'Black economy' costs State €5bn

The black economy is costing the Exchequer €5 billion per year, small and medium enterprise lobby Isme said today, as some consumers look for ways to make their diminished pay packets go further.

The organisation has called for a review of tax rates and public utility costs, cutting back on red tape and a clamp down on racketeering to reduce incentives to operate in the black economy. It challenged the Government to bring in tough measures to tackle the rise in the "nixer culture" and alleged that an "outdated" social welfare system was adding to the problem.

The group said the black economy was believed to be worth about €25 billion.

"As the country remains in recession there has been a noticeable increase in black economy activities, with catastrophic consequences for those legitimate companies. Consequently, hundreds of businesses are being forced to close with thousands of jobs lost in the process," said chief executive Mark Fielding.

"The 'nixer' culture, in particular, is very much alive and well and there has been a definite shift towards a 'cash only' shadow economy. This is particularly evident in the construction and maintenance sectors, where there are increased incidences of 'jobs for cash', completely undercutting legitimate companies, who in many instances report that potential clients are demanding that they pay 'off the books' to save VAT."

The association said the attractiveness of Ireland's social welfare system was contributing to the problem.

"As the system is not designed to make it easy for people to take irregular temporary work, the effect is that individuals end up signing on and also working when they can, leading to millions in illegitimate dole claims. With rising costs and taxes, there's also an incentive not to work, or to work but avoid tax," he said.

Last week, figures from the CSO showed that Ireland's economic performance during the first three months of the year relied heavily on export growth and that domestic demand is continuing to weaken.

Economic output - as measured by gross domestic product (GDP) – grew by 1.3 per cent in the first quarter compared to the final quarter of 2010. But another measure of output - gross national product (GNP) which excludes repatriated profits of multinational firms - fell by 4.3 per cent.

This prompted Minister for Finance Michael Noonan to encourage consumers to spend rather than save in an attempt to boost the domestic economy. He said he believed the Government's jobs initiative would also help lift growth rates during the year.

Irishtimes.com took to Henry Street in Dublin to see if shoppers thought the Minister's call to action was a reasonable request or an overly simple solution to a difficult question.