Pandemic pushes Spanish workers out of the shadows

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MADRID/ROME, May 9 (Reuters) – For decades, a cash-stuffed envelope – or “sobre” – was the way hundreds of thousands of Spaniards working without a legal contract in tourism, agriculture or construction worked theirs collect salaries.

But COVID-19 may finally be ending the sober ones, economic data and workers’ experiences suggest – accelerating a six-year crackdown on the informal economy in Spain and giving a welcome boost to the country’s public finances.

The Spanish economy was hardest hit by the pandemic in the euro area, shrinking by 11% in 2020 amid tough lockdowns. Two years later, it still hasn’t returned to pre-virus levels.

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But something unexpected has also happened: Total tax revenues and the number of civil servants are actually higher now than when COVID-19 struck.

According to labor experts, union leaders, employers and workers polled by Reuters, this is because an unforeseen side effect of the pandemic has been pushing many Spaniards out of the informal economy into regular employment.

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Main causes were declining use of cash as a result of hygiene measures in the pandemic era, as well as increased demand for contracts from workers realizing that going underground also meant forgoing furlough expenses during the lockdown.

While some of these factors apply to other countries, the composition of Spain’s economy and other local factors mean that the impact has been particularly noticeable there.

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

“Workers have realized that even though they earn more by not paying taxes or social security contributions, it does not pay to work underground.”

While measuring the informal economy is inherently difficult, estimates showed that even before the pandemic, efforts to curb hidden activities had already drawn Spain away from eurozone competitors Italy, Greece and Cyprus, where the informal economy remains significant.

Before the pandemic, Spanish authorities expanded labor inspections in tourism and agriculture, even using algorithms to detect tax fraud.

“Employers have changed. Everyone gives you a contract now,” said a 55-year-old, who would only be identified as “AR” because he worked moonlighting as a waiter for 30 years 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 came and started identifying all the waiters. A group of them ran away through the olive groves,” he told Reuters.

At the same time that working practices were changing, COVID-19 highlighted the lack of protection for informal workers and led to a change in consumer behavior as hygiene protocols encouraged a switch from cash to credit card payments, a key factor in reducing tax fraud.

“This is very important for tax control because these are traceable transactions,” Spain’s tax agency director Jesus Gascon told lawmakers in a parliamentary committee.

Additionally, that postponement came with a July 2021 ban on paying more than 1,000 euros ($1,054.00) in cash as part of government measures to combat the informal economy.

“Paying by bank transfer has completely changed the whole mindset in the agricultural sector,” said Vicente Jimenez, responsible for the agricultural sector at the CCOO union. “This is a one-way trip. A trip into the 21st century.”

Together, these two trends had a significant impact.

The number of workers paying social security contributions surpassed 20 million for the first time ever in April 2022, compared with just under 19 million before the pandemic.

Tax revenues grossed 275 billion euros in 2021, compared to 248 billion in the previous year and 266 billion in 2019 before the outbreak of the virus.

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This extra boost to the treasury was a factor that allowed Spain to reduce its budget deficit to 6.9% of GDP in 2021 from 11% the previous year, better than the government’s own expectations.

“The underground economy, which was one of the weaknesses of the Spanish tax system, is finally being brought to light,” Economy Minister Nadia Calviño said at a news conference on April 29 presenting Spain’s economic prospects.

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ITALY IN THE DARK

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

According to its calculations, seen only by Reuters, Spain’s informal economy briefly grew to 17.39% of total economic activity in 2020, before experiencing a sharp decline in 2021 that will see it reach 15.8% of activity this year. That’s well below Italy, Greece or Cyprus, where hidden activity accounts for at least 20% of total economic activity, Friedrich said, and below the European average, which he forecast at 17.29% this year.

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Italy’s efforts to tackle its informal economy have stalled, holding at about 20% of the Italian economy as of 2020, according to Schneider’s data.

Schneider emphasizes that the data for 2022 are still only forecasts and notes that the size of a country’s informal economy is also influenced by local factors.

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

Another factor that determines the size of an informal economy is what activities are considered legal there: Schneider noted that in the Netherlands, for example, the fact that prostitution or soft drug use is partially legal or tolerated means that such Activities in the formal, taxable economy.

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

Italy’s own data shows that it made steady progress in fighting tax evaders between 2014 and 2019, the latest data available. Further reducing tax evasion is one of the goals of Italy’s post-pandemic recovery plan, agreed with the European Commission in return for more than €200 billion in EU funds. Official data shows that in 2019 around 18.5% of taxes were evaded in Italy.

“We have done a lot to curb tax evasion, but there is still a lot to do,” said economics professor Alessandro Santoro, who advises the Italian government. Significant progress could be made by upgrading Treasury Department databases and relaxing data protection legislation.

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

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

“(My employer) told me not this year… He’s saving a lot of money by keeping me intermittently. Maybe next year.”

($1 = 0.9488 euros)

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

Our standards: The Thomson Reuters Trust Principles.

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