Wide-scale cuts in salaries and social benefits

After long discussions between the Latvian government and social partners, a number of new regulations concerning the amount of salaries, pensions and social benefits have come into effect. The tax free allowance has been reduced, together with pensions and expenditure on social benefits. The amendments are expected to lead to significant social consequences, with a decline in purchasing power, poorer working conditions and a slowdown in the national economy.

Changes in employee salaries

Protracted discussions took place between the Latvian government and social partners on revising the 2009 state budget (LV0810039I) before a number of amendments were passed. The agreed amendments prescribe a decrease in expenditure on social protection. From 1 July 2009, the monthly non-taxable minimum or tax free allowance on personal income tax has been reduced from LVL 90 (€129 as at 4 August 2009) to LVL 35 (€50), which means that the tax burden for employees has become higher.

Public sector cutbacks

In addition, the government has decided to cut state sector salaries. As of 1 July 2009, monthly salaries below LVL 300 (€430) have been reduced by 15% – affecting 21% of employees in the ministries and subsidiary institutions – while wages above that amount have been cut by 20%, impacting on the remaining 79% of the workers. This salary decrease is projected to reduce state expenditure by about LVL 90 million (€129 million).

Thus, since mid 2008, employee salaries in public institutions funded by the state budget have been cut for the third time. In the middle of 2008, additional payments and premiums were curtailed while, since the beginning of 2009, the salary fund has been reduced by 15%. Table 1 outlines the trends in public sector and private sector wages in recent years.

Table 1: Average gross and net wages in public and private sectors, 2005–2008 (€ per month)
  Gross Net
  2005 2006 2007 2008 2005 2006 2007 2008
Total 350 430 566 682 250 307 407 498
Public sector 406 498 674 803 289 356 481 581
Private sector 319 394 515 623 229 283 371 457

Source: Latvian Central Statistical Bureau (Latvijas Statistika, LR CSB)

Staff cuts

Furthermore, staff numbers in public institutions were cut at the start of the year. For the period from January to December 2009, decisions have been made on the abolition or reorganisation of 36 state agencies. By 1 July 2009, the following institutions had been reorganised: the Metrology and Accreditation State Agency, the cultural State Agency ‘New Three Brothers’, the Centre of Technical Aids, and the Translation and Terminology Centre.

Impact on education sector

The decrease in state expenditure also affects the education sector: from 1 September 2009, all teachers’ monthly gross wages will be cut by almost a third – from LVL 345 (€494) to LVL 250 (€358). The issue of teachers’ salaries has been discussed between the Latvian government and social partners for a long time. At first, the government intended to reduce their salaries by almost 50%.

On 19 June 2009, the Latvian Education and Scientific Workers’ Trade Union (Latvijas Izglītības un zinātnes darbinieku arodbiedrība, LIZDA) sent the President of the Republic of Latvia, Valdis Zatlers, a letter addressing the perceived contradictions between an initial agreement on reducing teachers’ salaries by 20% and the current actions by the government.

Regardless of the initial agreement, a 59.5% decrease in the average subsidy for local governments for the period from September to December 2009 was planned in the budget of the Ministry of Education and Science (Latvijas Republikas Izglītības un zinātnes ministrija, IZM). This implied that teachers’ average gross wages would be just LVL 180 (€258) a month. However, LIZDA maintained its demand that the reduction in teachers’ salaries should only amount to 20%. After discussions between the government and LIZDA, teachers’ salaries were eventually reduced by 28%, to LVL 250 (€358).

Changes in pensions

Changes in state pensions and social benefits are set out in the Latvian Law on state-provided pensions and benefits for the period from 2009 to 2012, adopted on 16 June 2009.

During this period, old-age pensions and long-service pensions have been cut by 10%, while the pensions received by working pensioners have been reduced by 70%. If a person retires prematurely, they are entitled to receive 50% of the calculated pension. Table 2 shows the number of pension recipients in Latvia and the average amount received in recent years.

Table 2: Number of pensioners and average pension amount, first quarter 2000–2009 (€ per month)
  2000 2008 2009
Number of pensioners 648,545 565,716 558,959
Average pension amount 84 176 245

Source: LR CSB

Economic and social implications

The decrease in employees’ salaries will significantly affect workers on low incomes. Moreover, the reduced salaries in the fields of education, science and health (LV0810019I) will have a considerabe negative impact on the competitiveness of the Latvian national economy.

On the one hand, the changes in pensions received by working pensioners will bring about more vacant positions in the Latvian labour market. On the other hand, this may result in deteriorating living conditions for the older generation. Pensioners older than 65 years comprise 21% of the overall population in Latvia. According to 2001 data, some 43,000 persons aged over 60 years were employed, which represents 6% of all employed persons. About 6% of these older workers were senior managers, 8% were professionals and 4% were technicians and associate professionals.

It is expected that, in the medium term, purchasing capacity will decrease in Latvia, causing a further decline in private consumption. Since the driving force of the Latvian national economy is consumption, a drop in gross domestic product (GDP) is inevitable during the remaining part of 2009 and in 2010 (LV0906019I).

Irina Curkina, Institute of Economics, Latvian Academy of Sciences

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