Published: 02.09.2020.

Restriction of the shadow economy is one of the government's priorities, for the implementation of which measures are being taken to improve the business environment and promote voluntary compliance with tax obligations, improving the legal framework, creating a stable and predictable tax policy, reducing the administrative burden, corruption, while improving the efficiency of the work of the state administration. In this way, prerequisites are created for attracting investments for the development of economic sectors and increasing the number of economically active companies. In addition, measures to reduce the shadow economy contribute to the increase of tax revenues in the state budget and have a significant impact on the well-being and social security of all Latvian citizens.

Effective restriction of the shadow economy is a long-term coordinated, complex measure of several state institutions, and for their implementation, all ministries of economic sectors must continue a constructive dialogue with sectoral organizations, participating state institutions and non-governmental organizations.

Just as there are different definitions of the shadow economy, there are also different methods of calculating it and also different results. The methods used in shadow economy research can be divided into direct (micro-data) methods and indirect (macro-indicator) methods.

Direct methods use surveys and (or) questionnaires with free-choice answers or tax audits. Indirect methods, also called indicator methods, are mainly macroeconomic and use various economic and other indicators that contain information about the dynamics of the shadow economy.

The modeling method assumes that multiple causes determine the existence and growth of the shadow economy, while changes in the shadow economy have multiple effects over time. The Dynamic Multiple Indicators – Multiple Causes Model (MIMIC) allows obtaining time series indices of the ratio of unregistered and registered output levels in the country.

The methods of calculating the volume of the shadow economy cannot be unequivocally considered accurate and mutually comparable. Most of these methods give an opportunity to assess only the direction of changes in the shadow economy and the approximate scale of growth or decline, that is, trends, and not its specific size. In addition, when estimating the size of the shadow economy for a particular country, the use of different methods often shows sharply different results or even opposite trends in dynamics. A more accurate assessment of the size of the shadow economy can be made by qualitatively collecting and analyzing data of individual companies, however, obtaining such data is a complex and expensive process. Methods that use macro indicators should be evaluated with great caution, carefully analyzing the results obtained. It should also be taken into account that more accurate data can only be obtained with a certain time delay.

Shadow Economy Restriction Plan for 2024–2027 (Adopted on 25 January 2024 by Cabinet Order No. 72)

There are several research sources according to which the Ministry of Finance assesses the share of the shadow economy in Latvia and its trends: