The Non–observed economy (NOE) refers to economic transactions that are missing from the national accounts because the transactions are "underground, illegal, informal, contribute to production for own use or are missed". This information paper reviews the Australian Bureau of Statistics (ABS) methodologies used to estimate the transaction activity in the NOE. These estimates can be used to adjust Gross Domestic Product (GDP) to allow for the NOE.
By its very nature, the NOE cannot be directly measured, or it can be very expensive to attempt this measurement. Therefore, estimates of NOE activity must rely on limited indicative information and a variety of indirect methods – all of which can be regarded as contentious. It is likely that an unknown proportion of underground production is already captured in the observable data, owing to the data sources used and the estimation methods employed in collecting the observable data.
Given this, the review:
- confirms that current adjustments to GDP for underground production and informal production are appropriate.
- confirms that GDP does not need to be adjusted for the statistical underground.
- demonstrates that not adjusting for illegal production due to the absence of regular and reliable data does not significantly understate GDP.
- identifies that additional up–to–date data are required to better estimate household production for own use, but there are no plans to update the data given the cost and the relative priority of this in an environment of limited resources.
The paper addresses five components of the NOE:
- underground production or "the cash economy" involving deliberate concealment of legal activities to avoid tax payments;
- illegal production covering activities forbidden by law where there is mutual consent (e.g. illegal drug production);
- informal production broadly characterised as consisting of units engaged in the production of goods or services with the primary objective of generating employment and incomes to the persons concerned;
- household production for own final use including production of goods such as crops, livestock and construction of owner–built houses, and excludes all domestic services except for owner occupied housing; and
- the statistical underground including production missed due to deficiencies in data collection e.g. under coverage of enterprises, non–response, under reporting.
Using the approaches outlined in this paper, the analysis indicates that the combined adjustments to the official GDP estimates for the five components of the NOE are unlikely to be greater than 3% in total, and are unlikely to contribute significantly to changes in growth rates.
Individually, the GDP adjustments attributed to these components are as follows:
- Underground production includes upwards adjustments of 1.5% to GDP.
- Illegal production is not currently accounted for in GDP due to the difficulty in identifying and valuing illegal transactions. No adjustment is made. However, an experimental series has been developed for this information paper that estimates illegal drug production at 0.4% of GDP.
- Informal production is not believed to be material in Australia, and no adjustments are made, or will be made, to GDP.
- Household production for own final use is included in GDP through a minor adjustment of 0.2% of GDP to cover home grown crops, owner self–construction of dwellings and in–home services.
- The Statistical underground is not subject to explicit adjustments. ABS data sources are subject to a quality assurance process that: closely monitors and adjusts the data sampling and collection frames, employs a rigorous follow–up of survey and data collection non–responses, and subjects all data responses to validation checks to ensure the correctness and consistency of data.
The ABS estimates of NOE contained in this paper are much lower than some third party estimates. For example, a 2010 World Bank model estimates the Australian underground production at 14% of GDP. The ABS does not support the methodology, assumptions and analysis of the model used in the World Bank estimate. Estimates of the order of 15% of GDP for the underground production are considered to be implausible. In particular, an increase of this order of magnitude is difficult to reconcile with independently observed measures of GDP for production and expenditure. Also, Australian Taxation Office audits of the goods and services tax (GST) returns indicate a high level of reporting and payment compliance.
This information paper includes a number of contestable methodologies, assumptions and data sources, particularly in relation to estimates of illegal production. The ABS welcomes discussion on these points and invites reader comments. To provide comments or feedback, please contact Derick Cullen on (02) 6252 7139 or email email@example.com