Measuring the size of Ireland's black economy

Abstract

Official estimates of national income are widely used in economic analysis, particularly in monitoring trends in national output and living standards over time and also in comparing relative income levels across countries. The adequacy of these estimates as a measure of economic welfare has long been questioned because they, by definition, exclude items such as household production, the costs of pollution etc. Another school of criticism, however, argues that these estimates are seriously flawed because they exclude a significant portion of activity which should be included but which is hidden from the authorities for various reasons, mainly tax evasion. In its extreme form (e.g. Feige 1979) it is claimed that this 'black economy1 is so extensive and that its growth in the 1970s and 1980s has been so significant that official estimates of GNP are no longer a reliable basis for formulating policy. In this view, for example, the phenomenon of weak output growth during the stagflation in the 1970s was a statistical illusion due to the massive shift from the official to the black economy. In this paper we try to assess the extent to which official estimates of national income in Ireland are affected by black economy activities. The first section begins by defining what we mean by the term 'black economy' drawing from discussions in international literature. This is followed by a brief overview of the methods used to construct Ireland's national accounts with a view to assessing the possible impact of black economy activity on official estimates of GNP. The third section reviews the techniques which are available to estimate the scale of the black economy. The following sections present the results of applying these techniques to the Irish case.