Commission faults efforts to crack down on shadow economy

A crackdown on Hungary's shadow economy produced results in 2006-2008, but the deterioration this year is bigger than improvement last year, a commission set up to review the measures said in its fourth review presented on Thursday.

The crackdown produced an extra 200-250 billion forints in budget revenue between 2006 and 2008, but the balance could be negative in 2009, said Csak Ligeti, a member of the commission.

Peter Pataky, another commission member, said the number of illegally employed people has grown, especially among security guards. The situation in the construction sector has improved thanks to the crackdown, he added.

Commission member Istvan Fekete said the fall in revenue from taxes and social security contributions was bigger than should have been the case because of the recession. Taking into account the contracting economy, there was still about a 50 billion forint shortfall in revenue from personal income tax, social security contributions and VAT.

The commission blamed the worsening situation on decisions to scrap some measures or loosen up restrictions, such as those on stock of cash.

Ligeti urged mid- and long-term measures, among them steps against corruption, to correct the situation.

Fekete said tax awareness had to be developed and tax morale raised, with appropriate incentives and audits.

Pataky pressed for stricter controls of public procurement procedures saying bidders whose low offers point to the use of illegal labour should not be accepted. A professional consensus would be necessary for this, he added.

A five-percentage-point reduction in the payroll tax will not have a big effect on the shadow economy this year, but will improve the situation in 2010, Pataky said.