How Latvia’s State Audit Office Assesses the Fight Against the Shadow Economy
According to the State Audit Office of Latvia (Valsts kontrole), the issue is not a lack of government action, but the design of the policy framework itself.
The auditors conclude that Latvia’s current approach to limiting the shadow economy is not the most effective, because implemented measures are largely focused on control and administrative enforcement, rather than on addressing the underlying causes of shadow economic activity.
Selective use of data
One of the central criticisms concerns the way data are used in policymaking and public communication.
Official translation of the audit finding:
“The shadow economy is an area in which the Ministry of Finance does not use official statistical data on unreported or shadow economic activity when communicating with decision-makers and the public.”
This refers to the data produced by the Central Statistical Bureau (CSP), which estimate Latvia’s unobserved economy at 6.7% of GDP in 2023. While this figure is not negligible, it is also not exceptional by international standards and reflects a reality in which certain private transactions between residents — such as occasional services or personal sales — cannot realistically be fully formalised.
Focus on consequences rather than causes
The audit repeatedly stresses that current measures target effects rather than drivers of the shadow economy.
Official translation:
“Planned and implemented measures are more focused on combating the consequences rather than the causes of the shadow economy.”
In practice, this means that policy efforts prioritise inspections, reporting requirements and enforcement mechanisms, while tax predictability, institutional trust and administrative simplicity — factors consistently identified by research as key determinants of voluntary compliance — receive less strategic attention.
Costs without cost assessment
Another structural issue identified by the auditors is the absence of a systematic evaluation of the cost of fighting the shadow economy itself.
While public discourse frequently refers to large potential revenue losses, the state does not comprehensively assess:
the financial cost of control measures,
their marginal effectiveness,
or alternative policy tools that could achieve similar outcomes with lower administrative burden.
This asymmetry makes control expansion easier to justify, as its own economic efficiency is not measured.
Governance oriented toward process
The State Audit Office also highlights weaknesses in the governance model, which involves multiple institutions with fragmented responsibilities.
Official translation:
“State action to limit the shadow economy is oriented more toward processes than toward results.”
As a result, accountability is diffused and policy evaluation focuses on implementation activity rather than measurable outcomes.
Positive developments acknowledged by auditors
The report is not exclusively critical. Valsts kontrole acknowledges that:
the Shadow Economy Limitation Plan for 2024–2027 is technically better structured than previous plans;
coordination mechanisms have improved in formal terms;
organisational changes implemented in 2025 within the Ministry of Finance represent a move toward a more rational governance model.
However, these improvements are described as partial and insufficient without a fundamental shift in policy logic.
Conclusion
The State Audit Office’s position is measured but clear:
Latvia’s fight against the shadow economy relies heavily on control-based instruments, while official statistics, cost-efficiency considerations and root causes remain underutilised. Without recalibrating this balance, the policy risks becoming a self-sustaining administrative process rather than an economically effective strategy. BSM © 2026
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