Recession fears may boost black economy

Recession fears in New Zealand are likely to prompt a resurgence in black economy activities as financially-stressed households try to rein in costs in any way possible.

The black or hidden economy - cash-in-hand work to avoid tax and other compliance payments - is estimated to cost the country several billion dollars annually, but the very nature of this sector means few studies or reports have been published.

However, despite the lack of measurement, the scene appears to be set for a resurgence in the black economy prompted by rising food, fuel and energy costs, and a softening in trades-related work as recession symptoms bite and work becomes more scarce.

Part of an Inland Revenue Department report from 1998, entitled Tax Evasion and the Hidden Economy, delivered to the Treasurer and Minister of Revenue at the time, outlines a black economy study covering 25 years to 1994, commissioned from a professor of the University of Victoria in British Columbia.

It found New Zealand's black economy was similar to others in the Organisation for Economic Co-operation and Development and growing.

The "long run average" annual measurement for New Zealand's black economy was 8.8% of gross domestic product.

In 1994, it was assessed at 11.3% of GDP or $3.2 billion, the report said.

In today's terms, to June 2008, a black economy of 8% to 10% of GDP would equate to $14.4 billion to $18 billion, but that figure would be heavily underpinned by illicit drugs and other criminal activities.

Westpac chief economist Brendan O'Donovan, who could find scant recent data on New Zealand's black economy, said the country's looming recession gave consumers the "incentive and motivation" to seek cash deals, as did higher tax scales.

However, he noted the introduction of GST would have reduced the black economy when undeclared cash was later spent on goods and attracted GST.

A Dunedin sub-contractor, who declined to be named, similarly believes any small cash jobs he does are "eventually recycled back" into the economy in the form of "beer money", which attracts excise tax, GST and retailing jobs.

Mr O'Donovan agreed, when asked, that potentially the black economy could be bigger than the forecast full-year Fonterra payout of around $9 billion which is going back into the economy this year.

However, government tax policy was "incentivising the black economy" with wide-ranging tax scales and the costs between tax paid and benefits received, he said.

The 1996 report said tax evasion from the black economy included legal activities on which tax was not paid, such as for-cash trade jobs, but included unreported illegal activities such as illicit drugs, prostitution and illegal gambling.

"The rate of economic growth, unemployment, inflation and Government regulation were found to be significant contributors to the size of the hidden economy," the report said.

The annual estimates of New Zealand's black economy over the 25 years to 1994 varied widely but remained within an band of 7%-11.3% of GDP.

A Dunedin builder, who asked not to be named, said there had been a notable increase in the number of customers asking if there was an alternative "cash price" to a quote, especially if the job was relatively small.

He said for reputable builders there was enough work around not to bother with small cash jobs, but he knew of businesses who took on cash jobs as perks or rewards for staff.

BNZ chief economist Tony Alexander said the greater the black economy the greater the tax burden for the rest of the population.

He was aware of the 1996 report and concluded that it showed the higher the economic cycle the higher the likelihood of a flourishing black economy.

"You would believe that with more money washing around there is more scope for a black, or hidden economy, to operate," he said when contacted.

The Dunedin builder believed that for many elderly people or families with limited budgets the only way to afford some jobs was by offering "cash-in-hand".

For the past 18 months budgets for people building their own homes were becoming increasingly stretched with rising construction costs and wages outpacing the available income of customers.

As the homes neared completion they wanted corners cut to save money and often changed their minds and re-ordered cheaper fixtures, fittings, carpets, drapes or appliances, he said.