Well, it seems that the LVL 500 million package has been radically changed once again. According to the new plan, there will be no VAT increase and no progressive tax. Instead, there will be a "solidarity" cut of all public sector wages by 20%, and all pensions and maternity benefits will be cut by 10%.
I think this is a step in the right direction. As I wrote earlier, because of severe information asymmetries in the public sector, it is naïve to think that the government can succeed in cutting budget expenditure by sorting out the inefficiencies on an individual basis. Any attempt to base the cuts on the perceived ‘importance’ of various public agencies would create incentives for the managers of this agencies to invest time and effort into being perceived as ‘important’. The only way to cut expenditure quickly and credibly is to implement uniform wage reductions in all of the public sector. No exceptions, no negotiations.
That means pensions, too. That “wage devaluation” does not affect pensions has always been an illusion (or a lie) and it’s time for it to go. The largest element in the present pension system is the pay-as-you-go (PAYG) pillar. This means that social tax payments from employees are simply redistributed to the existing pensioners. With wages falling and unemployment increasing, it is clear that pensions would have to fall as well.
Thus, the government, the social partners, and the President may have finally done the right thing. If these cuts are implemented, Latvia should receive the next tranche. So, for now, they may pat themselves on the back. Of course, this all is far from being over. The government should understand that its real problem is competence, especially in economics, and that this competence should be found, somewhere. And yet, what happened last night was a pleasant surprise for me. Maybe it’s because I got used to this ‘parade of incompetence’, that I am reading too much into this spike in good decision-making. But, maybe, (and that may be a big maybe) there is a glimmer of hope….