The School of Economics and Management of the University of Porto (FEP) estimates that the weight of the shadow economy on GDP will have reached a record 34.37% in 2022, corresponding to 82,232 million euros, which is equivalent, for example, to six health budgets and 30% of public debt.
The estimates now presented by FEP, based on a published scientific article and updated data, analyse the period from 1996 to 2022 and show a gradual increase over the years in the weight of the shadow economy, identifying as one of the main causes for this trajectory the high value of the tax burden, especially direct taxes and social security contributions, and also, to a lesser extent, indirect taxes.
It should be noted that the tax burden in Portugal reached an all-time high of 36.4% in 2022, a figure which, when compared to the standard of living (as a measure of countries’ ability to pay taxes), is the 5th highest tax burden in the European Union, 17% above the average, according to updated data.
“The official economy is uncompetitive vis-à-vis the shadow economy. It is important that the government takes adequate and comprehensive measures to make the official economy more attractive and competitive – compared to the shadow economy, but also to the competing countries – in general, so that people (workers and entrepreneurs) do not have to resort to the shadow economy to obtain more dignified income levels or even emigrate (relocate, in the case of companies),” highlights the author of the research, Óscar Afonso.
“The excessive tax burden has not been enough to finance an inefficient welfare state (Portugal is one of the EU countries with the highest risk of poverty and inequality), which doubly aggravates the weight of the shadow economy, because social benefits and subsidies, especially if well targeted, help reduce the shadow economy, unlike the tax burden. The most advanced countries tend to have lower shadow economy weights, which can serve as a reference for best practices,” adds Óscar Afonso.
Suggestions made to combat the shadow economy include:
- The reduction of the tax burden, especially in direct taxes (IRS, IRC and social contributions);
- In terms of support: (i) reducing taxation on income entering the official economy, allowing for an increase in support without exceeding that net income; (ii) strengthening monitoring (with the means available to the Tax Authority); (iii) conditioning access to empowerment of beneficiaries, avoiding “subsidiodependence” and accommodation;
- The implementation of the crime of illicit enrichment (public and private sector) as in France.
About the shadow economy:
The shadow economy, which exists in all countries, is the part of the economy not evaluated by national accounts – explaining, for example, the survival of populations in countries with per capita GDP below the subsistence threshold – and includes five areas: the illegal economy; the hidden economy (under-declared or underground); the informal economy; production for own use (self-consumption); and production that is undetected due to statistical deficiencies.
The Illegal Economy and the Hidden Economy are particularly serious – reflecting, namely, fraud, money laundering, the increase of conflicts of interest, the use of privileged information, deregulation and the weakening of the State – and must be fought energetically and effectively.
The Informal Economy and Self-consumption serve as a social cushion, preventing greater suffering of the population, especially in times of recession and in countries with fewer resources or social protection. The challenge here is to develop economies in terms of obtaining resources (via economic growth) and allocating them efficiently to social protection (with adequate supervision), so that the respective populations do not have to resort to the informal economy and self-consumption to meet basic needs, reducing these two phenomena to a socially balanced dimension, as they will always exist.
Undercovered production due to statistical deficiencies arises from the difficulties in collecting and processing information. Its reduction requires greater and better allocation of means to develop statistical systems.