Five cartons of body-packed cigarettes seized at Wellington airport in April. Our black market is an estimated $50b a year. Inset: Finance Minister Nicola Willis and Police Minister Mark Mitchell. Composite photo / NZ Herald.
Five cartons of body-packed cigarettes seized at Wellington airport in April. Our black market is an estimated $50b a year. Inset: Finance Minister Nicola Willis and Police Minister Mark Mitchell. Composite photo / NZ Herald.
International estimates put New Zealand’s informal economy at 11-12% of official GDP: that’s between $47 billion and $51 billion.
Globally, this is relatively small - see the table below for comparisons between countries.
Reducing the size of our hidden economy to match Switzerland’s could add another $3 billion to our annual tax take.
The size of the black market, to borrow from former US Secretary of Defence Donald Rumsfeld, is a known unknown.
Every economy has an informal component or black market: economic activity not known or taxed by the Government.
So how do we know the extent of ours, and its impact on the amount of tax the Government collects? With great difficulty, as it turns out.
An additional $47-$51 billion dollars of economic activity could be taking place on New Zealand’s black market.
Neither Stats NZ, curator of the official GDP figures, nor Inland Revenue (IRD), collector of tax - produce estimates of the size of New Zealand’s informal economy.
The World Bank, however, does it for 196 countries, using two different models.
Both models estimate the extent of unrecorded transactions, ranging from drug deals to the unpaid friend caring for the kids after school.
New Zealand comes in looking relatively wholesome: with the ninth-smallest black market of the 196 countries featured.
It's estimated there's $47-$51b of economic activity annually on New Zealand's black market. Composite Photo / NZME
The two most recent model estimates for New Zealand’s informal economy were 11.2% and 11.9% of our official GDP.
Last year New Zealand’s GDP was $425 billion - meaning an additional $47-$51 billion dollars of economic activity could be taking place on the black market.
Both models give Switzerland the smallest informal economy, at about 8% of GDP in 2020.
At the other end of the spectrum, estimates have Zimbabwe’s as either the largest or second-largest informal economy: between 60.4% and 62.2% of official GDP. But there are other countries that will have larger hidden economies: ironically, a country needs to have a formal economy to enable an estimate of the informal one.
If our informal economy was also 60%, IRD would collect around $35 billion less tax annually.
That’s more than our entire health spend: at the last budget the government allocated $30 billion to health.
Conversely, if our current informal economy was fully taxed, IRD would pull in another $13 billion annually.
If our estimated black market was fully taxed, Finance Minister Nicola Willis could have another $13b to spend on budget day. NZME photograph by Mark Mitchell
With Budget Day on May 22 fast approaching, an extra $13 billion would undoubtedly put a smile on Finance Minister Nicola Willis’ face. But the elimination of our informal economy is unlikely.
If our hidden economy shrank to 8% of GDP – the same as in Switzerland, the best in the world – IRD could collect about $3.35 billion more per year in tax than it currently does.
These calculations assume the same level of taxation, 27% of GDP, across the entire economy. This assumption may not hold, but it does give a sense of the numbers involved.
The informal economy isn’t just about hidden transactions like drug deals, but also the partial reporting of income by individuals and companies.
Of course, knowing how much unreported income there is is tricky.
There isn’t an itemised list of what makes up the hidden economy, but there are a number of interesting tidbits of data that - taken together - paint a picture.
In 2018, Victoria University and the IRD compared how much self-employed people spent with how much income they reported and estimated that 20% of self-employed income wasn’t being reported.
In 2018 IRD and Victoria University estimated about 20% of New Zealand's self-employed income is undeclared and untaxed.
Estimates of the number of self-employed workers range from 15% to 20% of all workers. Recent reports translate this to about $850 million in lost tax revenue a year.
Another recent report, published by the Police Financial Intelligence Unit, contains a number of estimates of the cost of various other illegal activities. Various types of fraud feature heavily.
“Identity theft costs the New Zealand economy more than $200 million a year,” it said.
“The Insurance Fraud Bureau (IFB) New Zealand estimates that insurance fraud cost policyholders and insurers in New Zealand about $880 million in 2023.
“IR revenue risk on GST frauds is estimated to be $300m annually.
“It is likely that the value associated with fraud has significantly increased to $700m–$1b annually. This value is likely to continue to rise.”
The report does state there is a risk some fraudulent activity is counted multiple times by different agencies, meaning the actual numbers may be lower.
The police also provide estimates of the profits from drug dealing.
“Profit from drug crime is conservatively estimated to be in the range of $500M – $600M annually.”
Methamphetamine is estimated to be the largest source of these profits — between $300m and $500m annually. This is followed by cannabis at $100m to $200m, cocaine at $25m to $35m, and MDMA at $10m to 15m a year.
These estimates give a sense of the size of some of the more obviously illegal parts of the hidden economy, but how much tax would increase with a reduction in illegal financial activity isn’t clear.
But moving $1.5 billion of economic activity from the informal economy to the formal economy could add $400 million in tax - if we assumed the same rate of tax across the whole economy.
On a global scale, given how small New Zealand’s black market is, perhaps we need to look in the other direction to increase the Government’s tax take.
The GDP is $425 billion. Using the same simple assumptions, a 1% increase in GDP would result in $1.15 billion more in tax.
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