain situations, but this doesn’t mean that we get all of the money back. If the state provides a benefit after the birth of a child, then the amount should be sufficient for that child’s care. “Are 100,000 lats (142,000 euros) required to raise a child?” –Vanags points out.

In addition, the state should provide services which can’t always be measured in terms of money – a high quality healthcare system, education, well maintained roads and police protection. The more citizens can enjoy such public goods, the better it is for the state. For example, educated and innovative people mean more productive workers and new jobs.

English researchers Richard Wilkinson and Kate Pickett, who have compared large data sets among developing countries, argue that a large income gap harms a country’s economic and democratic health. They found that the greater the inequality within a country, the greater the  level of crime, homicides, the number of drug users and alcoholics, as well as mistrust of the government.  Plus these factors affect everyone – both the rich and the poor.

To see municipal social benefits paid in 2011 in Latvia, click on the map. Map: eazyBI

If Latvia’s goal is to achieve greater equality, as in Scandinavia and Estonia, the more affluent citizens would have to pay more taxes. Of course, the high level of corruption in Latvia doesn’t promote the desire to pay taxes, since there are no guarantees that the money will actually go toward the salary of the nurses rather than into buying new cars for Parliament or the construction of another “golden bridge”.

Often also a situation gets marginalized, taking one aspect out of context. Criticism is often expressed in the press: why pay taxes, if they just go to subsidize the “lazy unemployed”? Such stereotyping often emerges due to lack of in-depth reporting, which often doesn’t analyze the tax, unemployment and social security system in a broader context. Inequality of income and low wages haven’t been created by the unemployed, but rather by the political elite. (Read K.Rizga’s article)

Why Should We Worry About Growing Inequality?

Because it harms the health of the state and estranges the wealthiest part of society from real life. The wealthy become even less interested in paying for the common good, as they can buy everything they need themselves – health insurance, heating and education for their children in private schools. Why should they have to improve the quality of universities in Latvia, if their children are studying in other countries? Why give more money to the hospitals, if they are not standing in line for an operation?

Nobel Prize winner, American economist Joseph Stiglitz explains that growing inequality means that we aren’t using our greatest resource – our people. For example, even though Latvia provides grants for study in universities, young people from well-situated families have more opportunities to access them. They tend to have more information about how and where to get scholarships and also money to study for entrance examinations – to pay for a private tutor, to purchase the required books, etc.

The most enterprising people, seeing that they won’t be able to improve their lives in Latvia, leave. Those who leave say that they feel like losers in Latvia and yearn for a country which will take more care of them.

“The time spent at home this time was too long. It’s getting harder and harder to pack the suitcases,” writes Inese Liepina from Cesis in an email from Norway, whom Re:Baltica met in Latvia this summer.

Inese and Pēteris Liepiņi. Photo: Māris Rizga

She and her husband have been working as newspaper delivery couriers in Norway for a year to repay 10,000 lats (14,000 euros) which they borrowed from Hipoteku banka to finish building their home. Despite the fact that Inese longs for her home and often cries when thinking about the places dear to her, she still finds it difficult to accept the absurdities in her homeland. “However, the situation continues to be the same – a visit to the building inspector, and to the Head of the Territory Planning and Development Department confirmed in full the customary behaviour of Latvian state bureaucrats and the ludicrous legal system,” recalls Inese from her visit to Latvia.

As opposed to more hot-blooded Southerners, Latvians don’t express their opinions through demonstrations. This summer, in Latvia’s Radio Labor Union Leader Peteris Krigers related that Latvians find two forms of protest acceptable – signing a referendum to dismiss the Parliament, or “packing their belongings in a suitcase and leaving Latvia”.

Krigers himself is also partly to blame for this situation. There aren’t powerful organizations in Latvia to defend the sales clerks or nurses. The inability to speak strategically with politicians is one of the reasons why the interests of businessmen once again prevailed in government this summer.

