Cash in hand: how big is Australia’s black economy?

A taskforce is to be set up to crack down on the underground economy, but what exactly will it be dealing with?

Cash in hand: how big is Australia’s black economy?
One measure under consideration is the phasing out of the $100 bill.
Photograph: Dan Peled/AAP

Powered by article titled “Cash in hand: how big is Australia’s black economy?” was written by Nick Evershed, for on Monday 19th December 2016 19.22 UTC

The Australian government has announced a taskforce to “crack down on the black economy”, with a panel reportedly to consider measures such as removing the $100 note from circulation and limiting cash transactions above a certain limit.

So what is the “black economy”, and what is it composed of?

In her press release, the minister for revenue and financial services, Kelly O’Dwyer, defined it in the following way:

While there is no single, internationally-agreed definition, typically the black economy refers to people who operate entirely outside the tax system or who are known to tax authorities but deliberately misreport their tax (and superannuation) obligations. The black economy can also include those engaged in organised crime, including those who engage in the production and sale of prohibited goods.

The black economy is also variously known as the underground economy, the non-observed economy or the shadow economy, and definitions can vary to include different activities. It can include things such as undeclared cash-in-hand employment, cash payments for goods and services, and payment for illegal activities.

One estimate of the underground economy from 1999, which only considered cash transactions and excluded illegal activities, put the size of the underground economy at around 15% of gross domestic product.

However, a more recent estimate by the Australian Bureau of Statistics (ABS) in 2013, which encompassed proceeds from illegal activities as well as other areas, estimated the size to be far smaller, at only 2.1% of GDP.

Here you can see the components of what the ABS called the “non-observed economy” (use the button to compare with GDP):

underground economy

The largest component is “underground production”, which had an estimated value of 1.5% of GDP at the time, or $22.7bn. Underground production is defined as “activities which may be legal but are deliberately concealed from public authorities”, such as undeclared cash-in-hand jobs, and the ABS report says it is typically concentrated in industries such as “construction, accommodation, cafes and restaurants, personal and other services, and retail trade”.

Indeed, construction topped the list of industry groups in the anlysis of underground production, where the estimate of the understatement of income and overstatement of expenses was considered relative to the industry’s contribution towards GDP.

The next-largest overall component is the illegal drug trade, with an estimated value of $5.6bn.

The last category is “household production for own use”. This may be a less-familiar category than the other two, and it’s defined as “own–account production of all goods retained by their producers for their own final consumption or gross capital formation; and own–account production of housing services by owner–occupied dwellings”.

This means things such as backyard production of vegetables or livestock, solar power, and the “imputation of rent to owner-occupied dwellings”. This is a bit tricky to explain but you can read more about the category here.

One of the measures to be examined will be the potential phasing out of the $100 bill, O’Dwyer said in an interview on 3AW.

A recent Reserve Bank of Australia bulletin showed that the two banknotes in highest demand were the $50 and $100 dollar bills, with these two making up the majority of notes in circulation:

dollar dollar bills yall

The same report showed that while the use of cash for payments is declining, it’s still the most popular option. It also noted that removing $100 notes would have little impact on illegal activities, as criminal elements reportedly prefer the $50 note as it’s more common in legitimate transactions. © Guardian News & Media Limited 2010

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