Curder. I'm Richard Martin in for Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. The government is set to cut billions of dollars from spending at the upcoming budget as a cost saving measure in these type financial conditions, But what if there was a way to raise more revenue from existing industries. Analysis from the NZED Herald has looked at
the black market or the informal economy. The industry is dominated by cash in hand methods of payment that pass by the tax system. INZED Herald, Head of Newsroom Data Chris Knox has run the numbers and joins us today on the Front Page to talk through just how much the country is missing out on. So when you hear about a black market or a hidden economy, the mind immediately goes to all all kinds of sinister dealings. But what actually falls under this umbrella?
So I guess the more that there's a kind of a more boring and technical definition, which is that the informal economy or the black market is every kind of economic transaction that takes place that isn't recorded in the official GDP of a country. You know that this can
be things like cash jobs. You know, so if someone if you pay someone in cash to rip out your bathroom, then that's not potentially not going to be recorded as an official transaction obviously things like drug deals, buying black market cigarette, but also you know, paying a babysitter if you're just paying them in cash and that never gets declared as income.
Do we know or do we have any sort of indication as to what might be the biggest contributor in New Zealand?
That isn't something that I was able to find any kind of useful estimates on kind of what the makeup of the different parts are. I guess what we found was was we found an estimate of how big it could be based on differences between income and expend and kind of using the World Bank uses a model that to look across a whole bunch of other countries, and then there's a bunch of kind of I guess, like little tidbits on here here's how big this part of
it might be. But I don't think anyone has a good good handle on what the biggest bit.
Is because I saw there's like two models for estimating Is that right?
Yeah.
I mean, when you look through the economic literature, it's like anything there, there's many different approaches for trying to estimate this, and obviously, from a kind of an intellectual point of view, it's a fascinating problem, like how do you figure out how big something is when by definition
you don't know how big it is. But there seems to be two models that are used widely, I think big part in part probably because they can be you know, the World Banks applied them to one hundred and ninety six different countries, which is a pretty big chunk of all of the countries, so the models have to kind of be you know, you can imagine there's some models that would work really really well in Singapore because they know so much of out their economy, but they wouldn't apply to other countries.
Yeah, I guess does it take into account because culturally as well, there's sort of differences between you know, certain cultures might be more inclined to do those you know, pain my fence, I'll pay you in X, Y Z versus you know, other places where that's sort of not part of the culture.
Yeah, I mean I think that those sort of things will show up in the model but also the models, you know that countries that have a GSC system probably have less of an informal economy because they've managed to capture a lot more of the transactions that take place as part of you know, GST, Whereas if there's there's no obligation to pay GSC on painting offense, then there's
even less chance of declaring it. GST fundamentally is just trying to tax every single transaction that takes place, and so that means that it's in the government's interests to have systems in place for tracking every transaction that takes place. And also if you don't report your GSC, then you know, that's an offense that you can be prosecuted for.
Do we know on a global scale how big New Zealand's informal economy is compared to the rest of the world.
Yes, So we're looking at these World Bank models, in New Zealand comes out about eight or ninth smallest informal economy in the world. That's obviously looking at it from the point of view of what it is as a percentage of the GDP. So these estimates seem to sit at about between eleven and twelve percent of our official GDP, and the smallest informal economy in the world is Switzerland, which sits at about eight percent, so we're actually pretty close to that.
There's many countries across the globe battle sky high inflation. Here in Switzerland, a small mountainous nation in Western Europe, the rise in prices has been far less dramatic. Have you felt the effects of price rises and inflation over the past year.
Not that much, to be honest, richmon or right most of Okay.
You think Switzerland somehow got it a bit more right than maybe the other places thin So inflation in Switzerland hit a twenty nine year high of three point five percent in twenty twenty two. While still high by Swiss standards, it is well below the double digit inflation rates in other advanced economies like the US, UK and Eurozone.
Do we know?
Is there anything special about Switzerland that's keeping their so small.
