Breaking News

Tweet TWEET

Spain’s Crackdown on Black Economy Aims to Trim EU’s Highest Jobless Rate

Spain unveiled a crackdown on underground employment as the government seeks to shrink one of the region’s largest shadow economies, bolster tax revenue and reduce the Europe Union’s highest jobless rate.

The plan increases fines for companies hiring workers without registering them with authorities and for people working at the same time as claiming jobless benefits, Labor Minister Valeriano Gomez said. The new fines come into effect on Aug. 1, and current sanctions remain in place until then, he told reporters after a weekly Cabinet meeting in Madrid today.

Spain’s Socialist government is clamping down on the underground economy, which is worth almost a quarter of gross domestic product, according to Spain’s union of tax inspectors. Amid efforts to shield the economy from the sovereign-debt crisis, the government is trying to raise revenue to slash the euro region’s third-largest budget deficit while cutting an official unemployment rate of 21 percent.

“We’re at the top of the European rankings in terms of the black economy, just behind Greece and neck-in-neck with Italy,” Jose Maria Mollinedo, secretary general of tax inspectors union Gestha, said in a telephone interview.

Gestha estimates undeclared earnings amount to 82 billion euros ($121 billion) a year and shrinking the shadow economy by 10 percentage points as a proportion of GDP would raise 13 billion euros in social-security contributions.

500-Euro Bills

Overall, the underground economy is worth 23 percent of GDP, according to Gestha. Funcas, the research arm of Spain’s savings-bank association, puts the number at about 17 percent and says there may be around 4 million undeclared jobs. Friedrich Schneider, a professor at the University of Linz in Austria, who studies underground activity, estimates Spain’s shadow economy at 19 percent of GDP last year, compared with 25 percent in Greece and 22 percent in Italy.

Spain is home to 18 percent of the euro region’s 500-euro bills, which are habitually used for unrecorded cash transactions, although the Spanish economy accounts for 12 percent of the region’s output, according to data from the Bank of Spain and European Central Bank.

Official Unemployment

The plan increases by five-fold the minimum fine for companies hiring workers without registering them with the social security system to 3,126 euros, and raises the maximum fine to 10,000 euros, the ministry said. It almost doubles the minimum fine for people claiming benefits while working illegally to 10,000 euros, lifting the maximum sanction to 187,515 euros. Inspections will be stepped up as part of the program, the ministry said.

Today’s measures aim to trim the official unemployment rate, which rose to 21.3 percent in the first quarter, the National Statistics Institute said today, compared with 20.3 percent in the previous three months. Even though joblessness in Spain tops the EU, the default rate on home mortgages is 2.5 percent, suggesting that households are topping up unemployment benefits with informal income, Mollinedo said.

“The underground economy is a survival system both for workers and companies,” said Jose Manuel Saiz, a professor at Nebrija business school and contributing author of “Ethics and Legality in Business,” which address the underground economy.

Informal jobs will only be converted into formal employment “if the company can pay,” Saiz said, warning that the program may “strangle small companies that are just surviving.”

Role of Companies

The plan may also not go far enough as it only tackles one aspect of the underground economy and doesn’t address the source of the unregistered cash that companies use to pay informal workers, said Javier Diaz-Gimenez, a professor at IESE business school in Madrid and former government adviser.

Employers paying a salary of 2,000 euros a month must additionally contribute more than 500 euros in social-security payments, data from the national statistics institute show.

“If you’re serious about the underground economy you need a big plan that doesn’t just include the labor market, but a comprehensive approach to the black market,” he said in a telephone interview. “The whole thing is patchy, half-baked.”

The government has also been cracking down on tax fraud since 2005, tracking payments made with 500-euro notes, tightening control on bank transactions and investigating fraudulent ownership structures in companies. The campaign against tax fraud raised 10 billion euros last year, or 1 percent of GDP last year, the Finance Ministry said on Feb. 10.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.