The state should not be bailing out companies, but rather creating conditions where entrepreneurs can work. Business is and will always be associated with risk, including the possibility of ceasing operations, says Kristaps Klauss, Executive Director of the Forest Certification Council of Latvia, in an interview with Dienas Bizness.
Kristaps Klauss believes that the Latvian state has implemented many good measures; for example, through Altum instruments, it has managed to ensure civilised cooperation between entrepreneurs and the financial sector. The reduction of the OIK (Mandatory Procurement Component) in next year's electricity bills is also very positive news. At the same time, there are several other solutions that are timely for ensuring that entrepreneurs working in Latvia are just as competitive, or even more competitive, than those in Lithuania and Estonia.
In its 2021 draft budget, the Latvian government projects a 5.1% increase in GDP and expects tax revenues to reach almost the same level as before the Covid-19 attack.
Latvia is not facing a crisis as deep as the one in 2008–2010. We are currently in a significantly better situation than we were 11 years ago. Moreover, the epidemiological situation in Latvia is even better than in some other EU member states. The revenue forecasts for the government-approved 2021 budget are relatively conservative—cautious. If the situation with Covid-19 does not worsen, then in 2021 it will be reported that more money was collected in taxes than in 2020. Am I being overly optimistic? Look at this issue from another perspective: if it hadn't been for Covid, the state budget revenue in 2021 would be hundreds of millions higher than what is currently planned. These lost hundreds of millions are the price we are paying for Covid.
How do you assess the proposal to increase the minimum wage from the current 430 euros to 500 euros per month during the pandemic?
Raising the minimum wage is the correct decision from a political point of view, but at the same time, it will have little impact on real life in 2021. The planned minimum wage increase does not affect productive companies. Specifically, a company spends less than 7,500 euros per year on a minimum wage worker (salary + employer's social contributions), while, for example, the average labour cost per employee for members of the Latvian Timber Manufacturers and Exporters Association is 19,000–25,000 euros. Raising the minimum wage is more relevant for those working in the public sector. There are job categories there where employees are currently paid, for instance, 550 euros, and after the planned minimum wage hike, they might put pressure on their employer to increase their pay, as it is psychologically difficult to explain why your work is valued at nearly the minimum wage level. On the private side, I have only encountered one textile company in practice where I truly believe that the minimum wage for full-time work is a reality, not a fiction.
In my opinion, private sector participants who have been paying under-the-table wages until now will adjust to the minimum wage hike by reducing official working hours.
In the current situation, is the introduction of a minimum mandatory state social insurance contribution even supportable?
The introduction of a minimum mandatory state social insurance contribution in Latvia should not be considered within the legislative package accompanying the 2021 state budget law.
In principle, such matters should not be included in budget packages! I support the introduction of a minimum mandatory state social insurance contribution in Latvia, but it is impossible to implement it in 2021.
Specifically, before introducing such a measure, several pieces of homework must be done—modelling how many employees this innovation affects, while setting exceptions and carrying out the necessary preparatory work. For example, by introducing a minimum mandatory state
social insurance contribution amount of 170 euros, it is necessary to understand how many employees are affected by this requirement, in which areas (sectors, professions) such employees are, and what kind of workers they are—students, people with special needs, pensioners, or people of working age—and how many of them work in the private versus public sector. The number of employees whose mandatory state social insurance contributions in 2019 were less than the state-determined minimum wage was impressive—268,000.
According to rough estimates, after the minimum wage is increased to 500 euros in 2021, the number of such people could rise to as many as 400,000, which is more than half of all employees in the private sector. How can such a decision, which affects so many people, be made without sufficient analysis? Besides, Latvia should act according to the Lithuanian example, where social insurance contributions are no longer split into employer and employee parts, but are merged into one side—the employee's. A person should be responsible for their own immediate—net salary—and deferred—social insurance accumulation—income.
The project submitted to the Saeima provides that the surcharges will be calculated for the employer, which means the entrepreneur will not even know or be able to plan for these payments!
Perhaps a person does not want to work full-time at all; why is the employer punished for that? Moreover, if an employee works for several employers, the employer has no way of knowing whether, for example, someone employed on a third-time basis is not working for another employer as well. Why should every company, including those paying taxes in full, be placed in a position of ignorance, unable to even know which employee requires this additional payment to fulfil the minimum 170 euro per month mandatory state social insurance contribution requirement? These are my reflections on why the issue is not prepared.
