RIGA - The audit conducted by the State Audit Office on the state's approach to curbing the shadow economy has been very weak and superficial, Finance Minister Arvils Aseradens (New Unity) said in an interview with the Latvian Radio.
He noted that the data of both researchers and the Central Statistical Bureau indicate a consistent decrease in the share of the shadow economy, which is the result of systemic and thorough work of the Finance Ministry, the government and the whole society, but the auditors of the State Audit Office have not taken this into account, as a result of which the audit has "not a single good word, everything is bad".
The minister listed various measures taken by the state to combat the shadow economy and stressed that the ministry and the State Revenue Service (VID) work in close cooperation with the sectors. For example, the construction sector is not as cooperative as the medical sector, where the shadow economy is hidden in the beauty sector.
"This is the first time I have consistently disagreed with these conclusions. We are really working. There are very few of them - four or five people in the Finance Ministry. Of course, there are the VID and the Financial Police, which are working, and their activities were not covered at all in this audit," the politician said.
However, when asked whether this means that the plan to fight the shadow economy is good and there is no reason to change it, Aseradens answered in the negative, admitting that the plans are constantly adjusted, in consultation with sectors and organizations representing economists, as well as working with society and the causes, not just the effects.
As reported, the State Audit Office's audit on the government's approach to curbing the shadow economy concluded that, despite sustained increased attention to the shadow economy by the state, the current approach is not sufficiently effective, as the measures planned and implemented are more focused on the effects than the causes.
According to the State Audit Office, the central instrument for curbing the shadow economy in Latvia is the Shadow Economy Reduction Plan. In 2024, the implementation of the fourth plan for the period 2024-2027 was launched with the aim of reducing the share of the shadow economy from 19.9 percent to 18.9 percent of gross domestic product by 2027. However, the audit concludes that no marked improvement is foreseen.
The plan identifies two priority sectors alongside horizontal measures: construction and health. In assessing the validity of the choice of these sectors, the auditors concluded that the health sector has a relatively low incidence of the informal economy, while sectors with a significantly higher informal economy were left out of the plan. Meanwhile, in the construction sector, measures to reduce the shadow economy have been implemented over a long period and the size of the shadow economy has fallen, but is still considered high. In the auditors' view, the measures foreseen in the plan will not reduce the causes of the shadow economy in the construction sector.
The audit assesses the 56 measures included in the plan - their impact on reducing the shadow economy, bureaucracy and administrative burden. It concludes that most of the measures reinforce control mechanisms rather than tackling the causes of the shadow economy. The auditors also conclude that the content of the plan does not make sufficient use of research evidence to select the most effective measures to reduce the shadow economy.
Research findings show that taxation is the most effective driver of the shadow economy, the State Audit Office pointed out. Although the Finance Ministry has been working on tax policy guidelines, Latvia still lacks a clear long-term vision for the development of tax policy, the auditors note. According to the State Audit Office, a predictable tax policy is a prerequisite for both economic development and reducing the shadow economy.
"At a time when the country is devoting a lot of effort to identifying and, it is expected, implementing ways to reduce bureaucracy and administrative burdens, part of the measures in the plan to curb the shadow economy are aimed in the opposite direction, namely to strengthen requirements and control mechanisms. This is already fighting the effects, not the causes. Research shows that as prosperity and confidence levels rise, the shadow economy tends to shrink," said Inga Vilka, Member of the Council of the State Audit Office.
The auditors also stress that curbing the shadow economy is a horizontal policy and involves many institutions. However, the audit concluded that the institutional framework is complex, responsibilities are fragmented and the focus is on processes rather than on clearly achievable results.
The State Audit Office also noted that estimating the size of the shadow economy is complex and is carried out using different methods. The latest available estimates of the size of the shadow economy in Latvia vary considerably and suggest that the size of the shadow economy can be estimated at between 7 percent and just over 20 percent of the gross domestic product.
The State Audit Office urges the MoF to review the country's approach to curbing the shadow economy, to base decisions and communication on comprehensive and long-term data, to reduce bureaucracy and to focus on tackling the root causes of the shadow economy.
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