EY: Romania's shadow economy on downward trend in recent years, accounts for around one eighth of GDP

Romania's shadow economy has been on a downward trend in recent years, reaching 13.1% of GDP in 2023, down from 31.3% of GDP in 2000, 19.5% in 2013, or 15.1% in 2019, according to data from Ernst & Young consulting company."Over the last 25 years, estimates have been put forward about the size of Romania's shadow economy, both officially and unofficially, estimates that have ranged up to 30-40% of GDP. The problem with these figures has always been the source and quality of the information on the basis of which a result as close to reality as possible could be obtained, which is precisely why we have always talked about estimates. What is certain is that, at the moment, technological advances and a rapid evolution of European and Romanian tax legislation have forced the black and gray economy to retreat. Romania's shadow economy accounts for around one eightieth of GDP, according to the recently released EY study "Shadow Economy Exposed: Estimates for the World and Policy Paths". The good news is that its share of the total is decreasing from one year to the next, as part of a trend of over two decades," explained Alex Milcev, Partner, Tax & Law Leader, EY Romania, in a company press release.According to him, the global concern of decision-makers to find the best ways to combat and mitigate the underground economy is not new, but in recent years it has intensified, and the causes are multiple, from the budgetary fallout of the 2008-2009 financial crisis to the costs of the pandemic and the current geo-political uncertainty.The EY research looked at 131 countries over a 23-year period (2000-2023), of which 119 have made remarkable progress in reducing the share of the shadow economy, especially in the last five years, by almost 6.7% of GDP. The study shows that the share of the shadow economy in total global GDP is expected to reach 11.8% in 2023 (or 19.8% if we take the arithmetic average of individual country estimates)."In this context, the share attributed to Romania does not look particularly special, but, admittedly, with this level, Romania remains at the bottom of the EU ranking," the source said.According to the EY study, the shadow economy (the unobserved, unreported or unregistered economy) comprises various types of unreported economic activity (GDP) of registered and unregistered enterprises and is responsible for only a part (often significant, however) of the total fiscal deficit.The estimate for Romania is 13.1% of GDP for 2023, i.e. only one percentage point more than the global average."The sector of the national underground economy exists and cannot be denied, but the interesting part is its size, now determined according to clear criteria, taken into account for all countries analyzed. Thus, the EY Global Study indicates that in 2000 the shadow economy in Romania was estimated at 31.3% of GDP, in 2013 at 19.5%, and in 2019 it reached 15.1%. The long-term downward trend is clear and the speed of reduction is naturally faster than in other developed countries (because it starts from a more precarious base)," the press release further shows.In this context, the EY report includes several key recommendations for decision-makers to reduce the shadow economy. The first of the recommendations is to strengthen taxpayer confidence in public administration and the tax system, with the consultants showing that tax compliance increases when taxpayers trust that their taxes are spent wisely and that everyone pays their fair share.Another recommendation is to formalize informal businesses, and authorities should make it easier and more advantageous for businesses to register and operate legally.Leveraging on technology to increase tax compliance and better detect non-compliance is another EY proposal as well as making more effective use of third party information: cross-checking financial system data, labor market information, public and private platforms and databases, etc.At the same time, efforts need to be coordinated across government agencies and even across borders."The direction for Romania is the right one and it is time for the perception of the share of the shadow economy in the National Gross Domestic Product to be changed on the basis of a study that shows that, in fact, the reality on the ground is better than the subjective image. However, we still have a long way to go to reach the EU average and to remember that the reduction of the underground economy is not only a matter of law enforcement by the authorities, but also of ensuring fair competition and a healthy business environment," maintained the representative of the consulting company.