On Tuesday, the 30th of May, a conference dedicated to the problem of grey economy happened in Latvia. Minister of Finance Arvils Ašeradens and Minister of Economics Ilze Indriksone attended it and provided their opinions for possible solutions.
According to estimates from the Grey Economy Index, which is performed in Baltic States since 2009, its proportion has been on a rise in Latvia since 2016 – with a small exception in 2019.
In 2016 the grey economy proportion in Latvia was 20.7% from GDP. In 2018 it was 24.2%, in 2020 it was 25.5%, in 2021 it was 26.6% of GDP. In 2022 the grey economy went down by 0.1 percentage points – to 26.5% GDP.
To reduce the grey economy, it is necessary to implement structural changes in the economy, said Minister of Finance Arvils Ašeradens. He said the good news from the study is that during the Covid-19 pandemic the continued growth of grey economy had stopped, whereas the bad news is that
the proportion of grey economy in Latvia remains very high when compared with the average index in the European Union,
where it is 17% of GDP. At the same time, he stresses: there is practically no grey economy in the economy’s productive exporting sector, because “exporters don’t have time to engage in it”.
According to him, to reduce the grey economy, it is necessary to think what can be done with non-competitive sectors of the economy. The minister said one solution would be reducing the circulation of cash, paying for work only electronically, as well as by introducing a general income declaration requirement. He also allowed for the option to limit the amount of cash residents can withdraw and deposit using ATMs.
The minister also said it is unacceptable to have 40% of businesses that have a negative equity.
“Operations with negative equity have to be prevented – it is a factor of hygiene,” stressed the minister.
The Minister of Economics, on the other hand, said the proportion of grey economy reflects the general mood in the commercial sector, when businessmen choose to resolve any difficulties with a simple solution.
Indriksone stressed that in order to reduce grey economy, it is necessary to think about reducing bureaucracy. For example, there are many people in Latvia that have multiple jobs. This means tax solutions have to be adapted to this reality.
In regards to the unproductive sector of the economy, Indriksone said “there will be businesses that will cease to exist – they will undergo a merge, or purchase or close down completely”. There will also be sectors that will shrink and become more efficient, she said.
Saeima deputy Andris Kulbergs stressed that the volume of grey economy is at EUR 2.8 billion, and it needs to be dealt with. He also mentioned that he is “against increasing any taxes as long as money doesn’t come from this enormous grey economy elephant”.
Kulbergs also said he believes until now grey economy prevention has not been a priority. According to him, the State Revenue Service (VID) “can only treat the grey economy, but what we need is a surgery”.
Saeima deputy Uldis Augulis (Union of Greens and Farmers) said grey economy prevention can be done narrowly, from sector to sector, instead of looking and the issue horizontally. According to him, it is necessary to stimulate the paying of taxes.
The member of the opposition also said it is necessary to find and shut down all sources of illegal cash. Big and honest taxpayers should be provided with a some form of stimulus to promote the payment of taxes.
VID Director General Ieva Jaunzeme stressed that her institution is trying to change the approach to prevention of grey economy and its signs, but all of the legislative measures suggested by VID remain stuck in the Saeima with no progress.
Jaunzeme also said businesses with insufficient productivity are unable to pay taxes in a situation with high competition, and this is the first thing these businesses avoid.
Also read: Taxes alone won’t help bring economic breakthrough, says Bank of Latvia governor