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The causes and consequences of this worldwide phenomenon

This paper highlights the sources of payments problems in less developed countries. Growth in the industrial countries has a direct impact on the current account of the developing countries through its influence on both the prices and volumes of their exports. An increase in the real effective exchange rate is clearly a fundamental determinant of a deteriorating current account since, other things being equal, it tends to raise domestic demand for imports and to reduce foreign demand for exports.

In recent years, a growing number of observers of the economic scene have called attention to a phenomenon described by a variety of terms, of which the most common is “underground economy.” A range of names are used to describe this phenomenon, including “parallel,” “unofficial,” and “black.” Regardless of the appellation, the phenomenon relates to activities ranging from relatively legal to totally criminal that somehow escape official attention and may distort official statistics and lead to erroneous policies.

The underground economy—as its plethora of names suggests—can be defined in various ways. If the relevant agency to which activities are not reported is the tax or customs authority, the definition is tax-related. If the relevant agency is the national accounts authority, then we get a definition that relates to the national accounts. More specifically, the underground economy can be defined either as the total of incomes earned, but not reported to the tax authorities, or as the total of incomes not included in the national accounts. There may be no close connection between these two definitions; an activity may not be reported to the tax authorities but may still be assessed by the national accounts offices if, for instance, national accounts data are compiled independently from tax data. Vice versa , there could be cases where some activities come to the attention of the tax authorities but not of the national accounts authorities. In this connection it should be realized that, depending on the country, the national accounts may be based more or less on tax information. For example, in the United States it is reported that only 6 percent of national income is based on information provided by the tax authorities.

In a well-working market economy, without a public sector, there would be no underground activities. Incentives for the growth of these activities increase with greater regulation of the economy, larger public sectors, and higher levels of taxation. The factors that stimulate underground activities can be classified under four different headings: taxes, regulations, prohibitions, and bureaucratic corruption, although in several cases, underground economic activities may have been brought into existence by more than one factor.

Taxes. The tax factor has been emphasized in most studies of the underground economy, and particularly in those dealing with the United States, the United Kingdom, and the Scandinavian countries. In recent years, the share of total taxes in the gross national product of many countries has increased substantially, reaching in some cases 50 percent. Further, the marginal tax rates associated with these taxes have been even higher. As tax rates increase, so does the incentive to evade them. When tax rates are high, the cost of honesty also becomes high, and many taxpayers who, under lower tax burdens, would have been honest, make the transition to tax evasion, even though in some cases only for parts of their incomes.

It is not just the level of the tax rates that is important, but also the general mood of compliance that prevails in a country. This mood may itself be affected by perceptions about the public sector—if these are that public expenditure is wasteful or that the tax burden is inequitably distributed, there may be a tendency not to participate in “above-ground” activities. Further, when tax administration is good and the penalties for evasion significant, high marginal tax rates may not lead to a high level of underground economic activity. Thus, when the attitude vis-à-vis the government and its tax and expenditure policies is negative, when the tax rates are high, and when tax administration is poor, underground economic activity is likely to flourish.

Different taxes may stimulate these activities more in one country than in another. In the United States, the major cause of the underground economy has generally been assumed to be high income tax rates. As a consequence, the studies dealing with this country have emphasized that aspect. In other countries, and perhaps to a more limited extent even in the United States, social security taxes have also been important. In fact, it is likely that these taxes, which in some countries have achieved a very high level, may have been more important than the income taxes. Both of these taxes may bring about a kind of black market for labor; if workers can be hired without the payment of income taxes or social security contributions, they can be paid lower wages. The worker may gain, as the wage he receives will be free of income tax and of the employee’s contribution to social security, and the employer will gain by the lower wage bill and by not paying his share of the social security tax.

Much of the material in this article is based on the author’s book , The Underground Economy in the United States and Abroad (Lexington books, 1982), which covers the United States, the United Kingdom, Italy, Norway, Sweden, the U.S.S.R., Canada, Colombia, Australia, and Israel. The estimates in the chart for these countries come from the book and from other published articles .

Sales taxes also contribute to underground economic activities. The value-added tax, for example, is reported to have brought about a proliferation of small and difficult-to-control enterprises that produce services or goods sold net of taxes. For some countries (for example, Italy and Argentina) there are estimates assessing the value-added tax evasion at 50 percent. It is, thus, a fair question to ask whether the evading activity is being properly measured in the national accounts.