But perhaps it is even more important to understand that this decision is completely ill-timed. I fully agree with two seemingly contradictory theses at once. Downtime benefits, or the methodology for their calculation, exposed the misery of low-tax regimes and officially declared low wages in all its vividness. The second thesis—downtime benefits are not the same as unemployment benefits, so theoretically, they should not have been calculated based on historical social insurance contributions. But what is the difference whether downtime benefits should or should not be calculated from historical social insurance contributions? For nearly a third of employees, social insurance contributions do not reach the levels required by the minimum wage, and 2/3 of these fellow citizens have no connection to low-tax regimes because they work for employers under the general tax regime.
Forgive me, but I will compare these 180 thousand fellow citizens to aggressive drivers on the road who, either out of objective necessity or out of great selfishness, do not follow the general rules.
But nevertheless, it must be understood that as a result of measures restricting the spread of Covid, these aggressive drivers have ended up in the business ditch and have sustained economic injuries. Introducing a minimum social insurance contribution is comparable to opening the doors of a crashed car and, instead of providing first aid, lecturing the victims on traffic rules and dragging them to driving school by the scruff of their necks. It is not the right moment! Does anyone really believe that by 1 July next year everything in the economy will have long since settled and there will be no restrictions of one kind or another due to Covid?
The year 2021 should be used to properly prepare for the introduction of minimum social insurance contributions, and if everything related to Covid settles by the middle of next year, then it can be gradually introduced starting in 2022. Conceptually, I support the introduction of minimum social insurance contributions.
How do you assess the tax burden on labour in Latvia, which is the highest in the Baltics?
Unfortunately, in terms of labour costs, Latvia is uncompetitive not only in comparison with Norway but also with its neighbours—Estonia and Lithuania. If a company has, for example, 200 employees, the difference in labour taxes between a company in Latvia and one in a neighbouring country will be 100,000–200,000 euros annually. That is a very large sum. The minimum task for Latvia would be to level this competitiveness with Lithuania and Estonia, and the maximum—to be more competitive than its neighbours. That is exactly why I view the first step—reducing the mandatory state social insurance contribution rate from the current 35.09% to 34.09%—positively.
Covid-19 has also significantly affected the labour market, as some sectors are currently effectively closed, in others the number of employees has been reduced, and these people are looking for work in Latvia because there are few opportunities to go abroad for work.
The multi-year discussion about labour availability in Latvia will have quietened down due to the impact of the coronavirus, but this conclusion does not apply to highly qualified specialists, because they were and still are in short supply. Theoretically, labour availability in Latvia has increased, but only theoretically, not practically.
Looking at the composition of the additionally available labour, there are questions. Specifically, there is no work in tourism, and theoretically, those working in this field could find jobs in other sectors where there is a shortage of workers, but practically, that is impossible. For example, in peat extraction and product manufacturing, the arrival of foreign workers in Latvia was hampered by the imposed restrictions, and there was a high demand for workers there. However, few people from the tourism or restaurant industry are psychologically or physically ready to work in this industry. The positive news for employers is something else—employees have started to really appreciate their existing jobs, and the number of people who followed the principle: 'I don't like it here, I'll hand in my resignation and find a better job in a few weeks' has shrunk. At the same time, employees are trying to do everything possible so that their existing workplace does not disappear.
The attitude of employees towards their employer and workplace has improved significantly, but there is another risk. Specifically, the biggest concern is that due to the coronavirus, not only will retraining be necessary, but businesses may have to be closed.
I doubt whether Latvia will be able to avoid a situation where employees in companies are diagnosed with Covid-19. Of course, the most important thing is how many illness risk mitigation measures have been implemented, and luck is also needed. The whole country can be lucky, and unfortunately, just as easily, unlucky.
The increase in the number of Covid-19 cases is once again stoking questions about stricter restrictions and, at the same time, about the reinstatement of downtime benefits.
