Social partners agree state budget for 2009

At the National Tripartite Cooperation Council meeting in August 2008, the social partners began discussions on the state budget 2009. The government presented a draft budget and its economic justification. At subsequent meetings, debate continued on the budget. Employers demanded increased effectiveness of the state budget expenses, pointing out unnecessary spending. Trade unions strongly rejected a public sector wage freeze and organised several protests.

State budget as major issue of social dialogue

The state budget in Latvia is a major issue of social dialogue. Tax changes, the minimum wage and minimum amount exempt from personal income tax, as well as wages of employees of public institutions are determined when drafting the state budget. All of these issues are closely interconnected. They determine the income level of companies and individual workers and, therefore, are of interest to both employers and trade unions.

Since 2004, the government has been trying to avoid discussions on the state budget with the social partners. In 2007, the government’s reluctance to involve the social partners in drafting the budget led to trade union protests, public demonstrations and a referendum on amendments to the Latvian Constitution giving voters the right to dissolve Latvia’s parliament (Saeima) (LV0806039I).

Government proposes drastic changes to state budget

In 2008, consultations with the social partners started in due time. In August 2008, the government announced basic approaches in relation to the state budget for 2009. Taking into account the decline in the country’s economic growth, the government believed that an austerity policy should be introduced in the state budget. Cost-saving measures would include a wage freeze for public sector employees. In addition, all government ministries would have to reduce expenditure by at least 10%. The government believed that these measures would help to balance the state budget for 2009 and control the budget deficit so that it would not exceed 1.9% of gross domestic product (GDP).

The first official discussion on the state budget in the framework of social dialogue took place in September 2008 at the meeting of the Nacionālās trīspusējās sadarbības padome (NTSP, National Tripartite Cooperation Council). At the meeting, the government presented the social partners not only with a draft budget, but also an economic development plan for the country for 2009. The government expected that the economic situation would get worse and therefore argued that the austerity policy is inevitable.

Trade unions look for better solutions

The trade unions strongly object to the government’s intention to freeze public sector wages. Following the government’s request to the unions to substantiate their opinions, immediately after the NTSP meeting, the Latvijas Brīvo Arodbiedrību savienība (LBAS, Free Trade Union Confederation of Latvia) prepared and submitted to the government concrete proposals on how to improve the national economic and social situation.

The trade unions’ proposals contain five basic demands and 17 concrete proposals concerning an increase of tax revenues and solving the most urgent social problems. In the preamble to the proposals, the trade unions highlight that, up until now, the government has tried to put the responsibility for reaching a balanced state budget exclusively on public sector employees; however, their remuneration is very different from that of private sector employees. Along with employees whose wages are two, three or even six times higher than the average wages in the public sector, other workers still receive wages at the minimum subsistence level.

Moreover, wage inequality within state institutions is even greater than in traditional spheres – such as education and healthcare – because traditional forms of informing and consulting employees do not work in state institutions and activities of trade unions are impeded.

LBAS proposes discussing the determination of a so-called ‘bottom line’ for wages, under which no dispute can arise about wage freezing. In this regard, LBAS suggests that the wage level which cannot be affected by a freeze could be between €700 and €1,400.

Employers concerned about taxes

Employers support the trade unions’ demands, but they are worried that the government might try to raise taxes in order to fulfil such demands. Currently, the tax burden in Latvia is not significant, but the government has a tendency to introduce small additional charges, such as fines, duties and payments for the services of state institutions, which all increase employers’ expenses. Employers also consider that the state has great potential to increase the effectiveness of budgetary funds.

Budget approval promotes social dialogue

Tension linked to the agreement of the state budget for 2009 grew as the real estate crisis escalated and economic growth decreased dramatically. As a result, growth of the state budget revenues was not high enough to enable the government to keep its promise of previous years in respect of implementing the programmes on wage increases for teachers, healthcare workers and the police force. Moreover, the government has kept to its decision to attain the lowest possible budget deficit by not increasing the wages of employees in the public sector.

At the final stage of drafting the state budget in September and October 2008, the trade unions arranged several protest actions in the capital city Riga. On 26 September, the Latvijas Izglītības un zinātnes darbinieku arodbiedrība (LIZDA, Latvian Education and Science Workers’ Trade Union) organised a picket outside the Saeima building. On the same day, the Latvijas Veselības un sociālās aprūpes darbinieku arodbiedrība (LVSADA, Latvian Health and Social Care Workers’ Trade Union) organised a picket and warning strike in front of the Latvijas Republikas Ministru kabinets (Cabinet of Ministers) building and the Latvijas Apvienotā policistu arodbiedrība (LAPA, Latvian United Police Trade Union) organised a picket outside the Iekšlietu ministrija (IeM, Ministry of the Interior). Furthermore, on 4 October, LAPA organised a protest march from Riga’s Dome Square to the Cabinet of Ministers offices. On 7 October, a general trade union picket, organised by LBAS, was held in front of the Cabinet of Ministers building.

Social partners forced to make concessions

Despite active protest campaigns, the social partners had to make some concessions. At the government session on 7 October, when the government approved the draft state budget for 2009, the government, the Latvijas Darba Devēju konfederācija (LDDK, Latvian Employers’ Confederation) and LBAS signed a tripartite agreement. The parties agreed to avoid making proposals for the 2009 state budget that would increase the budget deficit by more than 1.85% of GDP. Moreover, they agreed not to budget additional funds to cover wage increases of the employees of governmental bodies, which would increase the budget deficit by more than 1.85% of GDP. Furthermore, they agreed, as of 1 January 2009, to set the minimum amount of taxpayers’ income to be exempt from personal income tax at €142 a month and the tax relief for a dependant at €100 a month. The decision to freeze the wages of public sector employees remained in force, but leaving some room for manoeuvre – for instance, funds to increase the wages of healthcare workers, teachers, police officers and senior staff of government ministries can be obtained from internal reserves.

Commentary

The government’s proposal to freeze public sector wages can be explained by rapid wage growth in the sector over the past three years. Wage growth in the public sector puts pressure on wages in the private sector labour market and makes it more difficult for companies to survive in business. On the other hand, trade unions are right in saying that public sector wages are not equally allocated and the difference in wages does not reflect the situation in the private sector. For example, on average, wages of healthcare workers are nearly three times lower than those of employees in the financial services sector. Therefore, the government’s announcement of an automatic wage freeze in the public sector was ungrounded. The government should keep its promises concerning the implementation of programmes on wage increases already agreed for workers in education and healthcare within the framework of social dialogue.

The state budget 2009 stipulates an increase of some payments in the social field. From 1 January 2009, increases took effect in the minimum wage, old-age pension and family welfare, disability allowances and social insurance benefits, grants for unemployed people during training and the limit of justified expenses on medical treatment and education.

Since the economic situation in Latvia has deteriorated and internal reserves of the ministries have not been assessed, it is unlikely that the wages of public sector employees will increase. The issue of balancing the ungrounded wage differences in the public sector or rearrangement of the wage system has not yet been discussed.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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