For developing countries, other types of taxes are also important factors. Countries that impose high import duties, which in some cases exceed 100 percent, provide strong incentives to smugglers to bring those goods into the country without going through the customs offices. The higher the import duty, and the smaller, more easily transportable, and more valuable the product, the greater is the incentive to smuggle it into the country. As a consequence, smugglers make considerable gains from this activity and these gains are difficult to measure. Estimates for some countries indicate that they can be enormous. Export duties are another major cause of these activities. The coffee producers who smuggle coffee out of the country; the cattle raisers who simply cross the frontier with their cattle to sell them abroad; and the diamond or emerald miners who take their finds abroad are all avoiding export taxes and making profits that are not likely to be properly measured. Even capital gains and capital transfer taxes may induce those engaging in the transfer or sale of property to underassess for tax purposes the value of their property. In all of these cases, activities may have been brought into existence, or channels of distribution may have been created, or economic relationships may have been changed because of the taxes. The end result is higher incomes for some, lower tax revenue for governments, and highly distorted statistics.

Regulations. By and large, the more regulated an economy, the greater will be the pressures within it to try to get around the regulations. In the process, various activities that cannot be controlled will come into existence; these will, to some extent, invalidate the objectives of the regulations and will be associated with the phenomenon of the underground economy. The regulations may relate to labor markets, goods markets, domestic financial markets, and foreign exchange markets.

The regulation of the labor market may include laws pertaining to minimum wages, overtime, and the work of minors, aliens, retirees, and working women. Many of these are circumvented or ignored. In the process, output is produced, incomes generated, and labor utilized in ways not desired, or even contemplated, by the government. In many cases a black market for labor develops.

Goods markets regulations include price controls, rationing, forced sales of commodities to the government or to marketing boards, import quotas, and export bans. All of these may generate a black market for goods as both producers and consumers try to escape the effects of these regulations by developing parallel or hidden markets. Again, the end result is the creation of unreported incomes, the distortion of measured levels of activity, and a loss of tax revenue. In the United States, the regulation of goods markets during the prohibition era and during World War II brought about widespread attempts at circumventing them. Available estimates indicate that underground economic activities were larger during World War II than in any subsequent period. Black markets for goods have reached epidemic proportions in some highly regulated African countries, and the same is reported to be occurring in some centrally planned economies of Europe.

Regulations of domestic financial markets are often associated with constraints on interest rates and with credit controls. When these regulations of domestic financial markets exist, a black market for money, sometimes called a curb market, develops. In this case, interest received by lenders is for the most part unreported to the tax authorities and the extent to which it is properly reflected in the national accounts is an open question.

Examples of regulations of foreign exchange markets abound. These are connected with the exchange rates, which may be widely out of line from the equilibrium level, or with capital controls. Distorted exchange rates, together with capital controls, are generally accompanied by attempts at getting around them. Obvious examples of this type are the overinvoicing of imports, which allows an importer to get some exchange at official rates and to leave some of this money abroad, or to sell it in the black market. Another example is the underinvoicing of exports. The exporter’s objective is to end up with unreported foreign exchange that can be kept abroad or can be sold in the black market domestically. In all these cases, a black market for currency exists in parallel with the official market. The exchange rates in the two markets can be significantly different, sometimes by as much as a ratio of ten to one. Again, untaxed incomes are created and economic statistics distorted as the relevant authorities are unable to tax those incomes and do not have the full range of information necessary to put out accurate statistics.

Prohibition. In all countries some activities are forbidden by law. To the extent that individuals wish to engage in them, these will inevitably go underground. There are many such activities, including traffic in illegal drugs, illegal gambling, lending at extortionate rates, and so on. As long as individuals engage voluntarily in these activities, they can be deemed to generate incomes to some people and services to others. For example, illegal drugs imported into a country and sold in the street can generate phenomenal incomes, as the street value is likely to be far higher than the value at which they are bought at the place of origin.

