The audit carried out by the State Audit Office (SAO) on the state’s approach to curbing the shadow economy has been very weak and superficial, Finance Minister Arvils Ašeradens (New Unity) said in an interview with Latvian Radio.
He noted that data from researchers as well as the Central Statistical Bureau show a consistent decline in the share of the shadow economy, which is the result of systematic and diligent work by the Ministry of Finance (MoF), the government, and society as a whole.
However, SAO auditors failed to take this into account, resulting in an audit in which, according to the minister, “there isn’t a single good word—everything is bad.”
The minister listed various measures taken by the state to combat the shadow economy and emphasized that the MoF and the State Revenue Service (SRS) work closely with different sectors. For example, the construction sector shows less willingness to cooperate than the medical sector, where shadow economy activities are largely concentrated in the beauty services segment.
“This is the first time I have consistently disagreed with these conclusions
[of the SAO audit]. We really are working. The resources are very limited—four or five people in the MoF. Of course, the SRS and the Financial Police are also working, but their activities were not examined at all in this audit,” the politician said.
However, when asked whether this means the shadow economy reduction plan is good and does not need changes, Ašeradens replied in the negative, acknowledging that plans are continuously adjusted in consultation with sectors and organizations representing economists, as well as through work with society and by addressing causes rather than just consequences.
As previously reported, the SAO concluded in its audit of the state’s approach to limiting the shadow economy that, despite long-standing heightened attention to the issue, the current approach is not sufficiently effective because the planned and implemented measures focus more on consequences than on root causes.
The SAO informed the LETA news agency that Latvia’s central instrument for reducing the shadow economy is the Shadow Economy Reduction Plan. In 2024, implementation of the fourth plan for 2024–2027 began, with the goal of reducing the share of the shadow economy from 19.9% to 18.9% of gross domestic product by 2027.
However, the audit found that no significant improvement is expected.
Alongside horizontal measures, the plan identifies two priority sectors—construction and healthcare. In assessing the justification for selecting these sectors, auditors concluded that the prevalence of the shadow economy in healthcare is relatively low, while sectors with a significantly higher level of shadow economy activity have been left outside the plan.
Meanwhile, in construction, measures to reduce the shadow economy have been implemented for a long time and the level has decreased, but it is still considered high. In the auditors’ view, the measures envisaged in the plan will not reduce the root causes of the shadow economy in construction.
The audit assessed 56 measures included in the plan, examining their impact on reducing the shadow economy, bureaucracy, and administrative burden. It concluded that most measures strengthen control mechanisms rather than eliminate the causes of the shadow economy.
Auditors also found that
research findings have not been sufficiently used in shaping the plan to select the most effective measures.
According to the SAO, research shows that taxes are the most effective driver of the shadow economy. Although the MoF has worked on tax policy guidelines, Latvia still lacks a clearly approved long-term vision for tax policy development, the auditors note. In the SAO’s view, a predictable tax policy is a prerequisite both for economic development and for reducing the shadow economy.
“At a time when significant efforts are being made to identify and, it is hoped, implement opportunities to reduce bureaucracy and administrative burden, part of the shadow economy reduction plan moves in the opposite direction—strengthening requirements and control mechanisms. This is already a fight against consequences rather than causes. Research shows that as prosperity and trust increase, the shadow economy usually decreases,” said SAO Council member Inga Vilka.
Auditors also stress that combating the shadow economy is a horizontal policy involving many institutions. However, the audit found that the institutional system is complex, responsibilities are fragmented, and the focus is on processes rather than clearly achievable results.
The SAO emphasizes that the leading role in this area lies with the MoF,
where a special structural unit has been established to coordinate shadow economy reduction. In the auditors’ view, the decision made eight years ago to expand the MoF structure by adding a new deputy state secretary and a department for shadow economy reduction was disproportionate and irrational. However, auditors note that structural changes implemented in April 2025—returning to unified responsibility for tax policy and shadow economy management—are a step toward rationalization and should be continued.
The SAO also notes that estimating the size of the shadow economy is complex and relies on different methods. The latest available estimates for Latvia vary significantly, suggesting that the shadow economy may range from 7% to just over 20% of GDP.
The audit found that the MoF uses the shadow economy indicator calculated by Austrian professor Friedrich Schneider (19.9% in 2022) as a performance indicator, while in communication with decision-makers and the public it mainly uses the shadow economy index by Latvian professors Arnis Sauka and Talis Putniņš (21.4% in 2024). Meanwhile, data from the Central Statistical Bureau on the unreported economy (6.7% in 2023) are not used. The SAO stresses that this hinders an objective understanding and assessment of the situation and undermines trust in state data. Moreover, dependence on the availability of individual studies complicates objective long-term evaluation of policy results, auditors explain.
The State Audit Office urges the Ministry of Finance to review the state’s approach to reducing the shadow economy, base decisions and communication on diverse and long-term data, reduce bureaucracy, and focus on addressing the root causes of the shadow economy.
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