Bank of Lithuania
2017-10-05
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Income inequality divides society, raises tensions among cities and regions, jeopardising sustainable economic growth and peoples’ well-being. Local and foreign experts are discussing ways to reduce it at the Economics Conference, organised for the first time by the Bank of Lithuania.  

‘The economy has been growing for some time, yet the fact that not everyone benefits from this growth to equal extent raises concerns. Income level differentials have been widening for the last few years, which causes negative economic and social effects. Unsolved income inequality issues may have painful consequences on the country's economic development,’ says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

According to Eurostat data, income inequality in Lithuania is among the highest in the whole of the European Union. In our country, in 2012, the 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 rose to more than seven times. The EU average is five times. Every fifth Lithuanian resident still lives in poverty.  A large share of those in need are normal, employed people trying to make ends meets and maintain their families with low wage (minimum or even lower), also unemployed and pensioners.  

‘Income inequality should, and must be reduced without delay. The examples of the Northern countries are proof to that. The first thing to do is to undertake really changing the tax, pension and education systems. The Bank of Lithuania is ready to contribute with its expert knowledge,’ says Vitas Vasiliauskas.

Income inequality could be reduced by a higher redistribution of economic welfare. In terms of the budget-to-GDP ratio, last year Lithuania was at the end of the list of EU countries: by revenue collection (34.5% of GDP) – the third from the end, by expenditure (34.2%) – penultimate. One of the causes for that is shadow economy.

According to Vasiliauskas, to reduce the incentives for acting in the shadow and increase revenue collection, a wider scope of reform is necessary in the tax area. When devising it, the focus should, firstly, be on the revision of labour taxation; secondly, reduction of the diversity of income tax rates; and, thirdly, a search for new income sources. Legalisation of a wider property tax base could, and should, be considered as well.

With the decline in population and society ageing, it is important to increase peoples’ motivation to participate in the social security system. A cheap way to do so is proposed – personal account, the daily monitoring of which would enable a person to see what future pension their official wage guarantees. A stronger correlation between contributions and benefits, as well as clarity would reduce incentives to stay in the shadow and improve the situation of SoDra. However, in the restructuring of the pension system, it should be seen as an integral whole, and separate elements of it should in no way be contrasted.

The Conference will be attended and income inequality issues, as well as possible solutions to them will be addressed by experts in the social area from Kingston University, Stockholm University, Organisation for Economic Cooperation and Development, and the European Commission.  

Researcher Mihnea Constantinescu from the Bank of Lithuania dealt with income inequality in Lithuania’s business sector.

‘The largest wage differentials are observed in small and medium-sized undertakings. Moreover, certain economic activities exhibit growth in the number of part-time workers. This contributes to the labour income gap between full-time workers and part-time workers,’ says Mihnea Constantinescu.

According to him, in the analysis of hourly wage trends, it turns out that income inequality in both exporting and non-exporting companies is not decreasing.  However, exporting companies, due to their higher labour productivity, pay higher wages than non-exporting ones on average.

Speech by the Governor of Bank of Lithuania

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