It is an open question, and a source of considerable controversy, whether the incomes generated by these activities should be measured in the gross national product of a country. Traditionally, incomes measured by the national accounts have not included those generated by criminal activities. In addition, if these activities were discovered and taxed, they would largely disappear, so that it is also controversial whether even the tax definition of underground economy should include incomes generated in these activities. On the other hand, one can take the position that they should be included, on the grounds that as long as people purchase these services freely, they are in some sense better off because of them. Moreover, the sellers of these services are earning incomes and using scarce resources, which, if used elsewhere, could increase the official gross national product. Only if the resources used in these activities would otherwise be completely unutilized would they have had no opportunity cost associated with them.

In the United States, for which some estimates have been made, these illegal activities are reported to range somewhere between one third and one half the size of the underground economy associated with legal activities. But, of course, in view of the difficulty of finding any accurate information in this area, these are very unreliable estimates. The value of these activities depends to a large extent on the fact that they are prohibited. For example, legalizing narcotics would almost immediately sharply reduce their value; therefore, the incomes that the sellers of these drugs receive would also fall sharply.

Bureaucratic corruption. In all countries, some public employees find themselves in control of powers that can be used to generate private gains. This private use of public power is obviously improper and frequently illegal, but it is a fact of life in some countries, and examples abound in the literature and in newspapers. In particular countries, for example, it has been reported that government jobs are sometimes literally sold by individuals with the power to dispose of them. In other countries, government contracts are awarded to individuals who are willing to make an under-the-table contribution to strategically located public employees. In still others, where economic activities may require specific licenses, acquiring a license, or, at times, acquiring a license without excessive delay, may be achieved in exchange for under-the-table payments. Licenses for investments, imports, construction, and waivers from particular regulations, or even obtaining public services which, because of supply bottlenecks, are not readily available (such as telephones), can often be obtained by literally purchasing the license, the waiver, or the service from the right person.

The argument has been made that in some countries this payment to a certain extent compensates the public employees for low wages and oils the bureaucratic mechanism by introducing some spurious sort of efficiency. The common denominator of these activities is that they all generate incomes for some people and these incomes are not reported to the authorities. They are not likely to be taken fully into account by those who generate national statistics.

• Consequences

The existence of a sizable and possibly growing underground economy has obvious consequences that may or may not be serious, and it raises issues of equity, economic policy, and efficiency. This article cannot engage in a full discussion of these issues, but will make a brief reference to them.

Equity. The issue of equity is particularly significant in the distribution of the tax burden and incomes. The fact that some people receive incomes that are not taxable implies that to raise a given level of tax revenues, the tax rate on officially recognized activities will have to be higher. Further, even when the economy expands because of underground economic activities, the need for additional public services will go up. For example, those who live on underground incomes still use roads and still send children to school. The reduction in tax revenues and the increase in the need for additional public expenditure as a result of these activities is an aggravation of fiscal difficulties. Equity considerations arise also in connection with income distribution, as very large incomes may be made in connection with underground activities, which may distort the distribution of income that the government wants to achieve.

Policymaking. The implications of underground economic activities for economic policy are perhaps more serious. A large underground economy will inevitably be associated with greater difficulty in properly assessing the size of variables that are important for policymaking. For example, if the underground economy is growing faster than the official economy, and is not properly measured by the national accounts authorities, the rate of growth of the country will be underestimated. This could lead to policies that, on the basis of what is officially known about the economy, seem appropriate but are actually overly expansionary.

Measuring the underground economy

Economists have been very resourceful in devising different methods for estimating the size of the underground economy. One method is based on attempts to measure directly the various activities that make up this phenomenon, and, through a process of aggregation, the calculation of the total. This method has been used mainly in the United States. Its main weakness is that many underground economic activities are not observable.

A second method, which has given interesting results for Norway and Sweden, includes the use of questionnaires to elicit answers from persons interviewed as to whether they have participated in these activities either as buyers or as sellers. In the case of noncriminal activities, selling the service may imply violation of some law; buying the service does not. Therefore, if the answers received from the buyers give more or less the same magnitude for underground economic activities as the answers received from the sellers, one can have some confidence in them.

