"Do you need a receipt?" - Chances are you'll be asked this question when paying cash at a local store in Bulgaria. Often, people here pay for services without expecting any documentation in return - whether at the hairdresser's, from repair workers fixing something in their homes, or even when taking a taxi. In Bulgaria, this has simply become the norm.
Avoiding VAT on products and services is one of the two most widespread forms of the shadow economy, alongside undeclared work, where employees are paid all or part of their wages "under the table," bypassing taxes and social contributions. These practices, by definition, go unnoticed by state authorities. They deprive the national budget of revenue, in most cases harming the very people involved: workers who aren't insured are likely to receive only a minimum pension later, be unable to rely on state support in case of unemployment or maternity leave, and face higher costs when they need medical care.
EU Champion of Grayness
According to a new study, Bulgaria's informal economy reached 34.6% of GDP in 2023 - around 64 bn levs - making it the largest in the European Union relative to its official economy (which amounted to 185 bn levs the same year). The research was conducted by U.S. consultancy firm Kearney in cooperation with Professor Friedrich Schneider of Johannes Kepler University in Linz, and commissioned by Visa.
The numbers suggest that if all hidden activities were brought into the formal economy, Bulgaria's GDP would be roughly one-third higher. Moreover, if the country managed to reduce the size of its shadow economy to match that of Greece - currently standing at 22% - it could boost its GDP by 20 bn levs annually and increase tax revenues by more than 6 bn levs in the coming years.
In fact, Bulgaria's finance ministry has projected an ambitious increase in state revenue in this year's state budget, expected to come from tackling the shadow economy. So far, however, the government has yet to clearly outline what measures it will use to achieve this.
Political Instability, Low Trust in Institutions, and No Guilty Feelings
The average size of the shadow economy in the EU stands at 18.9% of GDP, the study shows. Bulgaria tops the list, followed closely by Romania and Croatia, both with shadow economies exceeding 32% of their GDP. According to the analysis by Kearney and Visa, the previously declining trend of the shadow economy in most European countries was reversed during the COVID crisis. The war in Ukraine disrupted supply chains, and the subsequent surge in inflation further contributed to the shift.
Bulgaria is no exception - after a period of decline, the shadow economy in the country grew by 2.6 percentage points between 2021 and 2023. One of the key drivers: political instability. In just two years, Bulgaria held five parliamentary elections and saw several changes in government. When trust in institutions is shaken, the sense of guilt associated with under-the-table payments tends to weaken.
Bulgarians often believe the risk of being caught while working unofficially is low, and they are rarely aware of the possible consequences, the study says. The widely viewed ineffectiveness of the judicial system is another contributing factor. Catalin Crețu, General Manager of Visa Europe for Bulgaria, Romania, Slovenia, and Croatia, points out that, compared to the other markets he oversees, the evaluation of the judicial system in the country is the lowest, while the perception of corruption is the highest.
Crețu adds that if people believe public services in a country are inadequate, they are more likely to avoid paying taxes. The combination of low GDP per capita, the sense of corruption, low efficiency of public spending, and low levels of electronic payments creates conditions for a high level of informal economy, he says. Bulgaria being the only EU country where personal bankruptcy is not regulated is another reason why people with large debts shift to the informal sector.
Six Sectors Primarily in the Shadows
The report shows that the informal economy accounts for around half or more of the added value in six economic sectors in Bulgaria. Leading the list is hospitality and food services (70%), followed by agriculture, forestry, and fishing (66%), arts, entertainment, and sports (58%), construction (56%), wholesale and retail trade (53%), and manufacturing (49%). In absolute terms, wholesale and retail trade (14.2 bn levs) and industrial manufacturing (13.6 bn levs) are the sectors with the largest volume of the shadow economy.
Construction leads in terms of the share of undeclared employment - around 41% of all such cases in the economy are found in this sector, the study says.
The accommodation and food services sector is relatively small, contributing around 3% to the country's total gross value added (GVA). However, the penetration of the shadow economy here has increased to a striking 70%. The main driver is undeclared labor - officially, the sector has the lowest average wage, only about 30% higher than the minimum wage. But this is likely due to the notorious practice of paying part of the wage in cash while officially declaring only the legal minimum.
The informal economy in the trade sector has also increased, mainly due to undeclared sales, facilitated by high rates of cash payments.
Encouraging Digital Payments Is a Possible Solution
The development of digital payments is strongly inversely related to the size of the informal economy in EU countries (with over 70% negative correlation), the study finds. Digital payments reduce opportunities for tax evasion and provide a transparent way to conduct transactions. Increasing their share in Bulgaria by 5% annually over the next five years, all else being equal, would reduce the shadow economy by 1 percentage point -bringing 1.9 bn levs into the formal economy and increasing annual tax revenues by 0.6 bn levs annually. There is room for improvement as 39% of Bulgarians cite the lack of a payment terminal in stores as a barrier to using electronic payments.
The country could also follow successful regional examples, such as expanding the mandatory acceptance of digital payments beyond restaurants (as seen in Romania and Hungary) and encouraging digital payments through cashback incentives and tax benefits (as in Greece and Italy), the analysis notes. Another proposed measure is to lower the cash payment limit from the current 10 000 levs to 5 000 levs.
Of course, a more fundamental change needed is the restoration of trust in institutions and the political system as a whole. In recent years of political stagnation and fragmentation, however, the fight against the informal sector seems to be more talk than action.
"Do you need a receipt?" - Chances are you'll be asked this question when paying cash at a local store in Bulgaria. Often, people here pay for services without expecting any documentation in return - whether at the hairdresser's, from repair workers fixing something in their homes, or even when taking a taxi. In Bulgaria, this has simply become the norm.
Avoiding VAT on products and services is one of the two most widespread forms of the shadow economy, alongside undeclared work, where employees are paid all or part of their wages "under the table," bypassing taxes and social contributions. These practices, by definition, go unnoticed by state authorities. They deprive the national budget of revenue, in most cases harming the very people involved: workers who aren't insured are likely to receive only a minimum pension later, be unable to rely on state support in case of unemployment or maternity leave, and face higher costs when they need medical care.