I think it's a combination of it's a pretty it's a highly regulated country to live in, but also that one of the ways to get a smaller informal economy is to have a bigger formal economy. You could imagine that there's a certain amount of transactions that kind of inevitably happen between people that are always going to be informal.
But if you've got a massive Swiss banking system sitting there as par generating an enormous portion of your GDP, then percentage wise, you know, those little transactions are going on.
And that's actually what I think is happening. So the United States has a smaller informal economy than New Zealand as a percentage, And I think that's not so much that there's less of and less there's less informal transactions taking place in the US, but it's more that their formal economy is simply enormous compared to ours, and a kind of enormous amount of perposeon basis.
Yeah. Interesting, it's funny this idea, because we're talking about a babysitter making a few bucks cash for looking after some kids and you know, a drug cartel committing fraud laundering money in the same breath. But you know, clearly there's sort of like a moral difference between those. How do we draw a line between these?
I mean, yeah, I think they're obviously there is and I think, yeah, there's In my mind, there's a pretty clear continuum with babysitters at one end being morally kind of not really a problem, and then you know you've got you've got your drug cartles and things happening at the other end, and then things like cash jobs or under reporting of self employed income. I mean, from my point, oviou sit somewhere in the middle of here.
Obviously nowhere has zero as their estimate. But like, is that what I guess the government in an ideal world would be aiming for, or is painting offense for a few bucks not actually a problem?
I don't know. I don't think governments are ever going to aim for zero. And I think also these these economic models, they probably capture things that are inevitably not going to be to be something that the government will ever monitor or tax or capture. So one of the things I've looked at with these models, and I've tried to understand whether it's included in these models, and it
kind of full disclosure, I couldn't. But I have seen in other economic modeling things like if you model the unpaid work done by parents, then that becomes an enormous number. Because it's relatively easy to sit down and work out what the cost of raising a child is in the sense of you've got to pay for schooling, you've got to pay for feeding them, you've got to pay for
someone to look after them. If you basically want to have a child and completely outsource raising that child to nannies and that sort of thing, then it's pretty easy to work out what that costs. And so one way of doing these economic models is to pick up that type of transaction and say, well, there's this many children in the world and so or this many children in a country, So you know what the cost of raising those children is, and you're not seeing the payments associated
with that. So then that's part of the black market. Well that's part of an informal economy, you know, and then that's like from a strictly kind of economic point of view, that does make sense, but from any kind of common sense, this is how we organize our lives, it doesn't really you know, like I'm not going to pay myself to raise my own child.
Yeah right. I saw that the ID is going after the likes of plasterers and painters, and that makes sense on paper, I guess, because the trades are sort of one sector where you think about jobs just being done with cash deals, whether that's true or not. But do you think is that the right move?
I mean, it's an interesting something that I've been discussing a lot with a couple of people around this is
there's kind of there's two things, right. There's the size of the infall of economy, which I was actually relatively surprised that, you know, the estimated loss of tax from from underreporting of self blord income, which is essentially what the IOD is trying to go after, is only about eight hundred and fifty million, which is a big number, but like you could you could imagine easily spending something
getting close to that to try and collect that. And so I think I think that from the point of view of an organization like the AID, they've got to try and walk a sweet spot between, you know, not creating systems that are that actually suppress economic activity and also not spending crazy amounts of money on enforcement, but also making sure that the vast majority of people to actually pay their taxes are And so I think that probably the approach of carrying out a few kind of
high profile inquiries and prosecutions works pretty well from the point of view of actor. You want most people to be worried that if they don't do their taxes properly then they're going to get in trouble. But you don't necessarily want to be spending all the money to make that happen.
Yeah, because I guess, like, would the most effective way to shrink this hidden economy be to crack down on things like that? Or you know, should we be looking at formalizing some of the informal stuff because you think about like drugs, for instance, there was the legalizing cannabis referendum in twenty twenty, and around that time there was all these studies and reports that put the potential tax revenue of that between four hundred and ninety million and
potentially two point eight billion dollars a year. So you know, would formalizing some of these I guess, for lack of a better term, be a potential big revenue draw there.