A third method, which has been applied in Italy, is based essentially on the difference between the population that, on the basis of demographic data, could be assumed to be part of the labor force and those who officially report to be part of it. These estimates need to be accompanied by some assumptions about productivity in the underground sector. A fourth method, used in the United States and in the United Kingdom, has attempted to estimate the size of the underground economy by comparing the official estimates of the gross national product made from the consumption side with those made from the incomes side. The assumption is that underground economic activities would affect only the income estimations of national product. There are difficulties with this method, as the underground economy is likely to affect both consumption as well as incomes. Thus, some studies of the United Kingdom have attempted to estimate the underground economy by analyzing household budget studies for unusual levels of consumption corresponding to given reported income.

Many studies for a large number of countries have also attempted to measure the activities in question by analyzing monetary statistics, on the assumption that certain monetary aggregates—for example, currency or currency in large bills—may be directly influenced by the size of the underground economy. Still other methods have related electricity use to official output for a region or a town. If the electricity used is much higher than one would expect from the official production level, one can assume that unofficial production is taking place.

Whatever method is used to estimate the magnitude of the underground economy, it is evident that it is considerable. The accompanying chart provides some available estimates from studies of the underground economy for 19 countries from various parts of the world and with different social systems. Many of these studies indicate that the underground economy is not only sizable but is also growing faster than the official economy. The figures shown in the chart should be accepted with considerable caution as they are the result of applying different methodologies and, in some cases, even of different concepts. Therefore, it would not be prudent to make precise cross-country comparisons without first consulting the studies themselves. As research techniques and factual information improve, it will probably become easier to generate estimates that warrant a greater degree of confidence.

Estimated size of underground economy 1

Citation: Finance & Development 20, 004; 10.5089/9781616353551.022.A003

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The official unemployment rate may also be distorted. If people working in the underground economy are listed as unemployed, the unemployment rate will appear higher than it actually is. This again may induce the government to pursue expansionary policies when, in fact, the real rate of unemployment may be much closer to the full-employment rate than the official rate would indicate. For the United States some have argued that the actual unemployment rate may be more than 2 percent lower than the official rate.

The rate of inflation may also be distorted if the underground economy is growing faster than the above-ground one in countries where the services of the former are rendered at lower prices. In this case, the measured rate of inflation may be higher than the real rate. In addition, if the underground economy is connected with black markets for goods, then the reverse may occur, as scarcity of goods in the official economy brought about by price control or rationing may bring about much higher prices in the black market economy. In this case, the official price index is likely to be much lower than the real price index.

The balance of payments statistics, too, are likely to be distorted in the presence of an underground economy, as many capital and commodity flows will not be properly measured. Once again, economic policies based on the official statistics may not be the right ones. The tax burden of a country, as well as the share of public expenditure in gross national product, will be distorted, as total taxes or total public expenditure will be divided by only the officially measured and thus lower gross national product. Therefore, that ratio will appear higher than it actually is. Official statistics on income distribution, as already stated, will also be distorted as those actively engaged in the underground economy may appear poorer than they actually are.

Monetary policy may be distorted if the growth of money is related only to the growth of the official gross national income. If incomes in the underground economy are growing faster than this, then the rate of monetary expansion, determined in relation to the official economy, may be too low for the needs of the total economy. This discussion should be sufficient to emphasize the importance of studying this phenomenon, since economic policy in most countries is strongly influenced by the behavior of the officially measured macroeconomic variables.

Efficiency. The issue of efficiency can be approached from different angles. This is, however, a complex issue that would require far more time for a satisfactory treatment. In general, if the underground economy is caused by taxation alone, one will find that, ceteris paribus , resources (both capital and labor) will progressively move out of the taxed or official sector into the untaxed or underground sector. This exodus would continue until, at the margin, the rate of return net of taxes in the official economy becomes identical to the untaxed rate of return in the underground economy. Obviously, this movement of resources is likely to imply a substantial misallocation of resources.

However, the issue of efficiency involves somewhat more complex considerations than that of misallocation. As has been emphasized, in some studies related to the Italian situation, the existence of underground economic activities, often carried out within the house by housewives, give to the economy an efficiency that it would not have otherwise. For example, a woman who has children in school and who would find it impossible to hold a regular job, will be able to allocate to this (underground) domestic work those hours when the children are away and consequently do not need her attention. In addition, to the extent that this woman works in her own house, she needs less investment in structures, and there would be less need for roads because no transportation back and forth from work is required. Furthermore, as this person can fully and directly benefit from the additional output associated with any improvement in her human capital or in her equipment, there would be a greater incentive to carry out these improvements. For developing countries, where excessive regulation of the economy has at times brought about excessive rigidities, the underground economy, which in this case might be more properly called the “parallel” economy, has often made a difference between a relatively viable economy and a stagnating one.

