Hands up if you’ve ever paid cash for something because it was cheaper. I need to put my hand down now so that I can continue typing. Of course I have, we all have. Despite knowing deep down that the reason it’s cheaper is probably that it will never be declared to the tax man. “But we all do it. Doesn’t do anyone any harm. We pay enough taxes already. It’s not my responsibility.” are the justifications we use.
When we think about the ‘cash’ or ‘black’ economy, we tend to lump it into two categories - First there’s the prostitution and drugs and smuggling, which we conveniently link together as the ‘criminal’ side. Then there’s the other side - the cash in hand transactions, the undeclared income from second jobs or overstated expenses on tax returns that we pretend to ourselves isn’t criminal at all.
The HMRC estimate that a total of £42billion passed under the radar of taxation last year, which was an increase of nearly 10% on the year before. The amounts lost to under-declared self assessment and cash-in-hand transactions come to over £10 billion alone. That means that our black economy currently represents around 12% of UK GDP (i.e. bigger than the whole UK manufacturing industry). But is it necessarily a bad thing?
Well first let’s look at the supply side. The kind of jobs we’re talking about are those which are typically found in the low paid service sector - the nannies, the cleaners, the minicab drivers etc who perform vital roles in our society. These jobs provide vital additional income to families who may be working without visas or may largely depend on benefits that would be lost if the income was declared.
And where is the demand coming from? These jobs wouldn’t exist unless people needed people to clean their homes or look after their children . And for many of those home owning parents, the reality is often that they can’t (or won’t) afford to pay over minimum wage plus NI plus benefits plus holiday pay etc for those services.
So a deal is struck, both sides need each other, and a black market is created in which both are equally complicit. Therein lies the argument - a black market exists because we’d be ALL be a lot poorer without it.
There is growing evidence that the black economy becomes even more vital to society as times get tougher. For example Ireland and Spain reported in the last week that their black economies have grown to around 20% and 25% of GDP respectively. When the economy is struggling, desperate for work, people are more willing to take lower pay in exchange for cash-in-hand work. And then armed with that cash, they buy products for cash, which are, in turn, cheaper because they come tax-free. In effect, a vicious circle is created in which people become criminalised by their own desperation. One reason the Irish aren’t rioting right now, may be because they’re keeping their heads down.
But where does it end? Another EU member state, Greece shows us the potential dangers that arise if the black economy gets out of hand. Greece almost went belly up last year because its tax collection was so inadequate. At the height of its own financial crisis, an estimated 40-50% of the money sloshing through the Greek economy went undeclared. The result of course was that Greece nearly went bust.
So is there a perfect level for the black economy? Even HMRC accept that to eradicate the black economy would be impossible. Does that make us all criminals? Of course not. Most of us can only admit so freely to the odd cash payment here and there because we feel comfortable that we pay enough tax already. The size of our black economy is probably a good indicator of what we collectively feel ‘enough’ is.
But a word of warning. The next time you’re offered a discount for cash, you might just want to think twice - let it grow too large and the black economy might take us all down with it.
NOTE- I’m interested to hear your experiences of the cash economy - please let me know by posting here or if you’d prefer to be more discrete then email me - admin@conorwoodman.com
