Speaker 1: Curder. I'm Richard Martin in for Chelsea Daniels and this
Speaker 1: is the Front Page, a daily podcast presented by the
Speaker 1: New Zealand Herald. The government is set to cut billions
Speaker 1: of dollars from spending at the upcoming budget as a
Speaker 1: cost saving measure in these type financial conditions, But what
Speaker 1: if there was a way to raise more revenue from
Speaker 1: existing industries. Analysis from the NZED Herald has looked at
Speaker 1: the black market or the informal economy. The industry is
Speaker 1: dominated by cash in hand methods of payment that pass
Speaker 1: by the tax system. INZED Herald, Head of Newsroom Data
Speaker 1: Chris Knox has run the numbers and joins us today
Speaker 1: on the Front Page to talk through just how much
Speaker 1: the country is missing out on. So when you hear
Speaker 1: about a black market or a hidden economy, the mind
Speaker 1: immediately goes to all all kinds of sinister dealings. But
Speaker 1: what actually falls under this umbrella?
Speaker 2: So I guess the more that there's a kind of
Speaker 2: a more boring and technical definition, which is that the
Speaker 2: informal economy or the black market is every kind of
Speaker 2: economic transaction that takes place that isn't recorded in the
Speaker 2: official GDP of a country. You know that this can
Speaker 2: be things like cash jobs. You know, so if someone
Speaker 2: if you pay someone in cash to rip out your bathroom,
Speaker 2: then that's not potentially not going to be recorded as
Speaker 2: an official transaction obviously things like drug deals, buying black
Speaker 2: market cigarette, but also you know, paying a babysitter if
Speaker 2: you're just paying them in cash and that never gets
Speaker 2: declared as income.
Speaker 1: Do we know or do we have any sort of
Speaker 1: indication as to what might be the biggest contributor in
Speaker 1: New Zealand?
Speaker 2: That isn't something that I was able to find any
Speaker 2: kind of useful estimates on kind of what the makeup
Speaker 2: of the different parts are. I guess what we found
Speaker 2: was was we found an estimate of how big it
Speaker 2: could be based on differences between income and expend and
Speaker 2: kind of using the World Bank uses a model that
Speaker 2: to look across a whole bunch of other countries, and
Speaker 2: then there's a bunch of kind of I guess, like
Speaker 2: little tidbits on here here's how big this part of
Speaker 2: it might be. But I don't think anyone has a
Speaker 2: good good handle on what the biggest bit.
Speaker 1: Is because I saw there's like two models for estimating
Speaker 1: Is that right?
Speaker 3: Yeah.
Speaker 2: I mean, when you look through the economic literature, it's
Speaker 2: like anything there, there's many different approaches for trying to
Speaker 2: estimate this, and obviously, from a kind of an intellectual
Speaker 2: point of view, it's a fascinating problem, like how do
Speaker 2: you figure out how big something is when by definition
Speaker 2: you don't know how big it is. But there seems
Speaker 2: to be two models that are used widely, I think
Speaker 2: big part in part probably because they can be you know,
Speaker 2: the World Banks applied them to one hundred and ninety
Speaker 2: six different countries, which is a pretty big chunk of
Speaker 2: all of the countries, so the models have to kind
Speaker 2: of be you know, you can imagine there's some models
Speaker 2: that would work really really well in Singapore because they
Speaker 2: know so much of out their economy, but they wouldn't
Speaker 2: apply to other countries.
Speaker 1: Yeah, I guess does it take into account because culturally
Speaker 1: as well, there's sort of differences between you know, certain
Speaker 1: cultures might be more inclined to do those you know,
Speaker 1: pain my fence, I'll pay you in X, Y Z
Speaker 1: versus you know, other places where that's sort of not
Speaker 1: part of the culture.
Speaker 2: Yeah, I mean I think that those sort of things
Speaker 2: will show up in the model but also the models,
Speaker 2: you know that countries that have a GSC system probably
Speaker 2: have less of an informal economy because they've managed to
Speaker 2: capture a lot more of the transactions that take place
Speaker 2: as part of you know, GST, Whereas if there's there's
Speaker 2: no obligation to pay GSC on painting offense, then there's
Speaker 2: even less chance of declaring it. GST fundamentally is just
Speaker 2: trying to tax every single transaction that takes place, and
Speaker 2: so that means that it's in the government's interests to
Speaker 2: have systems in place for tracking every transaction that takes place.
Speaker 2: And also if you don't report your GSC, then you know,
Speaker 2: that's an offense that you can be prosecuted for.
