Latvia’s painful austerity program and recent economic growth is presented to the world as a success story and a model for other struggling countries resisting cuts. Re:Baltica’s investigation finds that Latvia has some of the highest poverty, unemployment and income inequality rates in the EU. What can other countries learn from Latvia to avoid the high human costs of its political choices?
When Zane Valdmane opens the door to her apartment, holding her two-year-old daughter Made in her arms, the chronic lack of money in this household is invisible at first glance. 36-year-old Zane’s athletic body and striking face, with tiny wrinkles around the corners of her lips, radiate health and joyfulness. The family’s small apartment in the city of Saldus, where Zane lives with her daughter and 13-year-old son Arturs, is orderly, calm, and filled with the light scent of a burning candle.
But as we talk at the small kitchen table set in a narrow kitchen, this idyllic family picture slowly dissipates. Two toothbrushes sit in a cup near the kitchen sink. There is no shower in this apartment. Made and Zane wash themselves in a small bucket in the kitchen. Arturs uses showers at his soccer gym. There is no refrigerator. Zane can’t afford to buy one or pay for electricity to run it. The kitchen walls are covered with wallpaper from three different rolls that Zane bought thanks to a church donation.
As a single mother, Zane is a part of the largest group at risk for poverty in Latvia. Overall, 425,000 people – or one out of every five people in Latvia – are poor. The monthly income of each household in this group is about 215 euros or less.
These families often don’t have enough money to cover rent, heat, or buy food. Sometimes, these homes don’t have running water, a phone or a TV. Last year, 100,000 Latvians lived on less than 65 euros a month.
The biggest joy and pride of Zane’s life —her children—turned out to be her biggest trial. Poor, single mothers like Zane have a harder time raising children in Latvia than in any other country in the European Union (EU). This is largely because Latvia spends less on social benefits that target the poor than almost any other EU country. The World Bank’s experts note that the Latvian government supports children from middle- and high-income families more generously than most European countries, but it invests the least amount of resources in children like Made and Arturs, who live in poor, single-parent homes.
Even after a significant expansion of the social safety net in the aftermath of the recession, Latvia’s spending on social protection programs for the poor was still among the lowest in the EU. For example, when the country faced the world’s deepest recession in 2009, only Bulgaria and Romania spent less on social protection programs. Estonia spent 40 percent more per capita than Latvia, Lithuania spent 33 percent more.
Today, Zane’s monthly income is much higher than it was in the past two years because she recently won a child support court case. Now her monthly income is 231 euros: 100 euros as a stipend for attending job training classes, largely sponsored by EU funding, 11 euros as a state Family Benefit, and 107 euros in child support from Artur’s father, which is late this month, as it is almost every month.
Zane’s small, two-room apartment in Saldus costs 86 euros a month. She pays 30 euros for firewood she uses for heat and utilities. With the remaining 116 euros – or 3 euros a day – Zane is struggling to feed her children. For two years now the family can’t afford to buy clothes, go to the dentist, buy school supplies or send Arturs on field trips with his classmates.
How does Zane survive on 3 euros a day? “A part of it is my creativity, a part of it is God’s mercy and the goodness of other people. German families affiliated with our church donate something. My friend who works at the Red Cross asks for my help to translate some materials for a Swedish delegation. Swedes donate something.” At least three times a month, Zane asks her friends to donate 7 euros. “I don’t have any issues asking for donations anymore. How else can I survive? And that’s how we live from month to month. Each time, I have no idea how we’ll make ends meet.”
But hunger and calls for donations is nothing compared to the judgement of your children. “Arturs is having a really hard time with our situation. He is angry at me—not at the world or his father—but specifically me. That adds the heaviest burden,” Zane adds in a quieter voice.
But that’s OK, says Zane. She is doing much better than other single mothers in her Saldus community. “When you are able to get paid job training or work in the “100 lats program,” [temporary government jobs] that’s considered glamorous here,” Zane adds. Most of the single moms with children Zane knows through the local “Baby College” provided by the local government receive only a job training stipend like Zane, but not child support. “I don’t understand how they survive,” Zane explains. The government doesn’t allow people to work and get government assistance at the same time.
Until the beginning of 2010, when Zane became pregnant with Made, she always worked, paid taxes and earned a good living. “We never lived in luxury, but I never had to ask for donations,” Zane explains. In the ‘90s, Zane was a rising star in the Latvian women’s hockey league. Later, she played and lived in Switzerland and Germany. After she returned to Latvia in 2000, Zane broke into journalism and worked as an editor and reporter with local radio stations. In the beginning of 2008, Zane supplemented her income with private ice skating and ballet classes. “We lived better than ever back then. I made about 574 euros each month. We had enough for rent and three meals a day. We could afford a visit to the dentist, after-school programs and field trips for Arturs. Once a year we could travel in the Baltics.”
