Vitas Vasiliauskas: Income inequality in Lithuania
Speech by Mr Vitas Vasiliauskas, Governor of the Bank of Lithuania, at the first Lithuanian
Economy Conference, organised by the Bank of Lithuania, Vilnius, 5 October 2017.
* * *
Good morning, dear colleagues and guests,
Welcome to Vilnius, everyone. And - special thanks to our distinguished speakers for joining us
at this very special (for us) event - the first Lithuanian Economy Conference organised by the
Bank of Lithuania.
Colleagues, I am saying "the first", as we intend to organise such conferences annually. The
reason for organising such conferences and their direct purpose is not only to share insights,
hold interesting discussions, but also formulate or at least contribute to the formulation of
constructive proposals on economic policy.
This is what I also expect from today's meeting on income inequality.
Yes, I admit - the expectation is ambitious. Merely because the issue of inequality is one of those
perennial issues, which have been widely discussed during all times, in all parts of the world and
in numerous various formats. It seems that not much may be added in the wake of Plato, Marx,
Smith and the eminent contemporary classics.
And yet life shows that this topic is not yet exhausted, the case remains open. Particularly in
Lithuania, and at this point in time.
During the period of independence, we have made huge progress towards Western standards of
living. We have overcome the 2009 crisis and the post-crisis recession, and we are now once
again among the fastest-growing European economies.
This is good news.
At the same time, however, there is different news too.
Eurostat data shows that income inequality in Lithuania is among the highest in the whole
European Union.
More than a fifth of our population still lives in poverty.
A large share of those in need are simple, working class people, trying to make ends meet and
maintain their families with low (minimum or even lower) wage, also our compatriots who cannot
find a job or those in retirement after having worked honestly all their lives.
This is bad news.
However, the worst thing of all is that, while the economy has been expanding, income inequality
continues to worsen, and has been worsening at a very fast pace. Let us compare: in 2012, the
level of income of the 20 per cent of the most-earning residents was five times higher than that of
the 20 per cent of the poorest residents. In 2016, this indicator already exceeded seven times.
In terms of income inequality, external observers often tend to equate Lithuania not with Northern
or even Eastern European countries - we are sometimes compared to economically less
developed countries. We do not like such "radical" comparisons and try explaining them by
referring to the large scale of shadow economy (and thus quite a significant share of income not
represented in official statistics) in Lithuania. However, this is neither an attenuating nor
aggravating factor behind the situation. Rather vice versa.
***
There had long prevailed a belief that economic expansion will, in the long run, mitigate income
inequality and that the task of the authorities is to enable rapid economic development, without
ensuring a more equal distribution of the gains within the society.
A convenient doctrine. It had long allowed neglecting the issue without taking into account what is
obvious: insufficient income limits the possibilities for people in poverty to purchase even the
basic goods and services. This not only undermines their well-being but also hampers domestic
consumption. In other words - high levels of income inequality prevent stronger and more
sustainable economic growth.
On the other hand, income is not merely about economics. Left unaddressed, income inequality
takes deep root. Over time, this threatens transforming into inequality of opportunities. I am
convinced that this is the most unfair of all the existing forms of inequality. And the most cunning
one too, as it gives rise to tensions, disappointment in one's country and, finally, leads to
decisions such as emigration. We try to interpret the scope of emigration as well, aiming to
explain it by statistical effects, errors, impact of compulsory health insurance (CCI) and other
factors. But the facts are undeniable.
Dear guests,
We are aware that Lithuania is not the only country facing growing income inequality. Similar
trends are observed (although to different extents) in many developed and developing
economies. Nevertheless, this awareness does not comfort.
All the more so that there are states which have managed to successfully cope with the
challenge of inequality. For example, at the time when Lithuania witnessed a drastic surge in
inequality rates during the post-crisis years, in Sweden it rose only marginally, while in Finland its
level even decreased.
So what should and what can we do to become more similar to our near-neighbours rather than
the above-mentioned less developed economies?
I am certain that today we will hear various interesting answers - this is what we have gathered
here for.
Seizing the opportunity, I will, however, mention a few, in my opinion, critical directions.
The first one is undoubtedly taxes. If we want to reach a real breakthrough in the fight against
income inequality, we will have to, or, to be more exact - we must immediately start
implementing real changes in the taxation system. The second pillar is reforming the old-age
pension system. And the third one - education.
