CONCLUSIONS


OVERALL RESULTS

8.1 In the compilation of GDP for the 2010–11 year, the ABS made adjustments for underground production that was unreported in the source data (1.5% using the income approach, 1.5% using the production approach). Minor adjustments were made to HFCE and GVA to account for household production for own final use (HPOFU).

8.2 No explicit adjustments are made for:

• informal production (as it is not believed to be material in the Australian context);
• the statistical underground (as existing quality assurance processes applied to source data adjust for any missing data); or
• illegal production (not included owing to the difficulty in identifying and valuing illegal transactions).

8.3 For all three measures of GDP, a minor adjustment is made for own–household production for "backyard" production, as well as for the value added by owner builders in the course of constructing their own dwelling.

8.4 Although an adjustment for illegal transactions is currently not included in the ASNA, the illegal drug economy (as estimated in this paper) would be 0.4% of GDP if included in the national accounts.

8.5 Within each of the three approaches to measuring GDP, areas where there is little or no scope for underground activities account for a substantial proportion of the total. Large corporations are subject to greater regulation, including more stringent independent auditing, and management has greater incentives to report strong sales and profit performance. Where understatement does occur, it tends to be concentrated in particular areas which could have an impact on the reliability of some components of GDP. Also up–to–date information is required to better estimate HPOFU, but there are no plans for this given the cost of obtaining this information and the relative priority of this in an environment of limited resources.

GDP (I)

8.6 For the income measure, under–reporting is mostly confined to the understatement of income by unincorporated small businesses, small corporations, and COE paid by small businesses. There is no evidence to suggest that large corporate organisations are involved in underground activity to any significant degree. As most small businesses are unincorporated, the GMI estimate would be the most affected. However, GMI only accounts for approximately 7% of the unadjusted income measure of GDP. Hence, any understatement due either to missing income or missing businesses would have to be many times the current estimate to suggest that GDP is significantly understated.

GDP (P)

8.7 From a production perspective, there is limited scope for many industries to engage in underground activities. Conservatively, industrial production represents at least 65% of overall activity. As well, for the remaining industries that are prone to underground activity (construction, accommodation, cafes and restaurants, personal and other services and retail trade), large businesses are unlikely to be involved to a significant degree. The scope for small businesses to be involved in underground activities would be limited to some extent by the possibility of detection by the taxation authorities.

GDP (E)

8.8 On the expenditure side, government expenditure and a large component of household final consumption expenditure are not susceptible to underground activity. Most private business investment expenditure is also unlikely to be susceptible. Underground activities are concentrated in some forms of household final consumption expenditure and in alterations and additions to dwellings.


SUMMARY

8.9 This paper has examined the five components of the NOE. Using the approaches outlined, the analysis indicates that the combined adjustments to the official GDP estimates for the five components of the non–observed economy (excluding owner occupied housing) are unlikely to be greater than 3% in total (see table 7 below).

TABLE 7 – NOE ADJUSTMENTS AS A PERCENTAGE OF GDP (2009–10)
NOE component	Percentage of GDP
Underground production	1.5
Illegal drugs	0.4
Informal production	–
Household production for own final use	0.2
Statistical underground	–
Total (excluding owner occupied housing)	2.1
Owner occupied housing	7.4
– nil or rounded to zero (including null cells) – Illegal drugs adjustment not included in official GDP estimates

8.10 Unless there is strong evidence of significant changes in the amount of underground activity over time, it is likely that the adjustment factors will be reasonably constant, implying that growth rates in GDP will be unaffected by the adjustments.

8.11 The ABS will advise of any possible revisions to national accounts series in advance of any changes being made, through its national accounts publications.