Social partners discuss the national budget

Social partners and international lenders met in 2010 to decide Latvia’s national budget for 2011. The budget was adopted under difficult circumstances – shortly after parliamentary elections and the formation of a new cabinet. It also had to set out severe austerity measures and scrupulously obey the recommendations of the international lenders. However, it satisfied neither social partners nor lenders, although the Latvian people accepted it without objection.

Background

The intensity of social dialogue usually increases during budget talks. In 2010, these involved not only the Latvian Employers’ Confederation (LDDK) and the Free Trade Union Confederation of Latvia (LBAS), along with their traditional partner the Latvian Association of Local and Regional Governments (LPS) but also other civic organisations. For the third year, international lenders, represented by the International Monetary Fund (IMF) and European Commission officials, monitored the budget’s preparation.

The budget, though adopted on time, satisfied neither the social partners nor international lenders. Even as the budget was being adopted, it was already apparent that it would have to be amended in order to comply with the requirements of the lenders, who questioned the efficiency of some austerity measures, for example in combating the shadow economy. They requested that the budget consolidation be increased by an extra €71 million.

Particular circumstances made the budget adoption process difficult. Because parliamentary elections were held in October 2010, political parties avoided mentioning the harsh measures that would be necessary to consolidate the national budget at the expected level. However, the election results did not change the ruling political power nor the prime minister. The new government was formed quickly, and it began to draft the budget without delay. The deadlines were tight, and decisions were taken almost without discussion. The discussions with national and sector-level social partners did not have any impact on the result.

Government proposal

The government’s ultimate goal was to consolidate the budget so that the budget deficit does not exceed 6% of gross domestic product (GDP) (lower than the target 8.5% of GDP in 2010). The initial intention was to reduce expenditure by two-thirds, and increase income by one-third of the expected consolidation volume, changing tax levels as little as possible, and not worsening the business environment or people’s living conditions. These intentions were not specified in precise indicators. Contrary to the initial intention, the consolidation was achieved chiefly by increasing the budget income. Several tax rates were changed.

  • Value-added tax (VAT) was raised from 21% to 22%.
  • The reduced VAT rate was raised from 10% to 12%.
  • The reduced VAT rate for electricity (10%) was cancelled.
  • Real estate tax on housing was doubled.
  • Employees’ share of social contributions was increased from 9% of payroll to 11% (increasing the total rate, including employers’ contributions, to 35.09%).
  • Instead of reforms to make state government more effective, social expenditure was cut.
  • Income tax, which had been increased just a year before (LV1001019I) was reduced to 25%.

Trade unions call for demonstrations

LBAS defended the interests of society. The influence of sectoral trade unions was less noticeable. The trade unions’ main objection was that the government’s decisions would increase poverty and social inequality, and lead to an unprecedented dependence on aid from national and international organisations, as well as on emergency relief.

During the budget talks, the unions managed to raise the monthly minimum wage from €255 to €285 and to retain some benefits for families; however, they were dissatisfied with the completed budget, and called for a demonstration on 9 December 2010, the day it was officially adopted. However, this protest did not gain broad support from society, and it did not have a perceptible effect on budgetary decisions.

Employers request structural reforms

Recommendations submitted on behalf of employers were supported separately by LDDK and the Latvian Chamber of Commerce and Industry (LTRK). Employers insisted that the adopted decisions were at variance with the election campaign’s promise not to raise taxes – higher taxes would adversely affect the business environment and would cause bankruptcy. They suggested achieving budget consolidation through structural reforms such as reviewing the functions of public institutions and delegating some public work to private organisations

Commentary

International onlookers are surprised by the ease with which Latvia accepts and implements socially unfavourable decisions. Latvian society appears passive, and although the government’s decisions are severely criticised, they are nevertheless accepted without complaint and without questioning the consequences. The involvement of social partners in national-level decision making becomes formal and meaningless without society’s support.

It is therefore important to determine if the Latvian people have complete trust in the government or, if they have no trust at all, whether they prefer to ignore the government’s authority and rely on their own resources. In view of factors such as emigration, the growing demographic crisis, and an ever-increasing shadow economy, it is likely that the latter explanation is more credible.

Raita Karnite, EPC Ltd.

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