Wednesday, 1 June 2011

We could Learn Something from the Informal Economy

Trains of thought are curious things. Like most, I had to smile after reading some of the imaginative excuses offered to the authorities by those caught 'working and claiming' that were revealed this week. My personal favourite was the one of the 'identical twin' - this brought back memories of the twin characters in the truly dreadful soap opera Sunset Beach, one of whom was a thoroughly amiable chap and the other a vicious and deranged serial killer. Funnily enough, you never saw the pair of them in the same room. Maybe this was the story that inspired the creative mind of a working claimant? Upon reading this piece, statists will no doubt add his act of fraud to the list of crimes for which television must answer.

Anyway, forgive the nostalgic trek into the televisual basement - back to the other train of thought regarding benefits. It should be noted that whatever sense of amusement the stories and the excuses may bring, defrauding the taxpayer is a serious offence which should meet the full force of the law without exception. We will all have encountered someone who perhaps was moved onto disability benefit when the Tories were shamefully herding masses of dole claimants off the official unemployment register in the 1980s and early 1990s. Some of the residue of this appallingly short-sighted move remains now, in the form of people in their forties or fifties, deemed 'unfit to work' by a medical professional who was placed under duress, but perfectly capable of going about a normal existence (for want of a better phrase) and perhaps earning a few shiny extra pennies on the side.

Of course this is always wrong, and despite government being a huge part of the problem in the first instance (apologies, I can hear your jaws hitting the desk), any of the numerous moves to 'crack down' on claims to which people are not entitled should be at first loudly laughed at and then the principle broadly supported. However, what I have noticed, interestingly enough, is the relative senses of rage that exists towards 'workers and claimers' in comparison to that which is fired towards the terminally unemployed. Despite their standard of living being almost certainly higher due to the presence of two revenue streams instead of one, the individual with a foot on both sides of the economic table remains considerably less hated than the socially lamentable bog-standard 'dole-dosser'.

It would appear that being an active part of any economy, even the informal one, is preferable in the eyes of most to a life of unrefined idleness aside from giddy afternoons in the boozer on giro day. The informal (or black) economy has remained one of the few sectors in Britian that has held up well in the years of stagnation and then recession that have in truth blighted us since the mid 2000s. A study in 2004 estimated that informal economic activity accounted for 'up to' 10.6% of GDP in the Uk. By last year, that top end figure had risen to a 14% slice of the national cake. While the formal economy stumbled, spluttered and then slept for a while, a 'black boom' appeared to take place in the informal one, filling some of the gaps and in all likelihood providing hundreds of thousands with jobs that the authorities happen to be unaware of.

The informal economy takes many forms. It can range from someone doing an odd job for cash, maybe mowing someone's lawn, through casual labour right through to higher-level activity such as the import and sale of duty free tobacco and alcohol. Most of us have done the first, while nearly all will know someone involved in the second or third. Hands up, who's taken advantage of an offer from an acquaintance to bring back a duty-free deck of cigarettes or bottle of our chosen poison? Was it always an individual just obtaining enough for their own consumption or did it represent a fairly lucrative sideline to at least some?

See, we're all criminals - the statists have got what they wanted...

The point is that most of us will use or even participate in the informal economy with at least on-off regularity throughout our lives. This is not surprising, since not only does it invariably deliver better value for money than the formal one, it is a place where things actually get done and real wealth is efficiently created. Free from the regulations and taxes that strangle the little guy legitimately trying to strike out, rid of the complications and minefields that appear to be a vindictive attempt by governments to deliberately stop people from earning money to spend on themselves.

This sector is a fast-paced and dynamic environment where the people involved, even those claiming some sort of benefit, could never be accused of lacking a work ethic. Many are self-employed people merely pursuing an undeclared sideline, and in my experience, these are some of the most driven and creative in society. I had to laugh when reading a study which warned that the rapid growth of the informal economy "undermined public goods and social protection". Upon absorbing that sentence, it's difficult not to give a quick thumbs-up and wish them all the best.

Of course, I would be utterly stupid to suggest that the formal economy should seek to entirely replicate the informal one. It can sometimes involve work done in horrendous conditions by people offered no form of legal protection and is also on occasion the semi-respectable haven of real criminals and a smokescreen for their more harmful activity. However, what cannot be guaranteed by definition but is highly likely is this:- in relative terms, the informal economy has grown as a percentage of national GDP in an era where taxes and regulation have conspired to choke the life out of the formal one. Now is this merely a coincidence?

I would naturally conclude that the two developments are intrinsically linked. Statists of course seek to reduce the size of the informal sector as their main concern is, was and forever shall be that of extracting as much money in taxation from law-abiding citizens as they possibly can. This has involved a string of failed 'crackdowns' (sorry if I made you laugh) in the past aimed at criminalising anyone with an undeclared income of any description and recouping the £42bn estimated to have been lost to the treasury in 2009/10. The real solution of course is one which would never be likely to make the journey from economic simplicity into their controlling and manipulative minds. Get out of the way of the formal economy, rapidly reduce the burdens of tax and regulation, stay well out of the way and allow it to grow - then watch the informal sector shrink in terms of relative size.

We can never be certain, but my suspicion is that if the formal economy had been run a little more like the informal one in the last decade, then the Uk may not find itself in the mess it is in now. Now who fancies a spot of cash-in-hand proof-reading?


  1. I've never heard of Sunset Beach, but there you go.

    Anybody who defrauds the taxpayer should be condemned. That's obvious isn't it? So who is doing it. The first candidate must be a series of governments which have fallen over themselves to build ever more comprehensive welfare systems to buy the votes that will put them back into another term of state power. The political parties contending to form those governments have manipulated people out of unemployment statistics and into disability status to try to pretend that their management of the economy was better than it was. At the same time these governments have imposed stealth taxes and regulation on entrepreneurs which make business less profitable and more difficult to employ people.

    The more fundamental question is why does the informal economy exist at all? Major reasons are likely to be:

    Too difficult too employ people 'legitimately'.
    Not worth working on the books due to tax and benefit loss
    Formal work too regimented and bureaucratic.

    It must be obvious, other than to the intentionally blind, that ever increasing efforts to hunt down informal workers wastes even more taxpayer money and damages the economy by preventing useful work from being done.

    The fact is that all taxes on income are an intrusion into personal privacy and an inhibitor on entrepreneurship. All welfare benefits are a disincentive to work and a problem for job seekers who could lose more in benefit than they are able to earn from work after taking account of travel, food, clothing and other costs of working.

    Workers in the informal economy are wealth creators who contribute to the overall well being of society. Rather than attacking these workers, a rational government would work towards an economy in which everybody could work as best suited to their efforts and abilities without interference from the state. All workers and their dependants buy things. This is the way that the state can collect the taxes it needs to provide protection for the safety and property of citizens.

    All employment laws and taxes impoverish and oppress us.

  2. Mal, if you've never heard of Sunset Beach then you got away with something...

    Of course your comments are spot on...