It seems that in crisis conditions, one can make long-overdue decisions and solve several problems at the same time. If in the new conditions a company cannot work even in a minimum regime, I do not think the state should take on the burden of saving it, unless it is strategically important for the economy. Greater attention should be paid to the question of how to help viable companies where economic activity has to be restricted due to Covid-infected employees or to reduce Covid risks. We can argue long and hard about what conditions to set for them, how much to pay, and end up annoying everyone just like with the downtime benefits in the spring. But we can keep it simple: the state pays for the employee's sick leave starting from the second day of incapacity for work. In this way, no special downtime benefits, related regulations, etc., are needed, but the state pays the employee for not coming to work during the self-isolation period exactly as if they were ill. So that we don't have to get on the nerves of and monitor employers and employees regarding whether or not missing work is related to Covid, this condition should be applied to absolutely all sick leaves. It must be understood that in the current conditions of Covid-19 transmission risk, employers must practically send home every employee who is sniffing or coughing, because it is a risk that the person is infected and could infect other employees, effectively paralysing the company's operation for some time.
From the employer's point of view, a few years ago, a sick leave certificate for a cold was perceived as very unserious, not to say suspicious. Now, a cold is perceived as a high risk factor.
Such a solution would eliminate many epidemiological risks and at the same time promote the competitiveness of companies working in Latvia. In this position, Latvia loses significantly to those working in Estonia and Lithuania, because entrepreneurs lose many tens of millions of euros from their income annually this way, while nothing like this exists in our northern and southern neighbouring countries.
How do you assess the government's actions regarding the Mandatory Procurement Component for electricity?
It must be remembered that the bill for the Mandatory Procurement Component (OIK) has a one-year lag. Latvia spent several months in 2020 in conditions of very cheap electricity prices. Meanwhile, electricity producers had been promised a fixed sum at which electricity would be purchased. As a result—the lower the electricity price on the exchange, the higher the OIK payment.
If changes had not been made, OIK payments for entrepreneurs in Latvia would have increased to 25.6 euros/MWh in 2021 instead of the current 22.7 euros/MWh. The consequences of the decision are that in 2021 the OIK payment will be significantly smaller compared to 2020—by nearly 18%—and will be 17.6 euros/MWh. This level of OIK, combined with changes in electricity distribution tariffs, is what manufacturers have been waiting for for several years, and thanks are due not only to the Ministry of Economics as a whole and the active stance of Minister of Economics J. Vitenbergs, but also to the entire Cabinet of Ministers. For these to come into force, of course, the support of the Saeima majority is still required.
Beyond Covid-19 risks, in 2021 there is also Brexit and now the US presidential elections. Which of the mentioned will influence the Latvian economy more?
Economically, Latvian entrepreneurs will be more influenced by Brexit than by the result of the US presidential election. Time will tell what the trade relations between Great Britain and the EU will be.
Currently, I do not want to get involved in a guessing championship about whether there will truly be a so-called no-deal scenario or whether some agreement will be reached on how trade between Great Britain and the EU will take place. It is clear that the British consumed and will consume goods, and entrepreneurs from some countries will supply them. What frightens entrepreneurs most are the potential new bureaucratic procedures for exporting goods to Great Britain, which will already be outside the EU, and also the potential payment terms for goods deliveries. The question that draws the biggest furrow of concern on my brow is the as-yet-unanswered one: will importers in Great Britain have to freeze part of their money—the VAT portion—at the moment Great Britain leaves the EU? This specific aspect could affect payment terms between importers in Great Britain and manufacturers in Latvia.
But the outcome of the US presidential election?
The election results in the US will not fundamentally change economic policy. Specifically, such a large economic ship as the USA cannot be turned—its course cannot be changed—very quickly and easily. It is a human error to see personalities, the main US presidential candidates Donald Trump and Joe Biden, but not see the teams working behind these people. D. Trump is a controversial figure, but behind his back is a very erudite and strong team that does not write speeches or tweets for the President, but brings an economic plan to life, resulting in decent growth. Yes, D. Trump reduced the tax burden and created new jobs through various measures (including controversial ones like trade wars), which caused significant growth in the economy, but I do not think all of this will vanish as a result of the election. Latvian entrepreneurs have also resumed their product exports to the USA.
What are and what will be the most important issues in 2021 for manufacturers working in Latvia?
