Shadow Economy in Greece is Shrinking, IMF Says

The shadow economy in Greece fell to 16 percent of GDP in 2021 according to the latest report by researchers at the International Monetary Fund (IMF).

The report titled “Recent Trends of Informality in Greece: Evidence from Subnational Data” notes that the shadow economy recorded a significant decline in Greece from 2013 to 2021, excluding the year of the pandemic in 2020.

Shadow economy or informality according to the term used by economists, consists of transactions between individuals, or individuals and businesses, without being registered.

It includes bribes to state officials, merchandise bought and sold in cash with no records showing, businesses and individuals providing goods and services without issuing receipts, money not declared for taxation and so on.

According to the report, the shadow economy strengthened at the height of the debt crisis, reaching 30 percent of gross domestic product in 2013. The increase is attributed to the severe recession, the deterioration of tax incentives and the further weakening of the payment culture. From these levels, the shadow economy fell to 16 percent of GDP in 2021.

There are also significant regional variations in the reduction of the shadow economy, ranging from 5 percent of (local) GDP in Western Macedonia to 18 percent of GDP in Crete. More generally, the decrease is greater in Attica and the islands, and smaller in more remote parts of the mainland.

According to the International Monetary Fund researchers, this shrinking of illegal money is also reflected in the increase in tax revenue by 4 percent of GDP.

The significant reduction of the underground economy in Greece in recent years is thanks to several factors, according to the IMF:

• The enforcement of stricter regulations against financial crime and tax evasion;
• greater flexibility in the labor market, such as in working hours;
• increased incentives to officially report irregular activities;
• significant progress in digitalization, including improving infrastructure and improving digital public services, that has helped integrate the self-employed;
• the modernized employment information system, which has curbed undeclared labor.

Greece’s Central Bank says the shadow economy is larger

Last October Bank of Greece governor Yannis Stournaras put the size of the shadow economy significantly higher at  20.9 percent of GDP.

The central banker said that the problem of tax evasion is an international one, but noted Greeks spend €40 billion more than they declare as income.

In the period 2015-21, this excess spending ranged from €36 billion to €49 billion, the central banker said.

Total declared income for 2021 was about €84 billion, of which 79 percent came from salaried workers, including merchant marine employees. These categories, who can’t hide their income, which is taxed at its source, pay disproportionately high taxes.

About 70 percent of taxpayers engaged in a form of business activity, or who are self-employed declare annual incomes less than €10,000. And 37 percent of individual taxpayers declare income of up to €5,000.

Stournaras said tax evasion was more evident among self-employed and very small enterprises, but tax evasion was notable also in indirect taxation with Greece recording the fourth highest VAT gap in the EU, equal to 19.7 percent of total VAT (or 3.0 billion euros).