Latvia's Shadow Economy Combat Plans Deemed Ineffective by State Audit

State Audit Finds Ineffectiveness in Shadow Economy Combat

Latvia's State Audit Office (Valsts kontrole) has issued a critical assessment, concluding that the nation's plans to combat the shadow economy are largely ineffective. The audit, published around January 15, 2026, highlighted that current measures primarily address the consequences of the shadow economy rather than its underlying causes.

The State Audit noted that despite increased government attention to the issue since 2010, the approach has not been sufficiently effective. Estimates for the size of Latvia's shadow economy vary significantly, with figures ranging from 7% to just over 20% of the Gross Domestic Product (GDP). Other studies, such as the 'Shadow Economy Index for the Baltic Countries' by the Stockholm School of Economics in Riga (SSE Riga), reported the shadow economy at 22.9% of GDP in 2023 and 21.4% in 2024.

Critique of Current Strategies and Future Plans

The audit specifically scrutinized the fourth 'Shadow Economy Curbing Plan' for 2024–2027, which aims to reduce the shadow economy's share from 19.9% to 18.9% of GDP by 2027. However, the State Audit concluded that 'no significant improvement is expected' from this plan.

Key reasons cited for the ineffectiveness include:

• A focus on consequences rather than the root causes of the shadow economy.
• Insufficient utilization of research findings, which indicate that taxation is a primary driver of the shadow economy.
• A lack of a clear, long-term vision for tax policy development in Latvia.
• Questionable selection of priority sectors (construction and health), with auditors noting that the health sector has a relatively low shadow economy compared to other sectors with higher levels that were excluded from the plan.
• Most measures strengthening control mechanisms rather than preventing the emergence of the shadow economy.

The State Audit Office urged the Ministry of Finance to reconsider its approach, advocating for decisions based on comprehensive, long-term data, reduced bureaucracy, and a focus on eliminating the underlying causes of the shadow economy.

Ministry of Finance Responds to Audit Findings

In response to the audit, Finance Minister Arvils Ašeradens (New Unity) publicly dismissed the State Audit's report as 'very weak and superficial'. Minister Ašeradens argued that data from researchers and the Central Statistical Bureau demonstrate a consistent reduction in the shadow economy, attributing this to the systematic efforts of the Ministry of Finance, the government, and society. He also pointed out that the audit did not adequately reflect the work carried out by the State Revenue Service (SRS) and the Financial Police.

The Ministry of Finance highlighted its own data, indicating a decrease in the shadow economy to 22.9% of GDP in 2023 and further to 21.4% in 2024. Furthermore, the Ministry reported significant narrowing of tax gaps: the VAT gap decreased from 11.3% in 2021 to 5.4% in 2023, the personal income tax gap fell from 21.3% in 2021 to 15.8% in 2024, and the social contributions gap reduced from 18% in 2021 to 13.8% in 2024. The Ministry maintains that its approach is data-driven, targeted, and inter-institutional, with the 2024-2027 plan incorporating measures to promote tax morale, transparency, automated procedures, expanded electronic payments, and targeted control in high-risk sectors.