Pandemic brings Spanish workers out of the shadows

MADRID/ROME, May 9 (Reuters) – For decades, a cash-filled – or “sober” – envelope has enabled hundreds of thousands of Spaniards to work without legal contracts in tourism, agriculture or construction to receive their salaries.

COVID-19, however, could finally end ‘sobriety’, economic data and workers’ experiences suggest – accelerating Spain’s six-year crackdown on the underground economy and giving public finances a welcome boost from the country.

The Spanish economy has been the hardest hit in the eurozone by the pandemic, contracting 11% in 2020 amid severe lockdown. Two years later, it has still not returned to its pre-virus level.

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But something unexpected has also happened: overall tax revenues and the number of people in formal employment are now actually higher than when COVID-19 hit.

The reason, according to labor experts, trade unionists, employers and workers interviewed by Reuters, is that an unintended side effect of the pandemic has been to drive many Spaniards out of the underground economy and into regular employment.

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The main causes were the decline in the use of cash due to pandemic-era hygiene measures, as well as the increased demand for contracts by workers who saw that going under the radar also meant missing out. leave payments during closures.

Although some of these factors apply to other countries, the composition of the Spanish economy and other local factors mean that the impact has been particularly tangible there.

“In the catering sector there is a before and an after the pandemic,” said Gonzalo Fuentes, representative of the catering sector at CCOO, the largest Spanish union in a sector which in 2019 represented 12.4 % of the official Spanish economy.

“The workers realized that going underground was not profitable, even if by not paying taxes or social contributions, they earned more.”

Although measuring underground economies is difficult due to their very nature, estimates have shown that even before the pandemic, Spain’s drive to curb hidden activity has seen it drift away from its peers. from the euro zone, Italy, Greece and Cyprus, where underground economic activity remains significant.

Prior to the pandemic, Spanish authorities stepped up labor inspections in tourism and agriculture, even using algorithms to detect tax evasion.

“Employers have changed. Now everyone gives you a contract,” says a 55-year-old who would only be identified as “AR” because he worked for 30 years moonlighting as a waiter to supplement his main income in the public sector.

“I remember being at a wedding just before the pandemic and before the service started, the inspectors arrived and started identifying all the waiters. A group of them ran away through the olive groves” , he told Reuters.

Along with changing working practices, COVID-19 has highlighted the lack of protection for informal workers and has led to a change in consumer behavior, with hygiene protocols encouraging a shift from cash to electronic payments. credit card, a key factor in reducing tax evasion.

“It is very important for tax control because these are traceable transactions,” the director of the Spanish Tax Agency, Jesus Gascon, told lawmakers during a parliamentary committee.

Additionally, this change was accompanied by a ban in July 2021 on paying more than 1,000 euros ($1,054.00) in cash as part of government measures to crack down on the underground economy.

“Payment by bank transfer has totally changed the mindset in the agricultural sector,” said Vicente Jimenez, head of the agricultural branch at the CCOO union. “It’s a journey of no return. A journey into the 21st century.”

Combined, these two trends have had considerable impacts.

The number of workers contributing to social security exceeded 20 million for the first time in April 2022, compared to just under 19 million before the pandemic.

Tax revenues reached in gross terms 275 billion euros in 2021, against 248 billion the previous year and 266 billion for 2019 before the virus hit.

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This additional boost for state coffers was one of the factors allowing Spain to reduce its budget deficit in 2021 to 6.9% of GDP, against 11% the previous year, above government’s own expectations.

“The underground economy, which was one of the weaknesses of Spain’s tax system, is finally coming to light,” Economy Minister Nadia Calviño said at a press conference on April 29 presenting the economic outlook. from Spain.

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Data collected by University of Linz economist Friedrich Schneider, an expert on underground economies whose work in the field has been published by the International Monetary Fund, suggests that Spain is moving away from its main Mediterranean counterpart, Italy.

According to its calculations seen exclusively by Reuters, Spain’s underground economy briefly rose in 2020 to 17.39% of total economic activity before experiencing a sharp decline in 2021 which will see it reach 15.8% of activity. This year. This is well below Italy, Greece or Cyprus where hidden activity accounts for at least 20% of overall economic activity, according to Friedrich, and below the European average which he predicts at 17, 29% this year.

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Italy’s efforts to tackle its hidden economy have stalled, according to data from Schneider, stuck at around 20% of Italy’s economy since 2020.

Schneider points out that the 2022 data are still only projections and observes that the size of a country’s underground economy is also influenced by local factors.

In federalized countries like Spain where many taxes are administered locally, the propensity to pay taxes is greater, says Schneider – which is reflected in the low figures for the underground economy in Austria or Germany.

Another factor determining the size of an informal economy is what activities are considered legal there: Schneider noted that in the Netherlands, for example, whether prostitution or soft drug use is partly legal or tolerated means that such activities can be taxable savings.

Like Spain, Italy has also benefited from the switch from cash to bank cards.

Italy’s own data shows it made steady progress in cracking down on tax evaders between 2014 and 2019, its most recent data available. Further reducing tax avoidance is one of the aims of Italy’s post-pandemic recovery plan agreed with the European Commission in exchange for more than 200 billion euros in EU funds. Official data shows that around 18.5% of taxes in Italy were evaded in 2019.

“We have done a lot to fight evasion, but there is still a lot to do,” said Alessandro Santoro, an economics professor who advises the Italian government, saying decisive progress could be made by expanding databases. of the Ministry of Finance and by relaxing privacy legislation. .

Back in Spain, one area of ​​the underground economy remains deeply rooted: the employment of undocumented workers whose livelihoods are often too precarious for them to challenge unscrupulous employers.

JC, a 27-year-old Colombian, moved to Spain three years ago and went from working in a bar to working in a factory – but never got the contract he needs to become a legal resident .

“(My employer) didn’t tell me this year… They save a lot of money by keeping me irregular. Maybe next year.”

($1 = 0.9488 euros)

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Reporting by Belén Carreño in Madrid and Gavin Jones in Rome; Editing by Mark John and Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

Edward K. Thompson