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Table of Contents

• Front Matter
• Sources of payments problems in LDCs: External and domestic causes of deficits, 1973–81
• The transfer of technology: Factors in the acquisition of technology
• The underground economy: Causes and consequences of this global phenomenon
• Countertrade: trade without cash?
• UNCTAD VI: for better or for worse?: International negotiations in a multipolar setting
• Korea’s major adjustment effort: Effective policymaking in difficult circumstances
• Energy transition in developing countries: Larger investments and more efficient use needed
• Industrial energy conservation in developing countries: Substantial savings possible
• World economy in transition: Interest rates in five major countries
• Interest rates and the developing world: How rates in developed countries affect LDCs
• John Maynard Keynes: To mark the centenary of the birth of a great economist
• Changing public attitudes toward aid: Guest article
• Minimizing the burden of recurrent costs: World Bank experience in sub-Saharan Africa
• Maintaining financing for adjustment and development: The 1983 Joint Annual Meetings of the Bank and the Fund
• Books: Books on rational expectations, structuralist macroeconomics, the psychology of taxation, development strategies, and successful management reviewed by Homi Kharas, Kyle Peters, Alan Tait, Phiroze Medhora, and Dale Weigel
• Index for Volume 20 (1983)
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The Meaning of the “Underground Economy” and the Full Compliance Deficit

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• Edgar L. Feige 3  

Part of the book series: Studies in Contemporary Economics ((CONTEMPORARY,volume 15))

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A growing amount of professional attention is now directed toward the issue of the existence and implications of the “underground” or “shadow” economy. Unfortunately, the terms “underground” and “shadow” have been used to mean quite different things by different investigators, and these unresolved questions of definition introduce considerable confusion in the literature. Theoretical and empirical research require a finer set of conceptual distinctions to clarify both the differences and the interconnections among the variety of descriptive terms presently employed by “underground economists.” To this end, I wish to put forward a taxonomic framework which distinguishes among economic, fiscal , and social concepts of income. The first section of this paper elaborates these income concepts and establishes their interrelationships.

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The author gratefully acknowledges research support from the ALFRED P. SLOAN Foundation.

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MURPHY, M. “Comparative Estimates of the Value of Household Work in the United States” Seventeenth General Conference of the International Association for Research in Income and Wealth August, 1981.

SKOLKA, J. “The Prallel Economy in Austria”. Presented at the Bielefeld Conference on the Shadow Economy October, 1983.

SMITH, J.; MOYER, T. and TRZCINSKI, E. “The Measurement of Selected Income Flows in Informal Markets”. Prepared for the Internal Revenue Service, December, 1982.

A System of National Accounts and Supporting Tables, Studies in Methods No. 2, United Nations, New York 1953.

Recorded income can be measured with different degrees of “grossness,” thus giving rise to distinctions between GNP and NNP. Estimates of national income are derived from NNP by subtracting indirect tax and non-tax liabilities, business transfer payments, and the statistical discrepancy, and by adding subsidies less the current surplus of government enterprises. Finally, personal income is derived from national income by subtracting corporate profits with inventory valuation and capital consumption adjustments, net interest, contributions for social insurance, and wage accruals less disbursements, and by adding government transfer payments to persons, personal interest income, personal dividend income, and business transfer payments.

The Bureau of Economic Analysis makes imputations for food produced and consumed on farms and also includes imputations for non-monetary transactions such as rent for owner occupied housing

SIMON C. and WITTE A. “The Underground Economy” LSA Vol 7, No. 2. 1984 report estimates for drugs, gambling and prostitution for 1980. The Internal Revenue Service estimates illegal income from these sources to be $ 34.2 billion for 1981.

An example would be food grown and consumed on a farm which is excluded from fiscal income under U.S. tax law, but is considered to be a segment of total economic income for which NIPA imputations are undertaken.

Income Tax Compliance Research, Department of the Treasury, Internal Revenue Service. July 1983.

