Shadow economy in Greece stands at 40 billion euros – Implications

The size of the shadow economy in Greece amounts to 40 billion euros per year, corresponding to between 20% and 30% of GDP.

This is the conclusion reached by Eurobank’s Department of Economic Analysis and Research of International Capital Markets, which issued a study. It also summarizes some of the effects that its size has on public finances and on the country’s production model.

In the study it is emphasized that in the past various attempts have been recorded in the literature to estimate the size of the shadow economy or tax evasion in Greece with the results moving in a range between 20%-30% of GDP. “Although the exact measurement of its extent is – by nature – difficult to impossible, we attempt an indirect assessment, observing the reflection of tax evasion in other economic figures”, it is characteristically noted.

The shadow economy at 20% to 30% of GDP

As pointed out, first of all, the total income declared by households in their tax returns falls significantly short of their consumption based on Hellenic Statistical Authority-ELSTAT’s national accounts data. The deviation for 2021 approaches the amount of 50 billion euros, which is probably higher in 2022. From these figures, the imputed rents, which ELSTAT includes in consumption, and the creation of new overdue debts to the State, must be deducted from these figures. it also stimulates consumption while a tax liability is recorded. Following these, a rough estimate for the size of the underground economy is around 40 billion euros per year. In the past, some interpretations have been offered to explain this difference between consumption and reported incomes, but these do not hold. These include speculation that consumption is higher due to tourists, while tourist consumption is recorded in exports, and that consumption is fueled by cash outside the banking system, while cash in circulation is at low levels compared to previous years.

Another indication of the size of the underground economy is provided by the labor market data, as there is a significant difference of 17% between the level of employment as reflected in the ELSTAT labor force survey and the employment that would be consistent with the data for the GDP. In addition, the fact that there is no significant correlation between declared incomes and fluctuations in economic activity is indicative. For example, in 2020, a year of great recession due to the pandemic, 1.3 billion euros more were declared than in 2019! The size of the declared incomes therefore seems to reflect only the scope left by the legal regime to minimize the tax burden and not the size of the economic activity.

There are important reasons why the overall shadow economy is likely larger than the above estimates. First, these calculations do not include tax evasion and avoidance by legal entities. Indications for these figures are provided both by the increase in business deposits compared to the net profits they declare. Second, the size of the so-called “VAT gap”, which – despite its noticeable decline over the past decade – remains proportionally the third highest in the Eurozone and more than twice the EU27 average. This, combined with the large size of the reserves, makes possible a systematic underestimation of the expenditure due to incomplete inclusion of tax evasion. Thirdly, overdue debts to AADE, which although formally not part of the shadow economy, exacerbate its consequences.

Loss of revenue

The direct consequence of widespread tax evasion is the loss of revenue for the State: Although public expenditure as a percentage of GDP in Greece exceeds the EU27 average, tax revenues from direct taxes lag significantly behind. Equally important is the issue of tax justice, that is, that in order to contain this gap, the state relies on extracting revenue from groups with inflexible tax options – mainly employees and pensioners: Of the 84 billion euros of income declared for the tax year 2021 the natural persons, 66 billion euros (78%) came from salaries and pensions and only 4.3 billion euros (5%) from business activity (7% if agricultural business activity is included). 80% of households that have a business activity declare incomes of less than €10,000. The distortion in turn creates a new one: the shift of the economy to a model based excessively on self-employment (Greece ranks first in the OECD and in the EU27 on the relevant list) and in a large number of very small enterprises, at the expense of the wage earner labor and larger businesses respectively. But as the former innovate significantly less than the latter and are less productive and extroverted, the economy ends up in a self-feeding trap of low productivity and investment: uncompetitive wages due to the distorted model prevent brain regain, while the more productive investments that would boost productivity and wages are being held back by a lack of suitable labor and the competitive disadvantage faced by the largest and most innovative firms.

Therefore, addressing the issue of the shadow economy is imperative, not only for fiscal consolidation and the fair distribution of economic burdens in Greek society, but also for the development dynamics and the very sustainability of our economy in the medium and long term. The study mentions some of the policy measures that have been proposed to control the shadow economy, focused on greater digitization of processes and controls, as well as the use of electronic means of payment. It concludes with the policy proposal that revenues from reducing tax evasion should not be directed to increasing public spending, which is already higher than the Eurozone average, but to reducing the tax burden on wage labor, in order to motivate a change in the development pattern .