Spain’s Growth Lags Behind Its Booming Shadow Economy

Job seekers at an employment center in Madrid Photograph by Antonio Heredia/Bloomberg

Spain’s black economy has flourished as the country struggled through a brutal economic downturn. A new study released by the Finance Ministry estimates off-the-books activity accounted for 24.6 percent of Spain’s economy at the end of 2012, up from 17.8 percent before the crisis began in 2008.

Spain’s shadow-economy problem is now one of the worst in western Europe. A report last year pegged Greece’s black economy at 24 percent of GDP, Italy’s at 21 percent, and Spain’s at 19 percent. Still another report from 2013 estimated that 1 million Spaniards work off-the-books.

The existence of a “high, persistent, and permanent level” of underground unemployment helps explain why Spain’s official jobless rate remains at a stubbornly high 26 percent, even as economic recovery takes hold, says Jordi Sardà Pons, a professor at the Universitat Rovira i Virgili in Tarragona who led the latest study. Many officially unemployed people do “mini-jobs” in the black economy, while some who hold legal jobs supplement their income with underground work, he says.

The recent surge in Spain’s black economy is linked in the study to the construction boom preceding the 2008 crisis, which “created a huge reserve of black money,” according to the report. Of an estimated €253 billion ($343 billion) in black-economy transactions, some 70 percent involve 500-euro bank notes, a denomination that doesn’t circulate widely in the broader economy.

The study says Spain’s government exacerbated the black-economy problem by raising taxes as it sought to reduce budget deficits—increasing the incentive for business to go underground—while failing to implement “efficient tax control.” Spain has only one tax inspector per 1,928 taxpayers, compared with 729 in Germany.

In addition, Sardà says, the tax system in Spain isn’t fair. “There are great companies and great family fortunes that pay very little” by finding legal means to reduce their tax bills, he says, adding that this contributes to tax avoidance by other taxpayers, who feel that “if the rich do not pay, why do I have to pay?”

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