European Trade Union Institute, ETUI.

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26 January 2018

Latvia: tax reform should contribute more to the reduction of wage inequality

Instead of contributing more to the reduction of income inequality, proposals to reform fiscal policy are too dominated by the aim of supporting competitiveness. Already at an early stage of the tax debate the unions took a strong stand for wage growth. According to the unions, the overall reform policy goes hand in hand with efforts to reduce the role of trade unions and collective bargaining.

Latvia has been the strongest reformer among members of the Organization for Economic Co-operation and Development (OECD) in recent years. Over the course of 2017, several reform proposals were put forward. The proposals on fiscal reform in the country’s Stability Program are rather one-dimensionally fixated on tax reduction, with the main objective to support competitiveness and improve the business environment. Another aim is to reduce the scale of the shadow economy that is the largest among the Baltic States.

After its transition to a market economy in the 1990s, income per capita in Latvia has more than tripled over the past 15 years despite a deep recession following the global financial crisis. Economic reforms led to strong growth, rising wages and improved public finances. Furthermore, it is very clear that the government is determined to continue implementing macroeconomic policies that will support investments in infrastructure, education and training. The last is relevant because, according to the OECD, unemployment is projected to fall only gradually due to skills and regional mismatches between workers and jobs.

But it’s not all positive: there is little access to well-paid jobs, high income inequality, and a serious gap in health status between rich and poor. Poverty is among the highest in the OECD. The availability of affordable housing is low and life expectancy is six years below the OECD average.

According to financial experts, the economic situation will be beneficial for future wage growth and the changes in the state budget will allow for an increase of wages for public servants. This can have a positive impact on purchasing power and domestic consumption. The wide-scale emigration of young people can lead to shortages in the labour market, and different industries will expand their search for employees, including the possibility of hiring people in neighbouring countries.

In recent years, the trade unions have criticised the reform policy with the argument that, although the country as a whole has overcome the financial and economic crisis, the workers do not sufficiently feel the beneficial effects of this. Optimisation projects of wages and other employee costs go hand in hand with efforts to reduce the impact of trade unions and the rights provided for in collective agreements, and national and international legislation. The tax system contributes to the high rates of inequality and in-work poverty. According to the unions, the most important thing as regards tax policy is to achieve adequate wage growth, not by means of redistribution but through stimulation of economic growth.

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