Engine of economy is being suffocated by inequality of income

While some citizens experience growth in their income and they can afford more things, for others the prices are becoming too high and they are forced to decrease their consumption.

“We know that consumption is the largest engine of economy in Lithuania and it helps it to grow. However, when the inequality is too great, it can harm the consumption. If a lot of people cannot afford the commodities that they or it becomes too expensive. Then they automatically need to decrease their consumption” – Marius Vaščega, an officer of Economic governance at the European Commission representation offices, told DELFI.

He also talked about the Commission’s report regarding Lithuania, where it is also suggested to raise some taxes. However, he stated that he is an optimist and shared some ideas on how the citizens can contribute to the overall welfare.

– Raimondas Kuodis, who is an economist said that the situation of social capital in Lithuania is catastrophic. He, along with a sociologist Boguslavas Gruževskis state that up until now the implemented social policy was not effective. Would you agree with this?

– I would evaluate not only the previous social policy. From the perspective of European Commission, we can look further than social politics and focus on the politics of economy in general. Going through economic sectors we can see its weak and strong sides. In reality, despite the good indicators of macroeconomics, there has been growth for the last few years but social indexes are not impressive.

We see two parts. One is the risk of poverty and social separation – how many people are already there. The second is the level of inequality. So when you take them both into account (economic and social policies), it can be seen that macroeconomic index is felt not by al Lithuanian citizens.

– But the previous social policy was what led to where we are now. So maybe we should look back and see how it was done before?

– I would rather look at where we are now and what could we do in order for that not to happen. Going backwards and attempts at where and what actions – I would rather not.

– You mentioned that not everyone experience the growth of economy. As seen in public opinions, “I don’t know if someone’s salary is increasing, but not for me “or” the economy is increasing but it does not affect me”. What would be your response to these statements?

– We don’t need economic indexes for this, people experience this themselves. We all want and hope that these things would be addressed in the near future. However, we did not have an opportunity to evaluate the basic monthly income, by using the European commission report, which could be a tool in helping the people feel the improving situation.

There is, however, a question on whether it is enough to achieve this. If we look at the growth of income, which was on average 8 per cent in 2016, we can see that it was bigger in some sectors than in others. For example, IT and telecommunication services, which make only 2 per cent of the labour, receive double than the average national income. This would be good but that is only 2 per cent of our work force.

– If we focus on Vilnius: we have service centers where young people with promising degrees are working and who get good wages. They have more income and their consumption capabilities grow. However, other residents make up the other part, who so not have the amount of money and cannot pay according to the rising prices. Can we see friction between these two groups of people?

-That is a more philosophical aspect. How much is there of the said inequality and what impact does it have? We of course have to focus on the impact from economic inequality, but we also have to look deeper. When we talk about inequality, we have to include about the negative floods of migration in Lithuania.

Also, we can see that too much inequality is harmful. When one group of residents increases the prices, how does it affect the whole consumption? We do know that consumption raises the economy and now that is the major engine of the economy in Lithuania. However, when inequality is too big it negatively impacts the consumption. If a large group of people cannot afford the necessary commodities and services or if it becomes too expensive, naturally they end up decreasing their consumption.

-This is what may have a psychological effect on people. If they see that they do not make enough to maintain their previous lifestyle, their self-worth decreases.

– Without a doubt. There might also be a negative impact for economy that is caused by inequality which is not always taken into consideration. The growth of economy becomes a priority.

When talking about consumption our aim is to have as much of the society participating in it as possible. When the gap is large, a part of society loses the ability to participate in consumption on the same level. This leads to a slower growth than it should be.

-At this time it can me stated that in Lithuania the inequality of both income and property is extremely large. Is it possible to distinguish the reasons that resulted in this?

-Even though the level of employment in Lithuania is rather high, we can see the gap between high and low qualification workers is large. The level of employment among low qualification workers is low. They are left behind the line, have difficulty in finding work and their income is lower because the network of social security is not able to provide a higher level of livelihood.

If they have difficulty in finding employment, it means that the workforce supply is high and employers do not feel any pressure to increase the pay.

-It is an excellent observation. This is the second reason of inequality – the large gap of payment.

-We can also analyses the tax system: the statistics in European Commission’s report are slightly late, but when we look at the taxes that were paid two or three years ago, we can see that the burden for people with low income was large. These days the burden is decreasing and moving towards European Union’s average.

The last important aspect is that social security system does not ensure a sufficient level of income for certain social groups. Elderly people and the unemployed are the ones that are most affected by poverty and social separation. Also, it affects women more than men and the disabled, which shows that integration into the labor market is not effective.

-A recent European commission report states that Lithuania needs to increase its real estate and security taxes. Do you agree with this?

-Taxes should be set by each member state individually. We can give advice, direct and show the most suitable path from our perspective. We see, that environmental taxes in Lithuania are 1.7 per cent of GDP, when the EU average is 2.5 per cent. There is potential.

We also notice that Lithuania’s real estate taxes make up 0.3 per cent GDP, when the EU average is 1.6 per cent. While we do not have transport taxes.

At first we should think about how big the shadow is because when we speak about inequality and social separation, we need budget. How can we achieve this? First, by looking for effectiveness with current taxes. Lithuania fails to collect about 36 per cent of VAT. Overall shadow economy is 15 to 26 per cent.

Second option – tackle the ineffectiveness of expenditure. For example, what is the consequence of economic downturn of residents – public infrastructure becomes too large.

Third option – reevaluate the ‘’mix’’ of taxes but it remains t a political question to find the most effective one. We must also realize Lithuania has a small budget and if we want the state to maintain its functions, it needs a budget.

-When looking at the tendencies of Lithuania’s demography it may seem that this country does not have a bright future. What would you tell those who are considering emigration?

-There is a number of examples when after long periods of emigration, it turned around and the returning masses were huge. It happened in Ireland. Personally I would like to remain optimistic and believe that these things will change.

-How can people, who decided to stay, help in ensuring a good quality of life for everyone, not only for residents of Vilnius, for those who only get ‘’a thousand euros after tax’’, not only those without health problems?

-I believe that Lithuania is changing. We are just extremely self-critical regarding those changes. If we compare Lithuania in 2004 and now, we would realize that now there is more justice, we can travel and see more, it becomes a more attractive place to live. Maybe we should live and try to notice our achievements. For everyone to sincerely do their jobs.

Going back to economy, there are things that are not noticed. Like when looking at the job market, we are getting closer to the EU average. Employment f high qualified people was 34 per cent in 2005, and 42 per cent in 2015. There is movement, 10 per cent in ten years. It depends on our focus. If it is at the positive, maybe everything is not that bad.