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Latvian Crisis Exacerbated Poverty, Inequality, IMF Report Says

Latvia’s economic crisis, which erased more than a fifth of economic output, led to a fall in incomes and an increase in the number of people at risk of poverty, the International Monetary Fund said.

“Average real income per capital 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 Baltic country. “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 EU.”

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 since turning to a group led by the IMF and the European Commission for a 7.5 billion-euro ($9.8 billion) loan in 2008. The government raised the value-added tax and cut the non-taxable minimum income as part of measures foregoing progressive income taxes and higher real-estate taxes.

“With crisis-related increases in the social safety net system about to expire, Latvia needs a comprehensive reform of the social safety system to improve incentives to work and help address poverty,” the fund said in the report.

Minimum Income

Receipts of the guaranteed minimum income, 40 lati ($75.49) for adults per month, can lose those benefits should income rise above that threshold. Recipients of a housing allowance can lose the benefit should their income rise to 150 lati, 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. Unemployment may remain around 15 percent as the turmoil in the euro area slows economic growth, according to the IMF.

High labor taxes are putting a break on employment and a lack of jobs is causing emigration 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,” said Mark Griffiths, the IMF’s mission chief to Latvia, in the survey.

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