Back then Zane was luckier than most Latvians. The data from the Latvian Ministry of Welfare shows that, even in the roaring, pre-recession years, the number of people living in poverty was increasing. This happened despite the overall growth of the income bubble and low unemployment. From 2004 to 2008, the poverty index in Latvia increased from 19 to 26 percent and was one of the highest among EU countries. That means that income growth was unequal. The Gini coefficient, which measures income inequality, is the highest in Latvia among all EU countries.
After the global economic meltdown, which was the deepest in Latvia according to International Monetary Fund (IMF) estimates, a growing number of economists agree that income inequality is bad for democracy and capitalism. English researchers Richard Wilkinson and Kate Pickett compared large sets of data among developed countries and discovered surprising similarities: the greater the income inequality within a country, the more crime, prisoners, mental illnesses, drug addictions and alcoholism there is. In addition, there are higher mortality rates, low social mobility and lack of trust for the government. This research also shows that in the countries with high income inequalities these factors impact people across all income groups.
Income inequality and poverty are often presented as inevitable consequences of capitalism, but both phenomena are influenced in large part by political decisions. Government can impact these factors the most through tax policy: countries with more progressive tax systems that redistribute more income like Denmark and Austria have lower poverty rates. Countries with lower redistribution like the U.S. and Latvia have higher numbers of low-income people and less social mobility. Tax experts in Latvia have noted that the country has had very conservative tax policies.
In the life of Zane this has meant that she paid a higher share of her income in taxes compared to other people with comparable incomes in Europe. That is because the greatest share of Latvian government revenue is collected through indirect taxes, primarily sales taxes (value added tax or VAT) that is added to the cost of food, clothing, or medicines. People with low incomes spend most of their money on such expenses. In the countries with more progressive tax systems, governments collect more from people with higher incomes through direct taxes on things like real estate, capital gains, and dividends.
The Government is Broke, Everyone Must Tighten Their Belts
This approach – that puts a relatively greater burden on the working poor—intensified during the recession years in Latvia. When the real estate bubble collapsed at the end of 2008 and unemployment jumped to 21 percent a year later, people who attended Zane’s ballet and ice skating classes started to lose their jobs. Fewer and fewer people came to Zane’s tutoring sessions.
In these difficult years, everyone felt the pain of deep austerity measures. The government added some limits to the amounts that can be paid out in family and unemployment benefits. For the first time since Latvia regained its independence, the government started collecting taxes on dividends, capital gains, and real estate. But the heaviest burden fell on the shoulders of the poor, again, analysis by the World Bank and the IMF found.
When Zane was still working in 2009, the government raised the income tax rate for the self-employed from 15 to 25 percent. The threshold for the non-taxable minimum for people with low incomes was reduced from 129 to 50 euros. The IMF estimated that this regressive policy raised taxes by seven percent for the third of the Latvian population with the lowest incomes. VAT or sales taxes increased from 18 to 21 percent.
Last year, tax changes significantly increased the cost of heat and hot water. All of these government decisions make a bigger dent in the thinnest wallets and have pushed many Latvians into poverty.
In 2009, Zane learned that she was pregnant. “Made came into my life in the moment when people said that this is not the right time to have a child.” Even the closest relatives suggested abortion to Zane, but she’d always dreamt about a daughter and resisted their pressures.
Made’s father lives in Russia and their relationship had ended. Child support for Arturs hadn’t started yet. The family often lived on 1.5 euros a day. “My pregnancy was the hardest time of my life,” Zane reluctantly admits. Most meals at the time consisted of oatmeal with dried milk that came from the free food boxes sent by the EU. On other days, the young mother and son went to eat at the soup kitchen in a local church.
Were There Other Approaches to Austerity?
During these difficult years, the Latvian government often called on everyone to tighten their belts. There are simply no less painful budget trimming options, the officials often said. But many facts do not corroborate this assertion.
In emails from 2009 that are available through Wikileaks, it is clear that the lenders – the EU, IMF and Swedish government—lobbied for different approaches to public expenditure cuts. One of the Wikileaks reports refers to a phone call between the then Finance Minister Einars Repse, the IMF, the EU and the Swedish government. Repse was strongly advised to raise property taxes or to introduce a progressive tax on the wealthy instead of lowering the minimum non-taxable threshold. Repse replied that this was not possible, because this decision was not politically viable.
Reading the Wikileaks along with the World Bank and IMF studies, it is evident that international lenders expressed the greatest concern about the high cost of the budget cuts to people with low incomes. They also suggested specific alternatives that would have cut government expenses and protected the most financially vulnerable children and families.
