Issue link: https://maltatoday.uberflip.com/i/1545285
4 maltatoday | SUNDAY • 7 JUNE 2026 NEWS Shadow economy accounts for 15.3% of GDP New Central Bank research finds Malta's underground economy has fallen to its lowest recorded level, but it continues to represent a sizeable share of national output MALTA'S shadow economy declined to 15.3% of GDP in 2024, marking the lowest level recorded in two decades, re- search by the Central Bank of Malta shows. The study, authored by econ- omist Glenn Abela, notes that the underground economy has followed a steady downward trajectory from a peak of 22.8% in 2005. Despite this improve- ment, the report warns that a substantial portion of econom- ic activity continues to operate outside official oversight. The shadow economy encom- passes legal economic activities that are deliberately concealed from authorities to avoid taxes, social security contributions, labour regulations or adminis- trative requirements. While these activities contrib- ute to economic output, they remain largely absent from offi- cial records. The shadow econ- omy does not include criminal activities like smuggling or drug trafficking. According to the report, the persistence of undeclared eco- nomic activity reduces govern- ment revenues, undermines the accuracy of national accounts and places compliant busi- nesses at a disadvantage when competing with operators who evade fiscal and regulatory ob- ligations. Self-employed and cash- based sectors remain vulnerable The report identifies tax eva- sion as being particularly preva- lent in sectors characterised by high levels of self-employment and micro-enterprises, where opportunities to under-report income are more readily avail- able. Cash-intensive industries are also considered especially vul- nerable because cash transac- tions are more difficult for au- thorities to trace and monitor. The study notes that the use of cash remains one of the strong- est indicators associated with hidden economic activity. Researchers argue that high tax burdens can encourage participation in the shadow economy by widening the gap between gross earnings and take-home pay, creating incen- tives for undeclared work and off-the-books transactions. New methodology Given the inherently con- cealed nature of the shadow economy, researchers relied on a Multiple Indicators and Mul- tiple Causes (MIMIC) model to estimate its size. The econometric model treats the shadow economy as a la- tent variable that cannot be ob- served directly. Instead, it iden- tifies relationships between factors that encourage informal activity—such as tax burdens and unemployment—and indi- cators associated with hidden economic transactions, includ- ing cash usage and labour mar- ket participation. The resulting index was then calibrated against an external estimate that placed Malta's shadow economy at 21% of GDP in 2013, allowing researchers to derive annual estimates ex- pressed as a percentage of GDP. Curbing hidden activity The report attributes much of the decline in Malta's shadow economy to a combination of economic growth and stronger institutional capacity. A key feature of this shift has been the growing use of tech- nology in tax enforcement. The government has introduced ar- tificial intelligence systems ca- pable of identifying anomalies and potential non-compliance in VAT declarations, with plans to extend similar tools to oth- er areas of taxation. The report suggests that such technologies are increasing the likelihood of detecting undeclared activity, making tax evasion a riskier proposition. These efforts have been rein- forced by legislative changes, which expanded the investi- gative powers available to tax authorities and introduced substantially higher penalties for non-compliance. Together, these measures have increased the financial and legal costs as- sociated with operating outside the formal economy. However, the study argues that reducing informality requires more than stronger enforce- ment. Improving the efficiency and transparency of public ser- vices is seen as equally impor- tant in strengthening trust in institutions and encouraging voluntary compliance. The report refers to the pro- posed National Business Portal, which would simplify registra- tion and reporting procedures for self-employed workers and micro-enterprises. By reducing administrative burdens, poli- cymakers hope to make partic- ipation in the formal economy easier and more attractive. The report also stresses the importance of maintaining a strong labour market, noting that low unemployment and re- duced barriers to finding work lessen the incentives for work- ers to seek undeclared employ- ment. Together, these devel- opments are contributing to a gradual narrowing of the space in which informal economic ac- tivity can operate. For high-risk sectors, particu- larly cash-intensive activities, the report proposes targeted reporting requirements, cou- pled with streamlined adminis- trative processes. The EU shadow economy averages 15% to 25% of GDP, though it varies greatly by re- gion. Western and northern countries like Finland maintain low rates, typically below 10%. Conversely, southern and east- ern nations experience much higher informal activity, with Bulgaria peaking at 30%. JAMES DEBONO jdebono@mediatoday.com.mt