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No one knew or probably cared then but as Britain plunged into recession in 2009, shedding jobs and piling up bankruptcies, the nation continued to entertain itself behind closed doors, spending £10-billion ($18.1-billion) on illegal drugs and prostitutes. The figure is arrived at using economic modelling but it comes from a very reputable source, the Office of National Statistics. Britain's ONS is engaged in a bout of self-improvement, tweaking the way it measures economic activity, and the latest series of reforms to the way it adds up the numbers concludes that five years ago the British economy was £33-billion larger than we believed and almost a third of that missing slice of cake was hidden for a reason.

The U.K.'s statistical agency is making these changes to bring its national accounting in line with European reporting standards which require that illegal but consensual economic transactions be recorded. By including the drug and sex trade in the national accounts, Britain will be joining Estonia, Austria, Slovenia, Finland, Sweden and Norway. The sum computed for 2009 represents 0.75 per cent of total GDP, a very significant but not hugely dramatic addition. The GDP number and how it is made up matters a lot because it affects the U.K.'s contribution to the EU budget. Eyebrows will also be raised when more European nations conform to the new standards; Italy's ISTAT statistical agency said it would include figures for drugs and prostitution this year and the Bank of Italy estimated in 2012 that the criminal black economy accounts for about a tenth of Italy's GDP.

There is a less sensational but deeper significance in knowing what makes up the economy of a nation, how it produces and consumes. Nigeria recently made large updates in the way it assessed GDP, a reform that almost doubled the size of the national income, making Nigeria the biggest African economy but more importantly the reassessment halved the proportion of national income generated by the oil sector while boosting the service sector. It was a moment for Nigerians to preen but it exposed a huge problem, demonstrating the inability of the Nigerian government to tax the expanding non-oil economy.

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The illegal economy is by definition untaxed and the ONS statisticians who compiled the series on illegal drugs and prostitution have had to work with assumptions based on historic surveys, data about behaviour generated in countries where the activities are not illegal, and Internet sites (for pricing). Out of all this, the government agency concludes, for example, that in 2009 there were 60,879 prostitutes in Britain who each saw an average of 25 clients per week and charged an average price per "visit" of £67.

There are huge risks in these figures, not least in that the data assumes no import and export trade in prostitution. Moreover, the notion that prostitutes and pimps are self-employed, rather than forming part of organizations is questionable; that they spend only the equivalent of €125 per year on work clothing seems conservative. Out of all this, the ONS concludes that the economic contribution of the sex trade to the the U.K. is £5.3 billion, a figure that probably errs on the diminutive side.

However, it is a start and it will provide ammunition for both libertarians and their ideological opponents that prostitution and drugs should be legalized and brought into the tax fold. It will also intrigue and excite politicians because it begs the question about all the other shadow or grey activities that partially escape the statistician's notice: casual employment, moonlighting, cash transactions and barter. These are certainly on the increase, thanks to Internet commerce and the rise in self-employment since the beginning of the recession. Some of this activity will be recorded in the form of supplies of materials – for building sites, for example – but a great many private but remunerated services, such as babysitting or repairing computers, will remain invisible.

It will remain hidden unless drastic measures are taken, such as the abolition of cash, a measure that economists on the left are calling for, in response to what is believed to an expanding shadow economy. In that event, commerce will find other ways to conduct its business away from the eye of the state, whether in bitcoins or cowrie shells but it seems likely that the GDP resets will add fuel to a gathering political storm.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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