Welfare benefits are replacing wages

As a result of the economic crisis, the importance of welfare benefits in Latvia has increased. In addition to the guaranteed minimum income benefit and housing benefit received by low-income families, unemployed people have access to various other types of generous benefits and help from mutual assistance programmes. In contrast, salaries have decreased or failed to mirror the rise in inflation. As a result, dependence on welfare benefits has risen sharply.

Availability of benefits improves

Since 8 September 2009, when the Latvian cabinet adopted the social safety net strategy, state financing for social security has increased every year.

To reduce poverty, local governments pay a guaranteed minimum income (GMI) benefit to families that lack basic necessities. From 1 December 2009, the state set the GMI level at €57 per month for adults and €65 for children. The benefit is granted for a six- or twelve-month period during which the family or individual has been certified as lacking basic necessities.

Needy families are entitled to receive a housing benefit which is intended to partially cover the cost of rent, maintenance, utilities or firewood. Mutual assistance programmes are also available for them. Unemployed people also have access to various types of financial aid.

Latvia finances these benefits through foreign aid. The World Bank carefully monitors whether the social safety net is being implemented and helps to finance it. The European Social Fund (ESF) finances the support programme for unemployed people by granting individuals funds for education or starting a business. The mutual assistance food aid programme (‘For a fed Latvia’) functions on an unprecedented scale – more than 120,000 inhabitants of Latvia are regular recipients of food packages.

Wages and salaries decrease

While uptake of benefits increases, income received from wages and salaries has decreased or remained the same.

Across the national economy, the average gross monthly wage in 2010, compared to 2008, has fallen by 7%; in the public sector it has fallen by 17%. Contrary to the general expectation that the minimum wage would increase, the social partners agreed at the beginning of 2011 to leave the minimum wage at €285 a month (LV1108019I). The untaxed wage/salary minimum was also reduced by 50%.

Dependence on benefits increases

The minimum wage is, of course, subject to taxation, but welfare benefits are not taxed. At the moment, this means that a family with unemployed parents and two children would receive more in benefits than a single working parent who earns the minimum wage.

Consequently, dependence on welfare benefits has increased. Andris Jaunsleinis, Chair of the Latvian Association of Local and Regional Governments (LPS), speaking before the State Administration and Local Government Committee of the Latvian parliament (Saeima) on 15 November 2011, stated that the minimum wage is now approximately the same as the income from the GMI. As a result, he stated, people find it more advantageous to receive welfare benefits than to work. Mr Jaunsleinis recommended that Latvia’s income system be changed because during the crisis years many people have become dependent on benefits. During the crisis years, the number of welfare recipients has risen sixfold from 30,000 to 180,000.

Cuts anticipated in the social safety net programme

At its meeting on 4 November 2011, the government agreed to cut expenditure and although it was decided to continue with the safety net strategy, its financing will be reduced by 24%.

Trade unions opposed ‘harmful’ cuts in funding for school transport and healthcare services for low-income families or individuals. This forced the government to implement cuts cautiously. The LPS and the Ministry for Welfare agreed to work out supplementary regulations affecting social benefits provided by local governments with the aim of encouraging people to seek employment. The LPS wants to set the GMI as low as possible in order to reduce dependence on benefits. Some local governments already make assistance in the form of social benefits dependent on evidence of efforts to find a job.

More recently, the Ministry of Welfare has confirmed its intention to investigate the extent to which welfare benefits are misused and to improve criteria for selecting recipients of assistance.

Commentary

In a crisis situation, welfare benefits help to ensure public security and order, as well as social equality. Nevertheless, a dangerous side effect of such benefits is that people may seek to survive on welfare benefits instead of trying to find a job, indicating that the current policy needs to be changed. It is expected that the procedure for financing benefits in Latvia will also now change. Until now they have been financed by the state and local governments together, but in the future they will be funded either by local governments or by the state.

Raita Karnite, EPC Ltd

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