Spain to Include Prostitution, the Drug Trade and 'Other Illegal Activities' in GDP

We only noticed very recently that after including various 'intangibles' in GDP a few years ago (similar to what the US has recently done), a number of European countries have added the estimated value of criminal activities to GDP as well. We have noticed this because a friend pointed out to us that Spain is going to add prostitution, drug dealing and smuggling activities to its GDP from 2014 onward. A link to a Google translation of an article in the Spanish press announcing this change can be  found here.

 

That's certainly one way of bringing one's public debt ratios a step closer to the Maastricht or 'fiscal compact' limits without having to actually spend less. Of course it is also complete nonsense to calculate the debt ratios with these numbers included, as illegal activities are by their nature untaxed, so how can they possibly matter with regard to public debt ratios?

The number that has been arbitrarily picked out of a hat by various European countries for this particular addition to GDP is 1% of GDP, so that in Spain's case about €10 billion will be added to GDP in 2014. Why so little? It is probably not necessarily because criminal activity (note though that prostitution is actually legal in many European countries) amounts to such a ridiculously small percentage of total economic activity. Most Spaniards would probably break out in laughter upon hearing this.

No, the reason is that adding these numbers to GDP is a two-sided sword in the EU. On the one hand, they allow the countries concerned to pretend that their public finances are actually in better shape than they really are, on the other hand however, EU contributions – the money every member must pay to the Moloch in Brussels every year – are calculated from GDP as well. For this reason, the government of the Netherlands has for instance refused to include the 'value added' by prostitution in the country's GDP data, because it figured it would cost  a few millions in additional EU contributions to do so, and that simply wasn't worth it in the government's judgment. Spain of course has at the moment a more pressing problem, namely to bring its debt-to-GDP ratio down.

As an aside to all this, what is definitely not included in these figures is the actual 'shadow economy' in its totality. This amounts to a far larger percentage of official GDP. Since most European countries are high tax countries, they have a commensurately large 'underground economy'. Estimates of its size vary, but they range from between 18.5% to 22.5% of the total EU economy. Now that would really be a big boost to GDP, but one suspects that absolutely no-one wants to see their EU contributions assessed on the basis of it – especially as the countries with the financially weakest governments also sport the by far largest underground economies (and all of them have raised taxes as a result of the sovereign debt crisis, which means the share of the underground economy has probably grown further in them). A 2012 estimate for several European countries can be seen below:

 


 

20121023_Gray1Size of underground economies in different European nations, per a 2012 estimate – via Bloomberg. Note that Ireland has the lowest taxes of the countries listed and the Germans are probably simply not as inclined to cheat the tax man as a matter of their mentality (although we suspect the estimates for Ireland and Germany are a bit too low anyway).

 


 

 

 

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4 Responses to “How to Increase GDP, Euro-Land Style”

  • Just think. Now they have done this, next they can add the imputed value of sex from wives, girlfriends, husbands and boyfriends as needed to the GDP. In any case, the value is likely in excess of much of the government spending that goes into determining it.

    • jimmyjames:

      Just think. Now they have done this, next they can add the imputed value of sex from wives, girlfriends, husbands and boyfriends as needed to the GDP.

      ***********

      What a can of worms you just opened-
      What if they taxed the husband for the use of the wife or vise versa and either one complained about being “overtaxed”

  • jimmyjames:

    Spain is going to add prostitution, drug dealing and smuggling activities to its GDP from 2014 onward.

    ***********

    Maybe Berlusconi can give them a GDP template to work from- since it’s hard to trace cash transactions-
    Perhaps all those bunga bunga parties had an economic purpose behind them-

  • Crysangle:

    What various countries in EU are actually doing is trying to bring the shadow economy into the real economy by raising fines, providing tax windows etc. . In other words the shadow economies only become part of GDP once they are declared and therefore taxed . Did they include AngloIrish in the Irish shadow GDP figures … debt conjure is actually a highly valued addition to ‘real’ GDP I suppose . I have heard that tax evasion is a German national pastime though that may be exaggerated – however German lawyers outside of Germany seem to know every trick in the book , in my experience .
    Maybe we will reach the stage where we must submit a daily homework of all actions taken that day to government so that they may better be able to value the running of the country – two points for a smile , opening a door one point and so on . They will then come round to the highest performers and confiscate all their belongings in tax – cannot have activity hoarders outdoing the rest of the bunch , with excuses like ‘after two world wars we should know not to spoil the peace’ etc. I then suppose that the sum of all these homeworks will show that people of the country do absolutely nothing all day and the whole country will get very depressed when they then realize that they are useless .

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