For the coming months, most Latvian manufacturing companies have an adequate product demand portfolio that must be fulfilled. Of course, there is a difference between manufacturers in different goods segments, and the product price dynamics for each will be different. There are even manufacturers who have excellent indicators under these coronavirus transmission restriction conditions. Why? Because in the spring of this year, competitors of manufacturers working in Latvia reacted very sharply abroad, significantly reducing production or even closing plants for the duration of Covid-19 restrictions. Thus, there are still goods in demand only because they were not produced. Many manufacturers working in Latvia are currently engaged in the production of these goods.
How do you assess the statement that it is a stereotype that various European Union directives over-regulate industries?
I have long feared Brussels' decisions more than Riga's. It is no secret that the EU increasingly wants to regulate everything. The biggest problem is that the EU is a huge machine that must find a unified product for all EU member states, which have very different situations.
Even in small Latvia, there are sometimes heated arguments over whether a condition can apply only to Riga and not be demanded for the rest of Latvia. And that is true. But what happens when identical, unified conditions must be created for Germany, Portugal, and Latvia? EU directives and regulations are transposed into laws in Latvia. The EU's attempts to regulate are frightening because there is a lack of understanding of what the consequences might be. For example, in the context of many policy documents, the EU very correctly argues that wood processing into wood products should be encouraged, and only after the lifespan of these wood products has ended should they be allowed to be used in energy. A correct philosophy that is hard to disagree with. Only one 'but'—Latvia has huge areas of degraded grey alder stands, and the wood obtained from them cannot be used for anything other than energy. If Brussels makes a decision that we cannot use wood directly from the forest for energy, then I am overcome with hopelessness, because it is unclear what the owners of such land should do, and at the same time, it creates a raw material problem for wood pellet manufacturers working in Latvia, who rely specifically on the use of low-quality wood as raw material for producing their product. In turn, building processing facilities for the wood obtained from degraded grey alder stands will likely take years. The solution is different—cut down these unproductive, degraded grey alder stands and plant high-quality birch and spruce stands in their place, thus killing two birds with one stone. The first would be a gain in the context of climate change mitigation, as young stands sequester CO2 and generate oxygen. The second—effective land use, where the owner grows a resource that will be in demand by wood processors.
What are the forecasts for 2021 regarding demand and product/service price changes?
It seems that during the current coronavirus transmission restriction measures, forecasts are only conditional. It is difficult to predict because, most likely, this situation with Covid-19 outbreaks will also continue in early 2021, possibly for the entire first half of the year.
I hope that a situation like the one experienced in the spring of 2020, when an entire region was closed and even the production of many goods was halted, will not happen again. One cannot exclude the risk that Covid-19 will be detected at a foreign partner's plant for a Latvian manufacturer, and thus deliveries from our manufacturer to this client will be completely stopped for a time—postponed for later.
However, there will be consumption abroad and in Latvia, though of course, its volume and prices will depend on the product and service itself. Most likely, social distancing and remote work will be exactly what might adjust the consumption basket. I have heard the assumption that people sitting at home will buy fewer clothes and shoes, so weaker indicators and therefore a more difficult time could be ahead for the textile industry, but how this consumption reduction will redistribute among manufacturers in different countries is currently impossible to even guess. Since residents in many countries were already forced to stay home during the first Covid-19 outbreak in the spring of 2020, many of them have already carried out home renovations, so in 2021 sales volumes of home improvement goods and repair materials could be lower than in 2020, but at the same time higher than in normal years. Various governments have already announced planned measures to stimulate the economy, which could promote construction material consumption. I am hoping specifically for government-targeted stimuli for home repair and renovation.
Social distancing affects many sectors, including those that consume wood products, for example, wood panels for setting up outdoor cafes. This sector consumed a relatively good amount of wood products annually, but in 2021 it will consume less compared to 2019.
Alongside the sectors and their companies that will be losers in these circumstances, there will also be those that gain. Internet commerce is already experiencing growth, even though there is the opposite—a decline—in general trade.
Companies that offer their products and services in online stores will even be able to increase their product sales volumes and earn higher income. This also applies to a sector like wood product manufacturing. Entrepreneurs in this field who already had developed internet sales platforms combined with deliveries in the spring of 2020, for example, set records in Great Britain. One probably won't be able to call those working in the food and healthcare segments losers, either.
One can safely predict only that 2021 will not be able to be called normal, because we are living in force majeure conditions, where the future is wrapped in thick fog.