We have already submitted proposals on the restructuring of the first two systems - tax and
pension - to the Government, and have presented them to the public. I believe that some of you
are already familiar with them.
For others, let me briefly tell you that, in the view of the Bank of Lithuania, the changes to the tax
system proposed by the Government this summer, such as easing the tax burden for those with
the lowest income, are the right actions in the right direction. However, alone, they will not be
sufficient to fundamentally alter the present situation.
That requires a more thorough and far-reaching tax reform. When designing it, we should focus
on several elements. Firstly - on reviewing workforce taxation, secondly - on reducing the variety
of income tax regimes, and thirdly - on searching for additional sources of revenue. In this
regard, expansion of the property tax base could, and should, be considered. The data confirms
such needs: budget revenue from income and property taxes in Lithuania accounts for less than
a fifth of total tax revenues. In the European Union, this share stands at one-third on average.
The general government revenue-to-GDP ratio in Lithuania also lags significantly behind the EU
average. This has an inevitable and, unfortunately, negative impact on the quality of public
services. In other words, compared to Western Europe, not enough money is collected into the
budget. This results in insufficient funds necessary for adequately funding public services and
ensuring their high quality for all citizens of the country - in line with the needs of a developed
society.
Now let me refer to the pension system. In our view, in its current form, it not only fails to address
the issue of income inequality, but even makes it more acute. Retirement pensions in our country
over the last few years have increased at much slower pace than average wages, which has
significantly deteriorated the financial situation of many pensioners.
As of next year, indexation of pensions is to come into effect, meaning that pension payments will
be linked to the average annual change in the economy-wide wage level. From today's
perspective, this is undoubtedly the right solution, which is to be viewed as a precondition for a
more consistent and sustainable pension system, dissociated from political cycles.
Or rather - as one of the necessary preconditions. And clearly not sufficient.
After carrying out comprehensive research, we came to the conclusion that changes which
(should we commit to implementing them) would increase transparency of the pension system,
boost motivation to participate in the social security net and reduce incentives for acting in the
shadow, are both necessary and possible. People need clarity. If, on our virtual personal
account, we could see how much we would accumulate for our future pension given our official
wage "on paper", everyone would think twice before agreeing to take payments "under the table".
This would not cost much and would not require particular expenses or long-term investments.
Yet, it would bring us closer to a few of our basic goals. It would improve the situation of SoDra.
More importantly - it would enhance the financial situation of each future pensioner. And, most
importantly, it would change our understanding of what social security is and whom - the
authorities or the insurance policy holder as well - it is necessary for.
One more thing that we need to keep in mind when discussing this reform - we must see the
pension system as an integral whole. This implies not making artificial divisions between its
elements (pillars).
I mentioned education. I am not going to argue for what is obvious. Income possibilities are
directly linked to the possibilities for achieving quality education. Meanwhile, insufficient utilisation
of the human capital potential increases the risk of getting stuck in the "average income trap"
without having caught up with the wealthier Western economies.
This is why I hope that in our today's discussions on the causes of income inequality and the
possible solutions, we will also focus on this, I dare say, essential pillar. We have been hearing
about the necessity of reforming the education system nearly as long as we can remember.
However, today we really are at the "either-or" point, when we must undertake essential reforms.
With these reforms, we must make sure that the bulk of money allocated to the sector is used to
ensure high quality education in the whole country rather than just maintaining the existing
infrastructure. This is the piece of advice that we constantly receive from various international
organisations.
Dear colleagues,
A few days ago, while discussing the latest economic projections, a colleague of ours presented
the following facts: labour resources are depleting; the reserves have dried up. Hence, the
number of the employed has decreased as well. Projections suggest that it will continue on the
downward path. The conclusion was laconic: we have reached the end of the road - Lithuania is
shrinking.
I must say that until now the insights of our economists have been rather precise. I hope the
latter insight will not come true. To be more exact, I hope that we will finally undertake solutions
and, most importantly, actions for it not to be fulfilled. Let me assure you that the Bank of
Lithuania is ready to contribute with its expertise.
I am sure that members of the academia, policymakers and representatives of the private sector
participating in today's conference will add to this by sharing their knowledge as well. A
multilayer discussion and insights from different perspectives should help us better comprehend the
underlying causes of the issue at hand and, hopefully, provide us with effective solutions.
Thank you for your attention. I wish you a meaningful discussion.