Personal Income represents one of the major components in the construction of the broader measure of economic activity, namely GNP. We focus our discussion on personal income, because it is to date, the only NIPA concept for which it is possible to derive a direct empirical relationship to empirical measures of fiscal income, eg. AGI.

See FEIGE, E. L. “A New Perspective on Macroeconomic Phenomena: The Theory and Measurement of the Unobserved Sector of the United States - Causes, Consequences and Implications.” Presented at the 1980 Meetings of the American Economics Association, and FEIGE, E.L. and McGEE, R.T. “Policy Illusion, Macroeconomic Instability and the Unobserved Economy”, in The Unobserved Economy, Cambridge University Press, 1985.

The IRS and BEA measures are reported in the Survey of Current Business, November 1981 and July 1982. The transactions method estimates of AGI are based on the relationship between adjusted total transactions and reported AGI. The transactions method is described in “A New Perspective on Macroeconomic Phenomena” ibid

14) “ Estimates of Income Unreported on Individual Income Tax Returns” Internal Revenue Service: Publication 1104 September, 1979.

15) “ Income Tax Compliance Research” Internal Revenue Service, July 1983.

Subcommittee on Oversight of the House Committee on Ways and Means, October 9, 1979.

PARKER, R.P. “Improved Adjustments for Misreporting of Tax Return Information Used to Estimate the National Income and Product Accounts, 1977”, Survey of Current Business June 1984.

Taxes and the Budget: A Program for Prosperity in a Free Economy Committee for Economic Development, New York 1947.

The High Employment Budget: New Estimates, 1955–80“ Survey of Current Business, November, 1980 and ”The High Employment Budget and Potential Output Survey of Current Business, November, 1982.

de LEEUW, F. and HOLLOWAY, T. “Measuring and Analyzing the Cyclically Adjusted Federal Budget”, Federal Reserve Bank of Boston Conference on the Economics of Large Government Deficits, October, 1983.

See de LEEUW and HOLLOWAY, ibid.

The introduction of inflation adjustments is discussed in EISNER R. and PIEPER P., “A New View of the Federal Debt and Budget Deficits” Mimeo, 1983.

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Feige, E.L. (1985). The Meaning of the “Underground Economy” and the Full Compliance Deficit. In: Gaertner, W., Wenig, A. (eds) The Economics of the Shadow Economy. Studies in Contemporary Economics, vol 15. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-88408-5_2

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1 See Johnson, Simon; Daniel Kaufmann, and Pablo Zoido-Lobaton, "Regulatory Discretion and the Unofficial Economy," American Economic Review , Vol. 88, No. 2, 1998.

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Measuring Underground Economy Can Be Done, but It Is Difficult

The informal economy, also known as the underground economy or black market, is very hard to measure. A good example is the produce vendor on the street who sells the same vegetables you find in the supermarket but handles only cash and pays little or no taxes. Nevertheless, this sector adds considerable value to the economy. In developing countries, the informal sector has been estimated to account for about 36 percent of gross domestic product (GDP). In developed countries, it has been estimated to be about 13 percent of GDP. 1 ( See table. ) So how do economists measure the informal sector? This article explains the two main approaches—direct and indirect—and the difficulties that each entails.

Direct Approaches

These methods rely on surveys, samples based on voluntary replies, tax audits and other compliance methods. The problem is that the results depend directly on the questions asked by the survey, and few surveys are alike. As a result, it is very difficult to use the same parameters to measure and compare the informal economy in different countries.

Usually, what ends up happening is that the definition that is used has to be very simple and contain only one parameter. For example, the informal sector may be defined as those people who do not have the right to a pension when they retire. Clearly, this definition excludes several important elements that would describe the informal economy differently. Another very common definition is that people are considered to work in the informal economy if they work for a firm that has N or fewer workers. But a firm can be very small and still comply with the law, and its production can be reported to the authorities, meaning that its value added will appear in the GDP despite being a small firm.

If what is used is a direct questionnaire, people are not usually willing to admit that they are not reporting taxes or that they are engaging in fraudulent behavior, either because they feel afraid of getting caught or because they feel ashamed since they know this is a moral issue. This makes it difficult to estimate the extent of undeclared work.

SOURCE: Schneider.

