Policy Perspectives >>
The Underground Economy
Posted Oct 10, 2014
- “Underground” economic activity takes different forms and includes the production/provision of both legal and illegal goods and services. The underground economy (UE) is a concern for governments because it reduces the tax base and can weaken regulatory regimes intended to protect consumers, workers and the environment.
- Published global estimates suggest that the UE amounts to between and 8-30% of GDP among the advanced economies, with Canada closer to the lower end of the range.
- Estimates of the size of the UE produced by Canadian researchers vary widely, ranging from just 2.3% of GDP to over 15%, depending on the author, the definition, and the research methodology used.
- Studies from Statistics Canada over the past two decades find the UE equal to 2.3% to 5.2% of GDP. These studies do not capture many kinds of illegal transactions and also miss some legal but “hidden” activities involving households and unincorporated businesses.
- Based on broad definitions, the current size of the UE in Canada may fall in the range of 5-8% of GDP.
- We believe that unobserved, unreported and untaxed economic activity is more prevalent in British Columbia than in the country as a whole, for three main reasons. First, the private sector in BC is heavily weighted toward small unincorporated businesses and the self-employed, where underground activity is more common. Second, the construction industry – the industry that’s most prone to “hidden” activity – is proportionately larger in BC than in other provinces. Finally, BC has a large and thriving illegal drug industry that generates several billion dollars of cash-based transactions every year and serves to increase the size of the UE.
- Add it all up, and it would not be surprising if the overall UE in British Columbia is equivalent to 10% or more of the province’s reported GDP.