Using sex and illegal drugs to boost economic growth figures? That’s what Britain is doing, following a similar move by Italy and other countries to add billions of dollars in black market spending to the country’s wealth.
These two categories contributed more than £10-billion ($18-billion) to the economy in 2009, the most recent year calculated, according to Britain’s Office for National Statistics.
The move to tally profits in these illicit industries comes alongside a wider push through the European Union to refine the measurement of gross domestic product (GDP). Britain has added other categories such as spending on new cars, for a total of £33-billion added to the region’s economy, the equivalent of a 2.3-per-cent GDP hike.
Adding these new elements will change the size and shape of the economy, said Brenda Kelly, chief market strategist at IG Group in London.
“It will be disruptive to historical data,” Ms. Kelly said, adding that she was befuddled by the changes lumping illegal transactions in with legal ones. “You’d kind of wonder, if you’re going to do that, would you not be better off just legalizing all those things, really, and then you can actually derive revenue from them in the form of taxes?”
Britain’s impact assessment comes on the heels of Italy’s declaration that it would add the sex trade and bootleg cigarettes and booze to its GDP calculations as of 2014. The two countries will join others such as Austria, Greece and Sweden that also measure this underground activity.
“Worldwide, there is a move toward having more common ways of reporting numbers to make it all more consistent,” said Jennifer Lee, a senior economist at BMO Nesbitt Burns, noting that the financial crisis spurred many countries to standardize their reporting.
Canada has also tried to shine a light on the shadowy corners of the economy that escape frequent measurement. Two years ago, Statistics Canada studied the impact of the so-called “underground economy” between 1992 and 2009. The study looked at sectors where earnings are often undeclared such as restaurant tips, rental income and under-the-table construction work. In 2009, total underground activity in Canada was estimated at $35-billion.
But these estimates explicitly excluded prostitution and illegal drugs, leaving a gaping hole in the non-observed economic data.
Ms. Lee said she can’t see an immediate benefit to bringing the illegal activity reporting to North America. “I’m not looking through rose-coloured glasses. I’m sure there is some type of under-the-table activity going on, but … the bottom line is I think there would be a smaller impact here in North America,” she said.
Europe is a step ahead of Canada when it comes to accounting for illegal activity, says Lindsay Tedds, associate professor specializing in tax policy at the University of Victoria.
“They already have some idea of what’s going on in tax evasion, which helps them understand what is feeding into the underground economy,” Ms. Tedds said. That’s because Europe measures the “tax gap,” which are the funds unpaid, avoided or evaded in the tax system. Knowing these numbers helps with checks and balances in the calculations of unseen GDP contributions from items such as illegal cigarettes or prostitution.
“Far more academic literature has been thrown at studying the underground economy in Europe than it has in any other set of countries. It’s just more accepted there,” Ms. Tedds said.
Collecting the right data in Canada on drugs and prostitution wouldn’t be too challenging, said Marina Adshade, who teaches at the University of British Columbia’s Vancouver School of Economics. She noted that the RCMP already collect information on drug prices.
“But I think what matters here is what GDP is supposed to be telling us,” Ms. Adshade said. “We care about GDP because it tells us how our standard of living is changing over time. Once they add [the measurement of illegal activities], the comparisons over time are going to become incredibly difficult.”