By Belén Carreño and Gavin Jones

MADRID/ROME – “Sobre,” a cash-filled envelope, was used for decades by hundreds of thousands of Spanish workers in agriculture, construction and tourism.

COVID-19 could, however, finally put an end to “sobre”, according to economic data. Workers’ experience and other evidence suggest that it accelerated the six-year-long spanish crackdown against the shadow economy, and gave a welcome boost in the country’s public finances.

Spain was hardest affected in the Euro area, with its economy shrinking by 11% during tough lockdowns in 2020. It has not recovered to pre-virus levels even two years later.

However, there has been an unexpected change: both the total tax received and official job vacancies are higher now than when COVID-19 was implemented.

According to labor experts, workers and employers interviewed by Reuters, the reason is that the pandemic had an unintended side effect: many Spanish people have been forced out of the shadow economic system and are now in regular work.

Principal causes include the decline in cash use as a consequence of hygiene measures taken during the pandemic. Also, workers saw the need for contracts and realized that not being on the radar meant they missed furlough payments during lockdowns.

These factors may also apply to countries outside of Spain, but the Spanish economy is unique and the local influences mean that the effect has been felt in Spain.

Gonzalo Futes, representative of the catering industry at CCOO (Spain’s largest trade union), said, “In Spain’s catering sector, there’s a Before and After pandemic.” He stated that 12.4% of Spain’s economy was accounted in 2019.

The underground was not a good idea, but workers realized it. They were still earning more than they had to by paying less taxes and social charges.

DASHING TO THE OLE GROVE

While measuring shadow economies is due to their very nature difficult, estimates showed that even before the pandemic Spain’s drive to curb hidden activity had seen it pull away from euro zone peers Italy, Greece and Cyprus where shadow economic activity remains significant.

Pre-pandemic, Spanish authorities increased labour inspections in agriculture and tourism. They even used algorithms to detect tax fraud.

“Employers changed. One 55-year-old man, who preferred to be called “A.R.” He has been undocumented for thirty years and worked as a waiting staffer in order to supplement his primary income from the public service.

I can recall being at a wedding right before the pandemic. Before the service began, inspectors showed up and identified all waiters. He told Reuters that a group ran through the olive groves.

COVID-19, which highlighted labour practices changing at the same time, brought about a shift of consumer behavior. Hygiene protocols encouraged consumers to switch from cash payments to credit cards, an important factor in tax fraud reduction.

Jesus Gascon, director of Spain’s Tax Agency said that “this is very important in tax control since they are traceable transactions.”

This was in addition to a July 2021 ban on cash payments exceeding 1,000 Euros ($1,054.00), as part government crackdown on the shadow economic.

Vicente Jimenez is responsible for managing the agriculture branch of the CCOO union. “Bank transfer payments have completely transformed the attitude in agriculture,” he said. It is the beginning of a new journey. This is the journey into 21st century.

Together, they have had significant impacts.

For the first time in history, 20,000,000 workers made social security payments for the first ever time in April 2022. That’s a huge increase from just 19 million people before the pandemic.

Gross terms, 2021 tax revenues were 275billion euros, up from 248 billion last year and 266billion for 2019, before the virus hit.

This extra support for the state has helped Spain reduce its deficit to 6.9% GDP in 2021, down from 11% last year. It was also higher than the government expected.

“The underground economy, which was one of the weaknesses of the Spanish tax system, is finally being brought out into the open,” Economy Minister Nadia Calviño told an April 29 news conference presenting Spain’s economic outlook.

ITALY IN THE DARK

Friedrich Schneider, an expert in shadow economies and a University of Linz economist, has collected data that suggests Spain is leaving behind its Mediterranean counterpart, Italy.

His calculations were only seen by Reuters. Spain’s shadow economies briefly grew to 17.39% in 2020, before experiencing a drastic fall in 2021 which will see it reach 15.8% this year. Friedrich estimates that this is lower than in Italy, Greece, or Cyprus, where hidden economic activity makes up at least 20% of total economic activity. It also falls below the European average, which Friedrich predicts will be 17.29%.

Schneider data shows that Italy’s attempts to combat its hidden economy are deadlocked. Since 2020, it has remained at about 20%.

Schneider emphasizes the fact that 2022 projections are only estimates and points out that shadow economies can also be influenced by local conditions.

Schneider says that in federalized countries like Spain, where taxes are administered locally, tax payers have a greater tendency to pay taxes. This is evident in low numbers for Germany or Austria’s shadow economy.

A second factor in determining size of informal economy is what activities are legal. Schneider said that, in some countries, such as the Netherlands, prostitution and soft drugs use can be considered legal.

Italy, like Spain has also benefitted from the switch from cash to bank cards.

Italy’s data shows that it made consistent progress against tax dodgers in the period 2014 to 2019, according to its latest data. Italy’s Post-Pandemic Recovery Plan, which was agreed upon with the European Commission to reduce tax evasion in exchange for more than 200 million euros in EU funds, has further ambitions. It is estimated that 18.5% of Italy’s taxes have been evaded by 2019.

Alessandro Santoro is an economist who advises the Italian government. He said that while we have made a great deal of progress in curbing evasion, there’s still much to do.

One area of shadow economics in Spain is the undocumented worker market. Their livelihoods can often be too difficult for them to take on unscrupulous employers.

J.C. (a Colombian citizen aged 27) entered Spain in 2003. Since then, he has been working as a lawyer and now works as a worker at a manufacturing plant. However, he never obtained the legal residency contract he required.

“(My employer), told me not to this year… His irregularity saves him a lot. Next year, maybe.”

($1 = 0.9488 euros)