The implemented measures of the shadow economy combat plan have yielded tangible results, and the chosen policy direction should be continued, the Ministry of Finance stated to the LETA agency, commenting on the conclusions of the State Audit Office following the audit.
According to the "SSE Riga" study "Shadow Economy Index in the Baltic States", the share of the shadow economy in Latvia decreased to 22.9% of GDP in 2023 (down from 26.5% in 2022), demonstrating the most rapid decline in the last 11 years. In 2024, it continued to decrease, reaching 21.4% of GDP.
At the same time, tax gaps have significantly narrowed: the VAT gap decreased from 11.3% in 2021 to 5.4% in 2023, the personal income tax gap fell from 21.3% in 2021 to 15.8% in 2024, and the social contributions gap reduced from 18% in 2021 to 13.8% in 2024. The Ministry of Finance concludes that this confirms the effectiveness of the measures.
The Ministry emphasizes that it implements a data-driven, targeted, and inter-institutional approach, where the Ministry of Finance coordinates policy, while practical implementation is carried out by the State Revenue Service and other structures. Various studies, administrative data, and shadow economy indices are used in the analysis, assessing long-term trends, as the shadow economy cannot be directly measured.
In recent years, the number of taxpayers, average incomes, and tax revenues have increased while tax debts have decreased. The plan to limit the shadow economy for 2024-2027 provides for an integrated approach linking the regulatory environment, oversight, and digital solutions, as well as interaction with business organizations, including the Latvian Confederation of Employers, the Latvian Chamber of Commerce and Industry, and the Foreign Investors Council in Latvia (FICIL).
The measures of the plan include promoting tax morale, ensuring transparency, automating procedures, expanding electronic payments, and targeted control in high-risk sectors. The Ministry notes that the choice of sectors is based on an objective risk analysis to enhance the efficiency of public resource use.
The reduction of the shadow economy has also been associated with a clear, predictable, and consistent medium-term tax policy, the ministry notes. In this process, a coordination group was created to improve tax policy, which has held over 30 meetings since autumn 2023: discussions focused on aligning tax policy goals with economic development, labor taxes, corporate income tax, property tax, indirect taxes, reducing the shadow economy, and digital solutions.
The group prepared proposals for revising tax policy for 2025-2027, which foresee reducing the tax burden on labor affecting approximately 95% of workers while ensuring fiscal sustainability.
The ministry promises to continue data-driven work focused on results, regularly assessing the effectiveness of measures and maintaining dialogue with entrepreneurs.
As reported, the State Audit Office concluded during its audit that despite the increased attention of the state to measures combating the shadow economy, the current approach is insufficiently effective, as these measures are largely aimed at consequences rather than causes.
In turn, Finance Minister Arvils Ašeradens expressed in an interview with Latvian Radio that the audit conducted by the State Audit Office was very weak and superficial.
Ašeradens noted that data from researchers and the Central Statistical Bureau indicate a consistent reduction in the share of the shadow economy, which is the result of systematic and meticulous work by the Ministry of Finance, the government, and society as a whole; however, the auditors of the State Audit Office did not take this into account, resulting in the audit containing "not a single kind word, everything is bad."