“Have a look at how the representatives of employer and business organizations operate! They go and meet politicians, talk with them, provide proof with statistics and achieve what they want, while Krigers just shouts and nobody takes him seriously,” said a civil servant who is closely connected with the development of tax policy.

At the beginning of this year the government was still promising that it would raise the level of  income not subject to income tax, which would mean that sales assistants, policemen, and nurses would receive more after tax. Instead, after active lobbying by business, the government decided that in the next three years they would gradually reduce the rate of individual income tax – therefore, more money would end up in the hands of the higher income earners.

According to the calculations from BICEPS, if the non-taxable income amount were raised to 90 lats (128 euros) for families of the bottom 90% of society with a average monthly net income of 425 lats (570 euros), income would grow by 2,8%, whereas for those who earn more than 1,000 lats – by only 0,5%.

With the policies currently being implemented by the government, income would increase by 5,3% for families which earn over 1,000 lats (1424 euros) per month, whereas for families like Apfelberga from Cesvaine – by 3,3%. (see the graphics for a more comprehensive breakdown)

The main priority for the Finance Ministry currently is the creation of new jobs, and that’s why taxes are being reduced on labour. The Ministry hopes that more foreign investment will be attracted in this way, although there isn’t any research to prove this.

“We never forget about social justice, but we must understand that the efficiency principle exists as well,” explains the Head of the Finance Ministry’s Direct Tax Division, Astra Kalane, “to implement the social justice principle in a developed model, one pays a heavy price.”

What’s so expensive? The government has calculated that to increase the non-taxable amount by even 10 lats (14 euros), 17,3 million lats (24,6 million euros) per year in additional state revenue would be required. We don’t have the money for that, the Ministry says. Instead, next summer the government will increase the non-taxable amount by 10 lats (14 euros) for those with dependants, which will cost the budget 4,3 million lats (6,1 million euros).

At the same time the government did find 143 million lats (203 million euros) from 2009-2011, to put towards saving the Hipoteku banka. IR magazine wrote that the government gave the last injection of funds, 25 million lats (35,6 million euros), just this summer.

The calculations by BICEPS also prove that with these sorts of policies, inequality will again increase. (see the graphics – GINI coefficient). The economist Kazaks’ view is that the priority in Latvia, together with the creation of new job places, should also be a reduction in social inequality, otherwise residents with small incomes have only one option – emigration.

What Can Be Done?

Despite the large losses, the crisis also had its positive side. The government was finally forced to make decisions which it had been putting off for the past 20 years. It placed a tax on dividends and capital gains which brought 28,5 million lats (40,6 million euros) into the state treasury in 2011. It got rid of costly boards in state enterprises which had served as political feeding grounds for the ruling parties. The most visible oligarchs have been sidelined.

“A change in regime actually took place in Latvia, without a war or revolution,” says economist Peteris Strautins about the positive side of the crisis. His view is that during the “good years” tax policy “was super elitist, (..) but now we are gradually moving to something more reasonable.”

Strautins is an optimist and thinks that “the real estate tax will definitely be developed so that people who own valuable real estate will also pay more. In the same way, sooner or later the non-taxable income amount will be raised, which will make income tax more progressive.”

Currently, however, there don’t appear to be any visible grounds for this optimism. Pressure from international lenders has abated, and it looks like the ruling elite is slowly moving back to its earlier path.

During the crisis politicians told us that international lenders were applying pressure for pensions to be reduced and for taxes to be raised. This was only partly true. A World Bank study from 2010 points out something different. It recommended the redistribution, not the raising of the tax burden. The main emphasis from the international lenders was to improve the lives of people on low incomes, and the World Bank study also provided specific examples of how to do this. Re:Baltica’s analysis shows that the majority of these recommendations were ignored.

The World Bank recommended the redistribution of the universal 8 lats (11 euros) state family benefit to redirect it more to the needy families. For the wealthy politician Slesere, the 32 lats (44 euros) don’t make a visible difference in the monthly family budget, whereas for social worker Apfelberga this sum would cover her monthly electricity bill. The Ministry of Welfare says that it didn’t introduce this proposal because the administrative costs would have been large. When Re:Baltica asked “how large?”, it appears that there hasn’t been any calculation of this and the question has been put off until 2015.

