Latvia’s economic crisis erased more than one-fifth of the country’s economic output, depressed incomes and put more people at risk of poverty, the International Monetary Fund said Tuesday, adding that the nation needs to work quickly to repair its social safety net.
The Baltic country, which ended its lending program from the IMF and European Commission in December, passed spending cuts and tax increases equal to about 15 percent of economic output after turning to a group led by the fund and the commission for a $9.8 billion loan in 2008. The government raised the value-added tax and cut the non-taxable minimum income limit as part of measures to forgo progressive income taxes and higher real-estate levies.
“Average real income per capita declined by about 19 percent, and the share of the population at risk of poverty increased by 1.4 percentage points,” the fund said in its fifth and final staff review of the Latvian economy. “Income inequality deepened — the richest 20 percent of the population earn seven times more than the bottom 20 percent — and is now one of the highest in the” European Union.
With measures taken to bolster the social safety net during the crisis set to expire, the fund said, “Latvia needs a comprehensive reform of the social safety system to improve incentives to work and help address poverty.”
Recipients of the government’s guaranteed minimum monthly income — $75.49 for adults — can lose those benefits should their own income rise above that threshold. Recipients of a housing allowance can lose the benefit should their income rise to about $285 a month, the fund said.
Latvian unemployment, which quadrupled during the crisis and peaked at about 20 percent, fell to 14.4 percent in the third quarter, according to a labor force survey. The jobless rate could continue to hover around 15 percent as the turmoil in the euro area slows growth, according to the IMF.
The report said high labor taxes are hurting job growth, which is prompting Latvians to leave the country to find work elsewhere at a quicker pace than official data suggest, the fund said.
“We would like to encourage the government to think of ways to make the safety net permanent, but in such a way that avoids ‘poverty traps,’ that is, so that the system does not penalize people if they go back to work,” Mark Griffiths, the IMF’s mission chief to Latvia, said in the survey.