We obtain comparable data
The differences in gross domestic product (GDP) per capita between the Baltic states are an order of magnitude smaller than national spending, and this shows only one thing – Latvia is inefficient, spending public money instead of producing values.
The figures for the analysis are taken from the World Bank’s statistical study “Latvia is moving into a socialist economy” reviewed by Jura Paider about the spending of different countries, relating them to GDP.
There is an immediate comment for those who are well acquainted with state budget spending and GDP measurements according to the data of the Central Statistics Office and the Ministry of Finance. Using national budget spending data from the Ministry of Finance, it can be obtained that they make up no more than 40% of GDP in 2022, but no less than 48.1% of GDP. Namely, the World Bank, when talking about the total expenditures of the public sector, takes into account a wider range of expenditures and includes in the methodology all possible expenditures made in the public sector, including those that are not directly accounted for in the basic budget.
When it comes to comparisons between the Baltic countries, we will not try to analyze the nuances of the World Bank’s methodology, trying to gain clarity from publicly available data in Latvia, but we will use them as a comparable quantity, trusting that the World Bank’s methodology is the same for all countries and thus obtain reliable comparable data.
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Latvia among the spending leaders
Since the beginning of obtainable statistics, Latvia has been the Baltic leader in the field of public sector spending. Starting from 2000, exceptions are no longer found. The closest Baltic countries’ spending to GDP is in 2007, when Latvia spends 36% of GDP in the public sector, Lithuania – 31.3%, and Estonia – 29.2% of GDP. In 2009 and 2010, Latvia’s public sector expenditures against GDP are 52.4% and 55.3%, respectively. These record numbers are related to both unemployment benefits and Parex saving the bank, as well as other features of the crisis at that time. Also in Lithuania and Estonia, the state spends around 40% of GDP at that time, however, spending in neighboring countries quickly falls below the 35% limit, whereas Latvia’s spending remains above 42% of GDP, until during the pandemic – in 2021 – it reaches 52.5% of GDP again .
In 2022, Lithuania and Estonia have returned to 35% again, but Latvia spends 48.1% of GDP. What are the components that make up about a third of the big difference in spending in relatively calm years is a question for economists. The most important conclusion – this difference must be reduced, because one thing is clear – it is too much!
GDP per capita
The ratio of the gross domestic product to the population is one of the most popular macroeconomic indicators, which characterizes the country’s ability to create values, the efficiency of the workforce and, to a certain extent, the country’s well-being on the overall background.
When comparing the GDP per capita of the Baltic countries, it can be seen that Latvia’s indicator is constantly lagging behind the other two countries since 2009, when Lithuania overtook us. However, the lag is not critical, and when compared with public spending from GDP in the public sector, it is an order of magnitude lower than the size of spending, and is in the lead.
Taking into account that the number of people working in the public sector out of the total number of employees is much higher than the average in Europe and public spending is substantial, it can even be assumed that our slight statistical lag is made up of the above-mentioned disproportions, and the longer they are, the greater the lag from the other two Baltic countries and we have to spend more.
Evaluating the amount of GDP per capita, it is clear that the labor efficiency of Latvia is critically not far behind the labor efficiency of the other two Baltic countries, and this cannot be the reason for the Baltic-wide backwardness.
Civil servants and other government wage earners
Considering that the number of people working in the public sector is about a third of the total number of employees (in most European countries, 15% to 20% of people work in the public sector (OECD data)), it can be concluded that part of the wasteful expenses is due to the large number of public employees. Due to various populist statements or even habit, it has been accepted to place all the blame on the shoulders of civil servants, who are certainly not the only creators of public sector spending. It should be taken into account that, for example, the recent reform of local governments, in which it was hoped to reduce the number of employees in local governments, has suffered a complete fiasco in this area. The number of employees has not decreased, and this amount is also public sector spending in the World Bank’s sense.
Officials, especially in the central state apparatus, ministries and institutions are becoming fewer in total, and it must be said that this visible part or the head of the state is trying to become smaller. At the same time, some reforms, such as the reorganization of small institutions, which took place under the leadership of the State Chancellery and were started even before the pandemic, did not result in a noticeable reduction in staff positions.
Looking at the share of state employees in various fields, it is necessary to single out local governments and their institutions, structures, etc. About a third of all public sector employees work in them. About 60 thousand people work in state budget institutions. In general, more than 280 thousand people work in the public sector, of which only about four thousand are in the central apparatus.
Municipalities can be an example of the outcome of several unsuccessful state-level reforms. In other words, the municipal reform and education reform should have produced results a long time ago, but in fact labor costs have not decreased. It can only be added that the total population is decreasing, the decline in revenues is inevitable, but the total number of state employees in all major categories is growing a little.
Conclusions
From these three main dimensions – public sector spending that is clearly higher than necessary, the huge number of people employed in the public sector in general, and the fact that we are by no means inefficient as value creators – a simple assumption can be made that any displacement of labor from the public sector and private at the moment is only to be welcomed. It is understandable that there are specifics in the details of each sector, which cannot be judged adequately using only macroeconomic figures, but it can be safely said that every employee who leaves the public sector justifiably and necessary and joins the labor market in the private sector will make a double contribution. First of all, the state will reduce expenses, secondly, the person working in the private sector will be a tax payer, the one who creates the unique quantity – sevenpence*, so that the public sector employee can receive a salary. We previously created the size “seplins” in the section Quite simply in the publication Heroine: 48 sevens in one hit!
With that, I want to emphasize that the state administration should value every seven cents created and be less stressed about spending them. Now, when the proportion is distorted and there are obviously too many employees on the public side, every person who works in the private sector and produces taxes is especially valuable, and every newcomer from the public sector – with double weight.
Finally, the postulate that the task of the public sector is to compete with the private sector in terms of wages should be shelved for some time, because it only makes sense if there are enough tax producers. Are we really willing to borrow money to hire more and better spenders of public money!? Since 2018, the number of people employed in state administration and defense has grown from 59 thousand to 63 thousand in 2022. Wages in this sector have been growing very rapidly in the last couple of years. Where will it lead? Who cares?
*The unit of measurement explaining the salary of Latvian state administration employees – 1 sepliņš, which corresponds to 258.23 euros, – the contribution of one employee directly to the needs of state salaries
2024-08-31 17:37:34