(adds more information)

Riga, June 12 (LETA) - The share of the shadow economy in Latvia decreased by 1.5 percentage points last year compared to the previous year and amounted to 21.4 percent of the gross domestic product (GDP), Arnis Sauka, Director of the Centre for Sustainability Business at the Riga School of Economics, said at a conference on the shadow economy in Latvia on Thursday.

At the same time, in Estonia the share of the shadow economy increased from 17.9 percent of GDP in 2023 to 19.5 percent of GDP in 2024, while in Lithuania the share of the shadow economy decreased by 1.7 percentage points to 24.7 percent of GDP in 2024 compared to 2023.

Shadow Economy Index has been calculated in the Baltic states since 2009. In 2024, Lithuania had the highest level of the shadow economy in the Baltic States, and although Estonia still had a lower share of the shadow economy than Latvia and Lithuania, in 2024 Estonia recorded its highest level since the start of shadow economy measurement in the Baltic states.

The results of the Shadow Economy Index survey show that the most important component of the shadow economy in Latvia in 2024 was "envelope wages", which account for 50 percent of the total shadow economy in Latvia compared to 43.9 percent in Estonia and 36.9 percent in Lithuania.

Given that the most significant component of the shadow economy was the envelope wages, Sauka believes that policy makers should continue to look more actively for solutions to reduce the size of unreported wages - especially through voluntary means, not only through fines and sanctions. One way to do this is to demonstrate good practice in using taxpayers' money more efficiently. This is linked, among other things, to the ability to reduce expenditure and overall bureaucracy in public administration.

"Such a practice would contribute to raising business tax morale - an attitude where taxes are paid even if there is an option not to do so. Tax morale cannot be improved by laws alone, but it has a big impact on reducing the size of the shadow economy," said Sauka.

In turn, another component, "unreported earnings", accounted for 23.6 percent of the total informal economy in Latvia in 2024, while "unreported employees" accounted for 26.4 percent.

Unreported employees in Estonia accounted for 30.2 percent of the total informal economy in 2024, and unreported earnings for 25.9 percent. In Lithuania, on the other hand, unreported earnings accounted for 36.8 percent of the total informal economy in 2024, while the unreported employee component accounted for 26.3 percent.

The share of average wages that entrepreneurs conceal from the state, or 'envelope wages', decreased by 2.9 percentage points in Latvia in 2024 compared to 2023 and amounted to 20.7 percent.

In Lithuania, envelope wages fell by 2.7 percentage points last year to 18.1 percent, while in Estonia envelope wages rose to 17.2 percent in 2024, up by 0.7 percentage points compared to 2023.

The unreported income or profits increased by 0.6 percentage points in Latvia in 2024 compared to 2023, from 14.6 percent to 15.2 percent.

Among the Baltic countries, the largest increase in unreported profit last year was in Estonia, where it rose by 2.6 percentage points, from 9.5 percent to 12.1 percent. However, Estonia still has the lowest level of unreported profits among the Baltic countries. The corresponding figure in Lithuania was the highest in the Baltics last year at 20.5 percent in 2024, up 0.9 percentage points compared to 2023.

In Latvia, the share of unreported employees accounted for 10.9 percent in 2024, showing a decrease of 0.8 percentage points compared to 2023. In Lithuania, unreported employees accounted for 11.7 percent, a decrease of 3.7 percentage points, and in Estonia - for 10.6 percent, a decrease of 0.1 percentage points.

The results show that the overall level of bribery, or the percentage of income that companies pay in informal payments to "settle the score", decreased by 0.7 percentage points to 9.3 percent in Latvia in 2024 compared to 2023.

However, the overall level of bribery increased in Estonia by 0.8 percentage points and in Lithuania by 2.4 percentage points, to 7 percent and 10.5 percent respectively.

The highest level of shadow economy in Latvia in 2024 was in Kurzeme - 24.2 percent, followed by Latgale with 22.7 percent, Vidzeme with 22.2 percent, Riga region with 21.2 percent and Zemgale with 18 percent.

Among sectors, the share of the shadow economy in Latvia was still highest in construction - 33.8 percent, a decrease of 0.4 percentage points compared to 2023. The share of the shadow economy in Latvia's retail sector was 26.2 percent last year, compared to 27 percent in 2023, in the services sector - 23.6 percent (26.4 percent in 2023), in manufacturing - 17.3 percent (18.9 percent in 2023), and in wholesale trade it remained at 13 percent, or the same as in 2023.

On a scale of one to five, Latvia's satisfaction with government tax policy has increased from 2.6 in 2023 to 2.65 in 2024.

In Lithuania, the indicator improved from 2.84 to 3.09, while Estonia had the lowest business satisfaction with tax policy in the Baltics, falling from 2.58 in 2023 to 2.12 last year.

Entrepreneurs' satisfaction with the quality of business regulation also increased slightly last year, from 3.04 in 2023 to 3.06 last year on a scale of one to five in Latvia. Estonian entrepreneurs' satisfaction with the quality of business regulation fell from 3.2 to 2.93, while in Lithuania it rose from 2.95 to three.

Satisfaction with government support for entrepreneurs on a scale of one to five in Latvia decreased to 2.52 in 2024 (2.57 in 2023). In Estonia, satisfaction with state support has fallen to 2.32 (2.43 in 2023), while in Lithuania it has risen slightly to 2.79 (2.77 in 2023).

Entrepreneurs' satisfaction with the work of the State Revenue Service on a scale of one to five increased to 3.6 in Latvia last year (3.47 in 2023). The score was the same in Estonia, down from 3.76 in 2023. In Lithuania, on the other hand, business satisfaction with the Revenue Service was rated at 3.72 in 2024 (3.75 in 2023).

Sauka emphasized in his presentation that the shadow economy in Latvia continues to shrink, which is certainly a good thing. This could be at least partly the result of the public administration's efforts to reduce the shadow economy through the activities of the Shadow Economy Action Plan.

However, Sauka acknowledged that the shadow economy is shrinking slowly, which raises the question of whether there are possible actions to accelerate the reduction of the shadow economy in the country, and whether it would not be time to return to the reduction of the shadow economy as one of the main priorities.

This is particularly important in a context where defense spending needs to be substantially increased, while at the same time economic development must not be neglected, and where there is limited scope for borrowing or increasing the budget deficit.

The Riga School of Economics' Shadow Economy Index in the Baltic states is measured annually using surveys of entrepreneurs in the Baltic states. The authors of the study are Sauka and Professor Talis Putnins of the Riga School of Economics.