For example, the universal state Family Benefit, which is 8 lats (11.4 euros) per child, eats up about a third of the total social benefits budget. This budget is set aside for the most vulnerable groups and is already among the lowest in the EU. The World Bank report expressed surprise that Latvia offers this universal benefit to everyone regardless of people’s income, in addition to other generous maternity and paternity benefits. Some Latvian residents don’t even bother to sign up for this program, the study found. The World Bank advised the government to redistribute these eight lats to the families with the lowest incomes. Even with a relatively high threshold, such as targeting 40 percent of the least wealthy among all Latvian households, the government could save about 17.3 million lats.
The Welfare Ministry says it has not reformed the state Family Benefit due to the high administrative costs. When Re:Baltica asked how high these costs would be, officials responded that no actual calculations have been made. The government has decided to continue this program and added more funding to continue the program without changes.
Latvia mostly supports its poor residents through the co-financing of the minimum guaranteed income (GMI) and housing allowances. These benefits are primarily financed through municipal governments, which in 2011 paid out three times more of these benefits than a decade ago. According to the World Bank, only 3 percent of the total population receive GMI, which is a lower number than the average in the EU, and most receive significantly less than the maximum allowance which until recently was 65 euros per person.
The World Bank analysis shows that an unusually large part of the GMI and housing allowances went to wealthy households. Experience in other countries shows that this happens when national authorities insufficiently monitor local governments and the World Bank recommends that the Latvian Ministry of Welfare oversee and administer these benefits. This would mean that all municipalities would give out the same benefits, and not be dependent on the whims of local government workers. But in an interview with Re: Baltica, the ministry confirmed that it is moving in the opposite direction. State co-financing of the GMI and housing allowances will be cut by 2013.
The World Bank experts didn’t think that Latvia could afford its generous Parental Benefit – which subsidized families with higher incomes more than the poor – in the years of the crisis either. In 2005, the government started correlating this parental benefit with individuals’ income level resulting in wealthier families receiving more money than poorer ones. But unlike similar benefits such as pensions, the government didn’t collect any additional income to subsidize this benefit until 2011. The World Bank advised reducing parental benefit during the crisis years up to 143 euros per month in the first year of child and 43 euros in the second, saving 70 million euros.
Although in 2010, Latvian government actively participated in the “European Year for Combating Poverty and Social Exclusion,” and Latvian officials frequently mention the relief of poverty as a state priority, none of the major recommendations by the World Bank have been implemented.
On the contrary, the recent tax changes will only increase the income gap in Latvia. Recently, the government reduced the GMI maximum allowance from 65 to 50 euros, and refused to lift the non-taxable minimum for income tax to 129 euros.
The Poor Don’t Need Government Hand Outs, Let Them Go to Work
“No,” Zane responds to the question if she is feeling that things are improving and that Latvia is moving out of a recession. That is contrary to the government’s assertions that the crisis is over, as it generously doled out more than 287 million euros in extra revenue this year to different programs.
Reports by the Latvian Ministry of Welfare, as well as interviews with its officials, make it hard to understand the justification for these recent government decisions. On the one hand, the officials report that poverty in Latvia is getting deeper, and on the other hand, they call for a reduction in the country’s social safety net for the poor.
The reports also highlight the significance of the temporary government job program called “100 Lats Program.” Every sixth participant found a job within six months after completing the program. But despite one of the highest unemployment rates in Europe, this program has been discontinued in 2012, and similar temporary public works program this year received significantly less funding.
Why such a difference between the stated intentions to help the poor and policies that are reducing the role of the state? “The crisis is over,” says Minister of Welfare Ilze Vinkele (Unity Party). “Overall trends are improving. While jobs are insufficient, people can find work,” the Minister explained the philosophy of her Party.
Next spring the Ministry is awaiting the results of another study by the World Bank that aims to analyze the changing labor market, the unemployed, and the needs of the poor better. Meanwhile, “people need to go to work even in a Maxima [supermarket]. State-subsidized jobs will end, but Maxima work will be available for years. It’s better for us to help cover the costs of the transportation to help these people to get to work,” explained Vinkele.
Ilze Kurme, the office director of the Ministry of Welfare adds: “Business people across the country are yelling at us that they can’t find unskilled labor to fill their jobs, and blame the government’s “100 lats” job program, GMI and child benefits for that.” Kurme partially agrees with this position, “If I have a family with children and can collect 300 lats (430 euros) in benefits, why should I go to work?” Both officials believe that the welfare system in Latvia has created too many dependent people who are abusing the system and don’t want to work.
When Re: Baltica asked whether the Ministry has data demonstrating such abuse, officials responded that there is no data. Perceptions of abuse are widespread among local government employees and social workers. International studies have investigated these claims and but have found no data to validate this view.
