The Way out of the Grey Economy - But will it work?

On Friday, 23 December, NALED and AmCham held an important conference entitled “The Way out of the Grey Economy”. The conference involved several ministers and key civil servants who explained the efforts being made to coordinate the inspection services and make their work more rational, and generally improve the work of the administration.

Minister Ana Brnabic announced a campaign and prize lottery that will raise public awareness. Goran Kovacevic, Chairman of NALED`s Managing Board, emphasized the importance of reforming the current 247 para-fiscal levies to make taxation more transparent.

Concluding the conference, Prime Minister Aleksandar Vucic made an appeal to citizens to see their own advantage in paying taxes, which pay for concrete benefits such as hospitals, schools and pensions. The following day Tanjug reported him as saying that a reduction of payroll taxes was planned on salaries of RSD 70,000 and upwards, not on the minimum wage which, according to the report, he suggested was paid by companies that added “a certain ‘cash in hand’ amount”.

Will these measures work? I think they will to some degree.

There are two conditions for sustainably getting people to pay more tax. First, they should directly see their own advantage in it. Secondly, they must be convinced that their money will be well spent.

When people begin to see that widening the tax base brings down deduction rates (not just what the Serbian government calls ‘tax’, which is a small part of deductions), they will see their advantage at first hand. This is why the prime Minister’s later announcement is so important and welcome. It is just a pity that it was phrased so as to stigmatise the many companies that cannot pay more than low salaries.

Assuming the Prime Minister was referring to a gross salary, the net would be around 42,000 dinars. Since Serbia’s average salary in November 2016 was around 46,000 dinars, any promised tax relief would only affect a little over half of all salaries, hardly any incentive for struggling companies with the lowest wages, or unregistered ones wanting to come in from the cold.

Participation in the grey economy is mostly not by choice – it is the result of decades of government policy

Today, many small companies - which account for the bulk of employment in Serbia - struggle to make ends meet. Prices are low and competition fierce: these companies cannot raise salaries before their competitors do. Their participation in the grey economy, whether by paying too little or by not being registered, is mostly not by choice – it is the result of decades of government policy that has given a competitive advantage to unregistered companies and workers.

To change such an entrenched situation requires more than good PR, it needs a clear and massive signal that policy will henceforth be different. It needs an inclusive initiative and certainly not stigmatisation.

Bringing down Serbia’s exorbitant income deduction rates on the lowest salaries is the only chance of starting a virtuous circle. Successful economies have a zero rate on the first part of any income, with the rate progressing as income increases. Such a system would gradually bring in those who want to be legal but can’t. I think this covers most of them.

Failure to tackle corruption risks bringing down all good reform initiatives

Secondly, will their money be well spent? You don’t have to talk to many people in Serbia to see that their perception of government probity hovers around ankle level. Perceptions of scandal dog public procurement in everything from real estate to light bulbs. And their ubiquity is not as bad as people’s reaction to them: they are not even outraged, but shrug: “what do you expect?” To be really successful, the initiative must be paired with a real commitment to dealing with corruption.

Once again, we see how the failure to tackle corruption risks bringing down all good reform initiatives. Good PR can only help an initiative with substance, and then only if a more ethical approach is perceived by the public. Until this becomes a prime focus, reform will only succeed to a limited degree.

Author: David Lythgoe, Director of Halifax Consulting

NALED Beograd

Halifax Consulting d.o.o. Beograd

Američka privredna komora u Srbiji AmCham Serbia

Ministarstvo državne uprave i lokalne samouprave Republike Srbije

NALED

Halifax

AmCham

grey economy

The Way out of the Grey Economy

countering grey economy

Goran Kovacevic

Ana Brnabic

Aleksandar Vucic

Ministry of Public Administration and Local Self Government

illegal work