Portugal's black economy expanded to a quarter of GDP in 2010, denying the debt-ridden country much-needed tax revenues, and probably grew further last year after tax rises, according to a new study.
The estimated 2.5 per cent increase in the shadow economy in 2010, although modest, is bad news for the centre-right government which has been implementing painful austerity measures under a €78 billion EU-IMF bailout to cut the budget deficit and rein in rising debt.
Aside from tax-dodging, the underground and informal economy also distorts competitiveness - already Portugal's weak spot - as tax-paying businesses find themselves in an unfavourable position compared to those not paying tax.
The report, prepared by Porto University's OBEGEF Economy and Fraud Monitoring Observatory, showed that the shadow economy expanded by 2.5 per cent in 2010, reaching 24.8 per cent of GDP.
That translates into more than €8 billion in lost revenue for the state at an average tax rate of 20 per cent at 2010 prices.
"We are still only starting to analyse the 2011 data, but taking into account higher taxes and rising unemployment, a further increase is to be expected in the unregistered economy," said Prof Oscar Afonso, deputy chief of the Observatory.
Prof Afonso said the data suggests Portugal's shadow economy is much bigger than the average of the 16 OECD west European countries, which stood at around 17 per cent of gross domestic product in 2003, the latest available data. Portugal is only surpassed by Greece - the main trouble spot of the euro zone debt crisis - and possibly Italy.
The size of lost revenue is comparable to a one-off transfer of nearly €6 billion from banks' pension funds to state coffers the government had to use last year to meet the budget deficit target of 5.9 per cent of GDP under the bailout.
The transfer allowed the country to reduce the budget gap to an estimated 4 to 4.5 per cent of GDP from around 8 per cent.
In 2010, Portugal raised value-added tax by 1 percentage point to a maximum rate of 21 per cent and further raised the top rate to 23 pe rcent in 2011. A wide range of products that had enjoyed lowed VAT rates are from this month now subject to the maximum rate.
Austerity measures have caused an unprecedented drop in private consumption which the central bank estimates will see Portugal's economy contract 3.1 per cent this year, after an estimated 1.6 per cent contraction last year.
The Revenue Commissioners estimate the shadow economy in Ireland is worth as much as €21 billion and are targeting enforcement activities on sectors which have the greatest potential to operate using cash.
Reuters
