Merryn's Blog

The rise of Britain's un-taxed economy

We're finally starting to get an idea of just how much income in Britain goes un-taxed.

I've written here several times before about the way in which the modern middle-classes have many streams of income,about the difficulties of measuring that, and partially as a result, about the size of the black economy; something the internet has caused to soar in size.

Who reports and pays tax on their airbnb income? Who really knows where the line is that makes selling on eBay a business rather than a hobby (particularly when even if it is a hobby, it creates un-taxed income)?

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Measuring the size of people's real incomes has always been hard the internet has made it harder.

I've spoken to various government officials about this, but despite getting verbal agreement that, yes indeed, the black economy is much, much bigger than official numbers suggest, no new numbers have been forthcoming.

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So, I was pleased to see this week that some proper economists have done their own research. Charles Goodhart and Jonathan Ashworth of Morgan Stanley have looked at the very fast increase in self-employment since the start of the financial crisis this has accounted for four fifths of all job gains.

But these self-employed people haven't started what you might think of as small businesses. Instead, they are individuals with no employees.

It has been, as Philip Aldrick puts it in The Times, "the age of the freelancer, not the entrepreneur." At the same time, the amount of cash circulating in the UK has risen hugely there is about £45bn more in actual cash around than there was in 2007.

From this, the economists back out the idea that the un-taxed economy (so, the illegal economy plus the grey or cash-in-hand economy) has jumped from 12% of the UK economy to about 16%. I'd still say that's far too low, but it still represents a degree of statistical progress.

It also suggests that the UK's output, far from being lower than it was in 2007, is actually about 4% higher.

Over the last few years, many older and wiser heads in the UK have told me that the answer to the productivity puzzle in the UK (the figures show that it has fallen steeply and isn't picking up) is that there isn't one.

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It is just that the rise in the black economy means less work is going reported, so it looks as if productivity has fallen. The Morgan Stanley numbers back this idea up pretty well.

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