The Underground Economy

Archived Topic Box from the 2005 Fifth Annual Benchmark Report

A portion of BC's economic activity is never recorded in official statistics. The underground portion of the economy includes legal activities that are not reported in order to avoid taxation as well as illegal activities. Although the existence of the underground economy is widely acknowledged, the fact that it is hidden makes determining its size and economic impact difficult.

Statistics Canada estimate of the size of Canada's legal underground economy for 1992 was 4.2% of GDP at the time. This narrow definition includes those activities that are legal, but are unreported or underreported. The contractor who offers a reduced price for a cash deal, the server who doesn't report tips, or the person that doesn't fully report earnings are all included – earnings based on illegal activity are not. Based on the same methodology, BC Stats estimated British Columbia's legal underground economy at an above average 4.7% of GDP. British Columbia has a relatively large service sector which is recognized as offering enhanced legal opportunities to under-report. British Columbia's illegal drug industry and the accompanying property crime suggests that the illegal portion of the underground economy may also be larger in BC than the Canadian average.

In spite of the measurement difficulties several attempts have been made to estimate the size of the total underground economy in Canada – both legal and illegal. Estimates range from 11.7% to 15.3% of GDP. Applying these estimates for the Canadian average to BC's 2004 GDP, yield an estimated underground economy of between $20.0 and $25.6 billion. To put this in perspective, BC's total international exports were $31.0 billion in 2004, and the provincial government's budget was $30.6 billion dollars in 2004/05.

With a large underground economy, citizens who fully and accurately report income are essentially penalized as tax rates are adjusted upwards to reach desired revenue targets with relatively fewer British Columbians paying for public health, education and infrastructure that is enjoyed by all – including those earning income in the underground economy.

Sources: BC Stats (June 13, 1997), Infoline Report: The Size of the Underground Economy; Statistics Canada (1994), The Size of the Underground Economy in Canada, cat. #13-603; International Monetary Fund, (2000) Shadow Economies Around the World: Size, Causes, and Consequences; Lindsay M. Tedds (2005), The Underground Economy in Canada in Bajada and Schneider (2005), Size, Causes and Consequences of the Underground Economy; Giles (October 1999), Cash Conundrum, University of Victoria Viewpoint.