Speaker 1: Do we know on a global scale how big New
Speaker 1: Zealand's informal economy is compared to the rest of the world.
Speaker 2: Yes, So we're looking at these World Bank models, in
Speaker 2: New Zealand comes out about eight or ninth smallest informal
Speaker 2: economy in the world. That's obviously looking at it from
Speaker 2: the point of view of what it is as a
Speaker 2: percentage of the GDP. So these estimates seem to sit
Speaker 2: at about between eleven and twelve percent of our official GDP,
Speaker 2: and the smallest informal economy in the world is Switzerland,
Speaker 2: which sits at about eight percent, so we're actually pretty
Speaker 2: close to that.
Speaker 4: There's many countries across the globe battle sky high inflation.
Speaker 4: Here in Switzerland, a small mountainous nation in Western Europe,
Speaker 4: the rise in prices has been far less dramatic. Have
Speaker 4: you felt the effects of price rises and inflation over
Speaker 4: the past year.
Speaker 2: Not that much, to be honest, richmon or right most
Speaker 2: of Okay.
Speaker 4: You think Switzerland somehow got it a bit more right
Speaker 4: than maybe the other places thin So inflation in Switzerland
Speaker 4: hit a twenty nine year high of three point five
Speaker 4: percent in twenty twenty two. While still high by Swiss standards,
Speaker 4: it is well below the double digit inflation rates in
Speaker 4: other advanced economies like the US, UK and Eurozone.
Speaker 3: Do we know?
Speaker 1: Is there anything special about Switzerland that's keeping their so small.
Speaker 2: I think it's a combination of it's a pretty it's
Speaker 2: a highly regulated country to live in, but also that
Speaker 2: one of the ways to get a smaller informal economy
Speaker 2: is to have a bigger formal economy. You could imagine
Speaker 2: that there's a certain amount of transactions that kind of
Speaker 2: inevitably happen between people that are always going to be informal.
Speaker 2: But if you've got a massive Swiss banking system sitting
Speaker 2: there as par generating an enormous portion of your GDP,
Speaker 2: then percentage wise, you know, those little transactions are going on.
Speaker 2: And that's actually what I think is happening. So the
Speaker 2: United States has a smaller informal economy than New Zealand
Speaker 2: as a percentage, And I think that's not so much
Speaker 2: that there's less of and less there's less informal transactions
Speaker 2: taking place in the US, but it's more that their
Speaker 2: formal economy is simply enormous compared to ours, and a
Speaker 2: kind of enormous amount of perposeon basis.
Speaker 1: Yeah. Interesting, it's funny this idea, because we're talking about
Speaker 1: a babysitter making a few bucks cash for looking after
Speaker 1: some kids and you know, a drug cartel committing fraud
Speaker 1: laundering money in the same breath. But you know, clearly
Speaker 1: there's sort of like a moral difference between those. How
Speaker 1: do we draw a line between these?
Speaker 2: I mean, yeah, I think they're obviously there is and
Speaker 2: I think, yeah, there's In my mind, there's a pretty
Speaker 2: clear continuum with babysitters at one end being morally kind
Speaker 2: of not really a problem, and then you know you've
Speaker 2: got you've got your drug cartles and things happening at
Speaker 2: the other end, and then things like cash jobs or
Speaker 2: under reporting of self employed income. I mean, from my point,
Speaker 2: oviou sit somewhere in the middle of here.
Speaker 1: Obviously nowhere has zero as their estimate. But like, is
Speaker 1: that what I guess the government in an ideal world
Speaker 1: would be aiming for, or is painting offense for a
Speaker 1: few bucks not actually a problem?
Speaker 2: I don't know. I don't think governments are ever going
Speaker 2: to aim for zero. And I think also these these
Speaker 2: economic models, they probably capture things that are inevitably not
Speaker 2: going to be to be something that the government will
Speaker 2: ever monitor or tax or capture. So one of the
Speaker 2: things I've looked at with these models, and I've tried
Speaker 2: to understand whether it's included in these models, and it
Speaker 2: kind of full disclosure, I couldn't. But I have seen
Speaker 2: in other economic modeling things like if you model the
Speaker 2: unpaid work done by parents, then that becomes an enormous number.
