What is the real size of the black economy?

No government will run smoothly without a sound revenue collection system. That may sound too much of a truism, and it is, but it is certainly not unheard of for countries to be found wanting on this most important score. Would Greece have landed itself in such hot water had its people and businesses not resorted to mass tax evasion over the years? There were other factors that landed that country in serious trouble but tax evasion contributed heavily to its present woes.

Is Malta’s revenue collection system sound? Some parts are but others need fine-tuning. The fraud that had taken place at the VAT Department some years ago, for instance, might not have occurred had the operational systems there been efficient enough. A government plan to amalgamate the revenue departments, first announced in the 2010 Budget, is about to take off following the approval by Parliament of a Bill that would place four revenue-earning bodies under one regime, headed by a Commissioner for Revenue.

The move is a very important administrative step meant to harmonise the work involved in the collection of revenue due to the government and check abuses in the system. This matter is raised so often, particularly when Parliament debates the budgetary allocation for the Finance Ministry and, more specifically, when fraud cases are discovered. As it happens, only a few days before Parliament approved the Bill, an EU study showed that the island has one of the largest black economies in the eurozone.

Were the figures given in the study to be entirely correct, Malta would definitely have a very big problem on its hands. The study conservatively estimates the island’s shadow economy at 26 per cent of gross domestic product or a staggering €1.6 billion. A mere 10 per cent tax proceeds from the black economy would result in an additional €160 million into the government’s coffers. That is quite a lot but are the figures correct?

The government is apparently playing down the significance of the study, arguing that it does not take into consideration such issues as tax credits and other deductions that legitimately reduced the government’s actual tax take. A spokesman for the Finance Ministry was reported saying that these considerations pointed towards the need to take a prudent approach towards the study.

The ministry’s arguments may very well be sound but does it have its own estimate of the amount the country is losing through the black economy? It is essential that this is established so that the country would know the size of the problem it is facing, that is, if the size of the black economy does indeed present a problem which, in many people’s eyes, it does. Only recently, another European Commission report, drawn up by the directorates for taxation and economic affairs, singled out Malta as one of the member states that needed to raise VAT efficiency. It said that Malta, Greece, Italy, Austria and Slovakia should work on “deficiencies in VAT collection”.

Explaining the reform, the Finance Minister said the day-to-day running would still be in the hands of the principal entities but the focal point and leader would be the commissioner who would take the necessary steps to carry out the transformation. Hopefully, the reform the government is now piloting in order to amalgamate the revenue collection departments would not only make the collection of revenue more efficient but would also check abuse more effectively across the board.