Perhaps the clue is in its name but the shadow economy’s drain on economic growth and public finances can be difficult to recognise. And, unfortunately, consumers can often unwittingly contribute to its growth, writes George Simon.
George Simon is divisional president for Central Eastern Europe at Mastercard.
The shadow – or undeclared – economy costs national governments billions in tax revenue, with a major impact on the public purse. The EU Country Specific recommendations, due to be officially adopted on July 11, stress the importance of better fiscal management and the need to counter the shadow economy due to its burden on tax and public finances. Indeed, the latest EU Commission VAT Gap Study highlighted the extent of the problem, with around €160 billion lost in the EU in 2014.
However public awareness of how to combat the shadow economy is not widespread.
A recent poll, conducted by IPSOS for Mastercard in ten Central and Eastern European countries, has found that while 81% of people want their governments to combat the shadow economy, many don’t realise that their own shopping habits can make a big difference and that one of the greatest contributing factors is the passive shadow economy’ where consumers engage in a legitimate transaction with sellers who then don’t report it in order to avoid tax.
So how can we curb this? The most effective ways are to always ask for a receipt and/or by paying electronically.
Cash is one of the main culprits in the shadow economy as it reduces registration of transactions thus enabling tax avoidance. Electronic payments can counter this by guaranteeing that the transaction is registered but consumers are often not aware that cashless payments can decrease the shadow economy.
While 75% of people identified asking for receipts as a way of combating the shadow economy only 37% of people pointed to card payments as a solution.
Action is needed and it should come in the form of education and awareness-raising activities for consumers on (1) how greatly the shadow economy affects economic growth and spending on public services and (2) on how we as consumers can take steps to counter it. Simply asking for a receipt makes a difference but often we don’t do it.
By combining this type of behavioural change with a move to a cashless society we can effectively counter undeclared transactions.
To enable this shift, investment and development of payment infrastructure is needed at both private and public level. It can facilitate not only the registering of transactions but also speed, reliability and security of payments and collection.
Whether it be paying utility bills or tax online or buying groceries at the supermarket, consumers have shown willingness towards this type of cashless transaction. Nearly 80% of respondents across the CEE region are eager to pay electronically more often and 86% would take receipts for each transaction
By raising awareness on how the shadow economy cycle affects the overall economy and our public services and working to empower and enable consumers to curb undeclared transactions the EU and national governments can work together with citizens to improve economic growth, fair competition and public services.
 Bosnia & Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Serbia, Slovakia, Slovenia and Romania