Speaker 2: Because it's relatively easy to sit down and work out
Speaker 2: what the cost of raising a child is in the
Speaker 2: sense of you've got to pay for schooling, you've got
Speaker 2: to pay for feeding them, you've got to pay for
Speaker 2: someone to look after them. If you basically want to
Speaker 2: have a child and completely outsource raising that child to
Speaker 2: nannies and that sort of thing, then it's pretty easy
Speaker 2: to work out what that costs. And so one way
Speaker 2: of doing these economic models is to pick up that
Speaker 2: type of transaction and say, well, there's this many children
Speaker 2: in the world and so or this many children in
Speaker 2: a country, So you know what the cost of raising
Speaker 2: those children is, and you're not seeing the payments associated
Speaker 2: with that. So then that's part of the black market.
Speaker 2: Well that's part of an informal economy, you know, and
Speaker 2: then that's like from a strictly kind of economic point
Speaker 2: of view, that does make sense, but from any kind
Speaker 2: of common sense, this is how we organize our lives,
Speaker 2: it doesn't really you know, like I'm not going to
Speaker 2: pay myself to raise my own child.
Speaker 1: Yeah right. I saw that the ID is going after
Speaker 1: the likes of plasterers and painters, and that makes sense
Speaker 1: on paper, I guess, because the trades are sort of
Speaker 1: one sector where you think about jobs just being done
Speaker 1: with cash deals, whether that's true or not. But do
Speaker 1: you think is that the right move?
Speaker 2: I mean, it's an interesting something that I've been discussing
Speaker 2: a lot with a couple of people around this is
Speaker 2: there's kind of there's two things, right. There's the size
Speaker 2: of the infall of economy, which I was actually relatively
Speaker 2: surprised that, you know, the estimated loss of tax from
Speaker 2: from underreporting of self blord income, which is essentially what
Speaker 2: the IOD is trying to go after, is only about
Speaker 2: eight hundred and fifty million, which is a big number,
Speaker 2: but like you could you could imagine easily spending something
Speaker 2: getting close to that to try and collect that. And
Speaker 2: so I think I think that from the point of
Speaker 2: view of an organization like the AID, they've got to
Speaker 2: try and walk a sweet spot between, you know, not
Speaker 2: creating systems that are that actually suppress economic activity and
Speaker 2: also not spending crazy amounts of money on enforcement, but
Speaker 2: also making sure that the vast majority of people to
Speaker 2: actually pay their taxes are And so I think that
Speaker 2: probably the approach of carrying out a few kind of
Speaker 2: high profile inquiries and prosecutions works pretty well from the
Speaker 2: point of view of actor. You want most people to
Speaker 2: be worried that if they don't do their taxes properly
Speaker 2: then they're going to get in trouble. But you don't
Speaker 2: necessarily want to be spending all the money to make
Speaker 2: that happen.
Speaker 1: Yeah, because I guess, like, would the most effective way
Speaker 1: to shrink this hidden economy be to crack down on
Speaker 1: things like that? Or you know, should we be looking
Speaker 1: at formalizing some of the informal stuff because you think
Speaker 1: about like drugs, for instance, there was the legalizing cannabis
Speaker 1: referendum in twenty twenty, and around that time there was
Speaker 1: all these studies and reports that put the potential tax
Speaker 1: revenue of that between four hundred and ninety million and
Speaker 1: potentially two point eight billion dollars a year. So you know,
Speaker 1: would formalizing some of these I guess, for lack of
Speaker 1: a better term, be a potential big revenue draw there.
Speaker 2: I mean, yeah, I guess the more the more transactions
Speaker 2: you make that illegal, then the bigger your formal economy
Speaker 2: is going to be, and you're going to decrease the
Speaker 2: informal economy. I mean, I was actually quite surprised at
Speaker 2: the police's most recently estimates that the profit from illegal
Speaker 2: drugs is between five hundred and six hundred million a year.
Speaker 2: I thought that was a relatively small number, particularly given
Speaker 2: some of those other estimates of potential taxation from legalization. Yeah.
Speaker 2: I think that all of those things are pretty hard
Speaker 2: to figure out until we actually happened.
Speaker 1: Yeah, tell, because I mean you look at cigarettes, which
Speaker 1: have been taxed up with the wise and then they've
Speaker 1: become a sort of big black market industry here as well.
Speaker 1: So I guess maybe there is just no countering to
Speaker 1: every possibility, no.
Speaker 2: Exactly, Like like you could have, Yeah, you could imagine
Speaker 2: being like, oh, well, we're going to legalize marijuana and
Speaker 2: you know, tax adjoint it. I'm going to reveal that
Speaker 2: I don't even know want to joint golf at the moment.
Speaker 2: You know, you can tax adjoint at what, you know,
Speaker 2: two hundred percent of what you'd have to pay on
Speaker 2: the street currently, and then probably you wouldn't collect any
Speaker 2: tax because people would just continue to go back to
Speaker 2: the original dealers. Yeah.
