Measuring the Black Economy

Moonlighting, ghosting,working for cash in hand, undeclared business profits, fraudulently claiming welfare assistance, failing to register a business for VAT purposes and organised crime. All of these ‘economic axtivities’ are said to operate in the shadow or informal economy and no one including the authorities have much of a handle on just how large is the size of the black economy.

A new report from the National Audit Office has been looking at the attempts of HM Inland Revenue and Customs and Excise to recoup lost tax revenue from tax evaders across the country. Recent estimates from the European Union hint that one worker in twenty has undertaken undeclared paid work in the last twelve months although the range of results from the twenty seven member nations was from 1% to 18% with the UK below average.

That strikes me as likely to be an underestimate. There are in Britain over three million people counted as self employed, one and a half million unemployed and over ten million people listed as economcially inactive. I would venture to suggest that a sizeable proportion of this cohort of nearly 15 million people would have the opportunity for a spot of extra income each year which might go undeclared. Then add in those in full time and part time work employed by someone else who moonlight - teachers offering tuition, people paying their gardeners or cleaners in cash, the recently divorced looking for extra income to meet maintenance payments, graduates trying to repay their student loans and families on low wages desperate for some overtime and unsocial hours paid in cash to meet rising utility and food bills.

Most of us have done it at some point in our lives. Detection rates are low, we might find it fairly easy to rationalise it on the grounds that we are already heavily taxed and our extra income and spending helps to support local economies especially when times are tough and budgets are stretched.

Anyway the latest estimate is that there are upwards of 2 million moonlighters and ghost workers out there in the UK costing the Exchequer around £1 2 billion a year in lost tax take. But the extra spending and income generated in the black economy does create some additional tax revenues - it is not simply a deadweight loss which might have gone to fund more teachers and nurses.