The World Bank recommended that parental benefits be calculated from social contributions over at least two years, to prevent cheating by making large tax contributions just before a child’s birth. At the same time the World Bank also pointed out that Latvia’s budget can’t afford such high parental benefits for the affluent in general, and that from 2005 until 2011 they were paid out of the social budget without collecting additional revenue. The recommendation is to pay a benefit of 100 lats (142 euros) to all families and to provide support in other ways – for example, with lower tax rates.

The Ministry of Welfare is currently working on a model where the parental benefit will be calculated from tax paid over three years. However, the ministry is not planning to put a ceiling on the benefit, which our neighbouring countries have.

The World Bank did not say that pensions had to be reduced, as had been presented by politicians in Latvia. The recommendation of the World Bank was to reduce the non-taxable amount of income for people on large pensions. Pensioners were hit the least by the crises since their incomes did not fall. The World Bank hasn’t defined what it considers to be large pensions, but data shows that in 2011, 11% (22,700 pensioners) received from 300 lats (427 euros) to 2,000 lats (2849 euros) per month. Fifty-nine people received more than 2,000 lats (2,873 euros). Last Autumn, when discussion about the pension reform appeared, the Minister for Welfare, Ilze Vinkele (Unity) said: “I am convinced that all pensions should be indexed,” otherwise it will demotivate people from making social payments.

The Welfare Minister Ilze Vinkele maintains that the crisis has ended and that it is possible to find work. Photo:

Indexation means that if Latvian President Andris Berzins’ pension is an average of 5,000 lats (7122 euros) per month before tax, he will have more added to his pension than a person with a 300 lats (427) pension. The argument that Berzins paid a lot of taxes in his time doesn’t withstand criticism. As mentioned previously the system doesn’t work according to the principle – I get back as much as I pay in. There are private pension funds where one can build up large pensions.

The recommendation from many foreign experts to raise the real estate tax as a way to raise more state revenue has also gone awry. Formally a maximum percentage rate of 1.5% for homes has been set, but at the same time the local municipalities which collect this tax have been given a great deal of freedom to apply discounted rates below 1.5%. The Ministry of Finance believes that local municipal governments will have a better idea which families should be granted discounted rates.

Swedbank economist Martins Kazaks is doubtful on this. “It would be naïve to hope that local councils will be very aggressive in increasing real estate taxes. I doubt if the local city council member will go to his neighbour with a smile on his face and tell him that we’re going to increase your real estate tax and I hope that you’ll vote for me in the next election,” says Kazaks. He recommends that the tax should be raised at the national level and “then the local council can look at who should receive a reduced rate.”

Meanwhile, on a recent work day in September, the mother of four children Ieva Apfelberga, couldn’t find her favourite local “Cesvaines piena” sour cream product at her local shop in Cesvaine. The shop assistants told her that the product had not been made for some time.

“Products just start disappearing and people are laid off. The type of manufacturing which employs people isn’t being encouraged,” – is Apfelberga’s answer to the question whether the economic crisis has really come to an end in Latvia. “In the countryside you can’t feel that in any way,” she concluded.

The Apfelbergs’ family’s life hasn’t changed significantly in the past ten years, and they can’t see any reason for any change in the future. The benefits for large families slated by the government won’t affect them. They won’t gain from the real estate tax discount or the increase in the non-taxable amount of income for those with dependants. These tax changes will be felt by the rich Inese Slesere’s family. The former politician didn’t wish to share her view about social inequality in the country, as “I feel that each word I say will be turned against me.”

Whereas Ieva Apfelberga’s view is that this problem must be discussed. She and her husband Maris don’t know enough to comment about the tax policy and aren’t asking for more financial benefits. The only way that the state could help the country is to encourage more jobs, they think. The Apfelbergs don’t really believe that this will happen. They are Christians and at difficult times rely on God and their congregation, not on the state.

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