An austerity measure too far 29

Eiropas humānās palīdzības pakas. Foto: Inta Puriņa, F64
Morten Hansen

For readers of this column it is well-known that I support the Latvian austerity programme – not because I get some perverse satisfaction from seeing the budget axe in use but because Latvian public spending had been allowed to enter a completely unsustainable path in the ‘fat years’. I have mentioned it e.g. here.

Some austerity measures are also needed for 2012, fine, but this one I cannot support. In order to cut 17 mill. LVL it is proposed that the Guaranteed Minimum Income (GMI) of some 40-45 LVL per month should be removed from the state budget and be made the responsibility of the municipalities instead. This is not good economics and it definitely lacks in fairness – here a few arguments.

Without exactly knowing it I am sure that recipients of GMI are not evenly spread out across the country. If so, some municipalities will be very hard hit while others will not. But why should municipalities with many such people bear the burden of what is a national issue? Centralized burden-sharing is one part of national solidarity where less prosperous areas benefit from more prosperous ones.

The prosperity of the latter is actually relying on the existence and functioning of the not so well-off regions. Think of it like this: Riga is by far the richest region in Latvia in terms of GDP per capita (see graph below), reflecting that it has a bigger share of high value-added activities than the rest of the country (banking, consulting, accounting, education; what have you). But this is still reliant on that other parts of the country provide relatively low value-added activities such as agriculture. Without the regions, Riga wouldn’t prosper the way it does. I can provide relatively high-value added hot air as an economist exactly because someone else grows wheat and raises cattle. In that sense it is fair enough that there is redistribution from Riga to the regions. Same with GMI recipients – one should not see it in terms of financing as a regional issue but as a national issue.

GDP per capita in Latvia and by regions of Latvia, 1000s LVL, 2008

Source: Central Statistical Bureau of Latvia

Note: 2008 data are the most recent data available 

Note 2: Riga’s GDP per capita is undoubtedly larger than in any of the regions but may be somewhat inflated by inhabitants of e.g. Pieriga adding to GDP via working in Riga.

It is also easy to imagine that some cash-strapped municipalities might find it hard to find the money for these payments thus contributing to making the already most unequal country in the EU even more so.

Allow me a whiff of populism and suggest an alternative consolidation measure such as a higher tax on cars. From an economic perspective this would represent the Mother of All Examples of a situation where one LVL to a GMI recipient represents far more value than the one LVL taken from the tax payer – a classical reason for income redistribution. The tax payer loses one LVL but has plenty of them already – one lat thus represents rather small value. For the GMI recipient one lat may not be the difference between life and death but 40 LVL might be.

So, scrap this idea and find a better and fairer consolidation measure.

Morten Hansen is Head of Economics Department, Stockholm School of Economics in Riga



Komentāri (29)

Pēteris Jakubaņecs 07.11.2011. 09.27

ja tev ir mašīna, tad jau var teikt, ka piederi pie ne-nabadzīgākās nodokļu maksātāju daļas.
Auto tomēr mums ir iegājies tīri amerikāniski kā Must-have. Lielākā daļa, piemēram, Rīgas iedzīvotāju varētu tīri labi dzīvot bez automašīnas, sakārtojot savas ikdienas gaitas. Bet lai būtu godīgi, auto nodokli vajadzētu diferencēt – kā progresīvu procentu no automāšinas vērtības/vecuma vai vēlsazin kā lai būtu līdzīgi kā ziemeļvalstīs – ieraugot cilvēku ar pagājušā gada izlaiduma Volvo, visiem ir skaidrs, ka pie stūres ir miljonārs.



    Piekrītu par luksusa auto. Tikai uzreiz arī kaut kā jāizdomā kā ierobežot tos, kas Lietuvā reģistrējas



    Ojārs Strauts > Pēteris Jakubaņecs 08.11.2011. 23.06

    No vienas puses piekritu, biezajiem, kas ikdiena brauc ar Lexus vai Volvo luksusa klases automasinam, butu jamaksa vairak. Bet sads princips nak pretruna ar merki samazinat gaisa piesarnojumu, tomer ari no jaunas luksusa klases masinas izplust mazak CO2, neka no veca BMW vai Golfa, lidz ar to nevajadzetu tadel aplikt ar lielaku nodokli. Pie tam jaunas masinas parada satiksmi drosaku.
    Cik es zinu, tad masinam ar jaudigiem dzinejiem gan ir lielaks nodoklis, neatkarigi no izlaiduma gada. Ta tad “leksusisti”, “bembisti” vai citi lielo masinu ipasnieki tomer maksa vairak, neka opitis, kas parvietojas ar vecu grabazu.
    Vienigais variants butu ieviest luksusa klases auto nodevu, apliekot tos pasus Leksusus, Volvo utt. ar lielaku nodokli.

    P.S. pats braucu ar otro golfu, man apskate+nodokli iznak ap 40 Ls gada, apdrosinasana 13 Ls gada. Nepilni 5 Ls menesi tiri par formalitatem, man liekas, ka tas nav daudz.



aivarstraidass 07.11.2011. 12.54

Fully agree with the author on the essence – need for solidarity between citizens within the same country. Idea that “municipality pays for everything” – and the central government just decides what has to be paid – this is increasing income gap between regions.

Tax on cars is a tricky proposition:
(1) As many people already noticed – for many people in Riga a car is not a necessity, but for many people in the countryside it may well be.
(2) The external costs created by someone owning a car (which would be perfectly OK to tax) differ considerably. Some people drive very economic cars, some others drive 4×4. Some people drive them in the congested streets of Riga (where public transportation is also abundant) – polluting air and making life miserable for others. Some other people drive car only when it is necessary – and in sparsely populated areas, where pollution is not a big issue.

If car tax could somehow reflect the widely varying external costs – it would be perfectly fine. There have been previous attempts to differentiate (e.g. depending on where the car is registered – cars registered in Riga paid a higher tax), but this is easy to circumvent. In the perfect world we would install “external cost meters” on each car – measuring the air pollution – especially if it is already polluted, penalizing for being in a traffic jam, occupying a bus lane during a rush hour, driving through the city center, etc. But since such meters are impractical – what would be a good approximation?

Obviously, we have tax on gasoline – but that accounts only for one particular kind of external cost – CO2 emissions.



    RitvarsPavlovs > aivarstraidass 07.11.2011. 15.48

    >> Some people drive very economic cars, some others drive 4×4

    on the other hand, some very economic cars will create traffic jams this winter by being stuck on the uncleared roads (and thus impose external costs on other people), while 4x4s will generally whizz around without a problem, taking producers and consumers about their respective businesses…

    Any tax rebate for a humble 4×4 ?



arturs_kucs 07.11.2011. 14.17

In the interests of fairness (which is what Morton’s post was about), I ought to point out that some of those ‘high-value-added activities’ mentioned are ‘high-cost-added’ to others of us.



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