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Serb Attack on Shadow Economy Would Cut Gap, Study Shows

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March 20 (Bloomberg) -- Serbia would narrow its fiscal deficit by about 1 percentage point if the government clamped down on the shadow economy, which makes up about a third of overall economic activity, U.S. and Serbian officials said.

About 30.1 percent of enterprises avoid properly registering and paying taxes for employees and cut corners on administrative and safety standards to save costs, the U.S, Agency for International Development and Serbia’s Foundation for the Advancement of Economics said in a study presented today. The survey of 1,251 Serbian businesses was conducted Oct. 16-22 by the Belgrade-based Ipsos Strategic Marketing.

“Low productivity, the economic crisis and a high degree of illiquidity, as well as a heavy administrative burden, weak regulatory framework, lack of legal safety and high degree of corruption” are among reasons for the black economy, said Gorana Krstic, a researcher at the foundation, known better as FREN.

Premier Ivica Dacic’s eight-month-old Cabinet wants to narrow the fiscal gap to 3.6 percent of gross domestic product from 6.7 percent in 2012, lead the economy out of its second recession in three years and bring down unemployment of around 25 percent. The two-month budget gap exceeded 28 percent of the full-year target.

“In light of the economic crisis and fiscal constraints,” Serbia should take measures to clamp down on the shadow economy to help boost tax revenue by 33 billion dinars ($382.5 million) over the next three years, said Lee Litzenberger, the U.S. Embassy’s deputy chief of mission in Belgrade.

Shadow Economy

The study also showed the shadow economy in Serbia contracted 3 percentage points from 33.2 percent between 2001 and 2010, mostly through the years of economic growth, and has remained unchanged since the start of the recession.

Serbia’s informal economy is almost double the size of those in the Czech Republic and Slovakia. Neighboring Bulgaria is the only European Union member state with a bigger shadow economy, estimated at 32.3 percent of GDP in 2010, according to a study presented by Friedrich Schneider, a professor at Linz, Austria-based Johannes Kepler University.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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