Meanwhile, this September, the Saldus branch of the State Employment Agency (SEA) offered Zane 69 job openings. Twenty seven unemployed in Saldus are competing for every one of these jobs. Re:Baltica called two companies that had the most openings to see what kind of jobs are available for people like Zane.
The first company, IMS, located about an hour and a half away from Saldus, is a fish processing plant. They are looking for people to pack cartons and seal containers. The pay depends on how many cartons are processed and the size of the box being packed. If the worker can do 1.5 shifts, it is possible to make more than 287 euros per month. Since Zane lives over 100 km away, the manager promised a bus ride. There are hostels at the processing plant too, but workers will have to pay to stay in them. Another company, Bears Ltd. is looking for cookie bakers, but openings are only in the night shifts. Each shift is 12 hours, and pay is about 2 euros an hour.
There are also some openings in grocery stores, but Zane already tried this route when she worked for a local butcher, and there was little gain. Work hours were from 9 am to 9 pm. The employer refused to sign a contract, offer sick leave, or vacation. Salary: 215 euros under the table. After Zane paid a babysitter, she ended up with less money than even the meager state benefits she currently receives. In 2010, most of the job growth occurred in positions that offered wages below 287 euros.
That’s why Zane is considering either emigration or getting back to self-employment as the only options to improve her family’s lot.
She often considers leaving Latvia. “But I already lived in Germany. I understand what it means to live in my own country, my own home, and among my compatriots. I love Saldus, this small community, the way air smells here, my people. I feel love and patriotism toward this small community.”
This November, Zane will try to get a job in radio again. If she doesn’t get lucky there, she’ll try to revive her private classes again or work part-time so that she can have enough money for rent, food and a few hours a day to spend with Made and Arturs. “My children are the main project of my life. I want to raise them with my values: honesty, openness, respect for others despite their financial situation or assets. I want to show my children that we can live very good lives without greed.
If we can find value in a modest lifestyle, rather than strive toward these excessive inequalities that we see in Latvia, then our community would have a lot more respect and trust for each other.”
Meanwhile, the same reports by the Ministry of Welfare that call for a reduction in Latvia’s social safety net for people like Zane, include data indicating that poverty is deepening and life for the poor won’t improve that much. Surveys show that businesses are not planning to hire that many people. Unemployment is slowly going down, but the number of job seekers is still very high: there are seven times fewer job openings compared to 2007. Unemployment is still the third highest in the EU. Last year, 50 people competed for every job opening.
When a country like Latvia is slowly recovering from a deep recession, high unemployment is inevitable and it could take several years for the job market to pick up again. But despite that, the government is already planning to reduce the overall social safety net spending to 8.9 percent of GDP next year. In 2007, when unemployment in Latvia was three times lower, welfare spending was 10.7 percent.
The maximum allowance for GMI has already been cut from 65 to 50 euros before the World Bank’s report with recommendations has been submitted. That means that the government is making decisions based on a few opinions rather than data.
Speaking to Zane and her social workers it becomes obvious that even low state benefits help single mothers and the most needy households to survive difficult periods without leaving their homeland. The early child development research of the past ten years also tells us that the first two years in a child’s life in a stable home with consistent caregiver is among the most effective ways in which the state can invest in productive and educated future citizens, and reduce costly consequences to taxpayers later such as chronic illness, drug and alcohol addiction, and higher crime rates. A strong safety net for the poor also acts as state protection against enterprises that sometimes take advantage of high unemployment to pay without a contract, cut wages, or increase working hours without compensation.
For now, the current government policies make it seem like there is no place for low-income families and children in Latvia. State officials highlight increasing birth rates and decreasing emigration as a priority, but in reality the government supports children and families with middle or high incomes, often redistributing scarce state resources to families that don’t even need them. At the same time, the unemployed and the working poor live on incomes that trap them in poverty.
Zane tries not to think about this. She knows that one day she’ll get to the 430 euros that she is dreaming of earning. Right now, she is learning a lot in job training classes for the unemployed where she is studying commerce.
A few months ago, in her review of macroeconomics, a lecturer proudly told the class how well Latvia is doing: the GDP is growing more than in any other EU country, exports are going up, unemployment is not that bad. Prime Minister Valdis Dombrovskis is traveling around the world to present Latvia’s approach to austerity as the right model for overcoming economic malaise. The faster a country’s GDP grows, the better everyone is doing, including the poor. Those who are not doing well in the times of growth need to try harder.
Zane’s classmates looked at each other and laughed. “That’s just absurd,” Zane remembered, as she looked outside her kitchen window. “Ordinary people understand that things are very different. But I’m not waiting for anything from this government. Right now, I survive off of the fact that I love this city, respect many people, including our Saldus social workers, who are all helping me a lot. And I try to give back as much as I can.”