I mean, yeah, I guess the more the more transactions you make that illegal, then the bigger your formal economy is going to be, and you're going to decrease the informal economy. I mean, I was actually quite surprised at the police's most recently estimates that the profit from illegal drugs is between five hundred and six hundred million a year. I thought that was a relatively small number, particularly given some of those other estimates of potential taxation from legalization. Yeah.
I think that all of those things are pretty hard to figure out until we actually happened.
Yeah, tell, because I mean you look at cigarettes, which have been taxed up with the wise and then they've become a sort of big black market industry here as well. So I guess maybe there is just no countering to every possibility, no.
Exactly, Like like you could have, Yeah, you could imagine being like, oh, well, we're going to legalize marijuana and you know, tax adjoint it. I'm going to reveal that I don't even know want to joint golf at the moment. You know, you can tax adjoint at what, you know, two hundred percent of what you'd have to pay on the street currently, and then probably you wouldn't collect any tax because people would just continue to go back to the original dealers. Yeah.
I mean I guess that there's there's a whole podcast just in that discussion.
Yeah.
Yeah, So our medicinal products for cannabis are ridiculously expensive. We're talking hundreds of dollars each month for a patient, So over ninety percent of patients aren't accessing through legitimate sources.
They're continuing to go to the illicit market to obtain it, Which is really the conundrum we have here is that patients are among these people who are either being prosecutors or living with the constant fear of prosecution because they cannot access the expense of hard to get legitimate products, they turn into the black market and facing prosecution.
Depending on who you ask, we're either in a recession or we're rapidly heading for one. So historically, does that mean we're sort of starting We're going to see estimates on the size of hidden economies growing as people turn more to side hustles and freelancing. And I guess these days as well. I mean I've seen people online talking about turning to crypto to avoid taxes as well.
Yeah, I mean cryptos obviously potentially has the pen being quite a big part of a hidden economy. But to your original question, that turns out that that's actually what most of the economics papers in this space are written about, is trying to work out what are the relationships between the formal economy and informal economy, and I think, like almost everything, the current kind of state of the answer
seems to be it depends. So certainly, there have been a bunch of times where people have observed that countries have gone into recession and there's been a big kind of almost boom, if you like, in the informal economy because people have forced to work there. But in other cases that doesn't happen because basically so much money is sucked out of the formal economy that it doesn't matter if you turn to the informal economy. There's still a
lot less money there. You can imagine that, you know, like if we're in a serious recession, then people are not going to be doing bathroom renovations, whether they're cash jobs or otherwise are and so you know that's going to then decrease that part of the informal economy.
So we've got a budget day coming up next week. So how likely is it, you know, we're talking about money, where money is going. How likely is it that the government's going to actually sort of try to tackle this in some way as a way of balancing the books.
I guess yeah. So interestingly, last week when I was driving ahead on the radio that Inland Revenue just announced that it has discovered one hundred and fifty million in unpaid taxes from property developers and investors. So it certainly seems like that there's some effort being put into trying
to recover some of this tax. And yes, wouldn't surprise me if the government kind of wants to push a bit more or maybe you know, give the AID more capability, more power to go after some of these areas, because in some ways, you know, I think that it's reasonable to assume that we're not ever going to be kind of have a smaller hidden economy than Switzerland, but also there might be a billion or two dollars just sitting there to be found with a bit of work.
Yeah, should we be looking at sort of growing out GDP rather than trying to look at shrinking our head in economy?
I mean growth, They shrinking their head a economies you know, inevitably bound, whereas growing our economy I think, you know, like a one percent increase in the formal economy is essentially another billion dollars in tax. So I think that in many ways that would be an easier direction to go if we could just figure out how to go in that direction.
Thanks for joining us, Chris Nors, You're welcome. That's it for this episode of the Front Page. You can read more about today's stories and extensive news coverage at inzidherld dot co dot nzet. The Front Page is produced by Ethan Sills and I'm Richard Martam. Subscribe to the Front Page on iHeartRadio or wherever you get your podcasts, and tune in tomorrow for another look behind the headlines.