Speaker 1: I mean I guess that there's there's a whole podcast
Speaker 1: just in that discussion.
Speaker 4: Yeah.
Speaker 3: Yeah, So our medicinal products for cannabis are ridiculously expensive.
Speaker 3: We're talking hundreds of dollars each month for a patient,
Speaker 3: So over ninety percent of patients aren't accessing through legitimate sources.
Speaker 3: They're continuing to go to the illicit market to obtain it,
Speaker 3: Which is really the conundrum we have here is that
Speaker 3: patients are among these people who are either being prosecutors
Speaker 3: or living with the constant fear of prosecution because they
Speaker 3: cannot access the expense of hard to get legitimate products,
Speaker 3: they turn into the black market and facing prosecution.
Speaker 1: Depending on who you ask, we're either in a recession
Speaker 1: or we're rapidly heading for one. So historically, does that
Speaker 1: mean we're sort of starting We're going to see estimates
Speaker 1: on the size of hidden economies growing as people turn
Speaker 1: more to side hustles and freelancing. And I guess these
Speaker 1: days as well. I mean I've seen people online talking
Speaker 1: about turning to crypto to avoid taxes as well.
Speaker 2: Yeah, I mean cryptos obviously potentially has the pen being
Speaker 2: quite a big part of a hidden economy. But to
Speaker 2: your original question, that turns out that that's actually what
Speaker 2: most of the economics papers in this space are written about,
Speaker 2: is trying to work out what are the relationships between
Speaker 2: the formal economy and informal economy, and I think, like
Speaker 2: almost everything, the current kind of state of the answer
Speaker 2: seems to be it depends. So certainly, there have been
Speaker 2: a bunch of times where people have observed that countries
Speaker 2: have gone into recession and there's been a big kind
Speaker 2: of almost boom, if you like, in the informal economy
Speaker 2: because people have forced to work there. But in other
Speaker 2: cases that doesn't happen because basically so much money is
Speaker 2: sucked out of the formal economy that it doesn't matter
Speaker 2: if you turn to the informal economy. There's still a
Speaker 2: lot less money there. You can imagine that, you know,
Speaker 2: like if we're in a serious recession, then people are
Speaker 2: not going to be doing bathroom renovations, whether they're cash
Speaker 2: jobs or otherwise are and so you know that's going
Speaker 2: to then decrease that part of the informal economy.
Speaker 1: So we've got a budget day coming up next week.
Speaker 1: So how likely is it, you know, we're talking about money,
Speaker 1: where money is going. How likely is it that the
Speaker 1: government's going to actually sort of try to tackle this
Speaker 1: in some way as a way of balancing the books.
Speaker 2: I guess yeah. So interestingly, last week when I was
Speaker 2: driving ahead on the radio that Inland Revenue just announced
Speaker 2: that it has discovered one hundred and fifty million in
Speaker 2: unpaid taxes from property developers and investors. So it certainly
Speaker 2: seems like that there's some effort being put into trying
Speaker 2: to recover some of this tax. And yes, wouldn't surprise
Speaker 2: me if the government kind of wants to push a
Speaker 2: bit more or maybe you know, give the AID more capability,
Speaker 2: more power to go after some of these areas, because
Speaker 2: in some ways, you know, I think that it's reasonable
Speaker 2: to assume that we're not ever going to be kind
Speaker 2: of have a smaller hidden economy than Switzerland, but also
Speaker 2: there might be a billion or two dollars just sitting
Speaker 2: there to be found with a bit of work.
Speaker 1: Yeah, should we be looking at sort of growing out
Speaker 1: GDP rather than trying to look at shrinking our head
Speaker 1: in economy?
Speaker 2: I mean growth, They shrinking their head a economies you know,
Speaker 2: inevitably bound, whereas growing our economy I think, you know,
Speaker 2: like a one percent increase in the formal economy is
Speaker 2: essentially another billion dollars in tax. So I think that
Speaker 2: in many ways that would be an easier direction to
Speaker 2: go if we could just figure out how to go
Speaker 2: in that direction.
Speaker 1: Thanks for joining us, Chris Nors, You're welcome. That's it
Speaker 1: for this episode of the Front Page. You can read
Speaker 1: more about today's stories and extensive news coverage at inzidherld
Speaker 1: dot co dot nzet. The Front Page is produced by
Speaker 1: Ethan Sills and I'm Richard Martam. Subscribe to the Front
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Speaker 1: tune in tomorrow for another look behind the headlines.