Finally, a direct estimate of the informal economy can also be obtained by calculating the discrepancy between income declared for tax purposes and that measured by selective checks. For example, one can compare the number of jobs declared by firms with the number of employed people found through household surveys. The number of employed people exceeding the number of jobs represents the informal workforce. Once the informal number of workers is identified, informal workers can be attributed the same net compensation as similar workers in the formal economy. 2

Indirect Approaches

These are macroeconomic approaches that try to use an indicator of the informal economy as a proxy for its size or growth.

Discrepancy between the National Expenditure and Income Statistics

In theory, the income measure of GDP and the expenditure measure should be equal to each other. However, informal activities can show up in the expenditure measurement but not in the income measurement. This is because the income side is measured through the value added of registered firms (the formal economy), while on the expenditure side there is some self-reporting. Thus, the difference between these two measures is an indicator of the size of the informal economy. The problem with this estimate is that statisticians would like to make the difference between the two as small as possible; so, using the initial measure rather than the published measure would be ideal. 3 Moreover, there are differences due to sampling and statistical errors, which cannot be disentangled from the amount that can be explained by the informal economy.

Discrepancy between Official and Actual Labor Force

Assuming that the total labor force participation is constant, all else being the same, then any decrease in the labor force participation in the official economy can be seen as an indicator of an increase in the activity in the informal economy. 4 The problem with this method is that changes in labor force participation can be due to other causes. For example, following the recent recession, many people have exited the labor force. It could also be the case that people work in both the informal and formal economy; so, this is not a very good estimator.

The Transactions Approach

In 1979, economist Edgar Feige developed this approach based on the quantitative theory of money MV = pT , where M is money, V is velocity, p is prices and T is total transactions. The main assumption is that the relationship of the volume of transactions and official gross national product (GNP) is constant over time. 5 Using the value of total transactions ( pT ) as an estimate of nominal GNP, he calculated the informal economy as the difference between nominal GNP and the official GNP.

Several issues arise with this approach. He had to assume there is a base year when there was no informal economy. Then, the assumption that the ratio of transactions to official GNP is constant over time was quite strong. Additionally, obtaining accurate estimates of the total number of transactions was difficult.

The Currency Demand Approach

This approach uses the correlation between currency demand and tax pressure, assuming that informal activities operate with cash. 6 Thus, if the tax burden increases and so does the demand for money, then that increase in the demand for money reflects an increase in the informal economy.

In order to calculate the excess in money demand, the economists behind this approach estimated an equation for money demand using econometric methods. They controlled for development of income, payment habits, interest rates and other related variables. In the equation, they also included government regulation, direct and indirect tax burden, and the complexity of the tax system. The most common critiques to this approach are the following:

• Not all the transactions in the shadow economy are paid in cash.
• Most studies using this approach include only the tax burden factor and ignore others, such as "tax morality," regulation and attitudes toward the state. (There are usually no reliable data on these factors.)
• A rise in currency demand deposits is usually due in large degree to a slowdown in demand deposits and not to a rise in currency due to informal economic activity.
• Also, most studies assume that both the formal and informal economy have the same velocity of money. 7

The Physical Input (Electricity Consumption) Method

This method assumes that electricity consumption is the best physical indicator of both formal and informal economic activity. It has been observed that the electricity/GDP elasticity is usually close to 1. 8 So, by using electricity as a proxy for the overall economic activity and then subtracting from it the official estimates of GDP, we get an indicator of informal economic activity. The difference between the growth of electricity consumption and official GDP is then attributed to the growth of the informal economy.

The critiques to this approach rely on the fact that not all informal activities require a considerable amount of electricity, or, if they do, other energy sources such as gas, oil and coal could be used. Also, the use of electricity has become more and more efficient in both types of economies. Finally, there may be differences in the elasticity of electricity/GDP across countries or changes over time.

Ultimately, the approach used to measure the informal economy depends on the specific question being asked by the researcher. For macroeconomic studies, indirect approaches usually suffice, but direct approaches are more generally used for microeconomic studies. Newer methods being developed to better gauge the size of the informal economy involve more-technical, model-based estimations.

• See Restrepo-Echavarria. [ back to text ]
• This is the approach used in Italy. See Bovi. [ back to text ]
• There is usually some degree of statistical discrepancy between the income and expenditure measures because of how the data are constructed. The initial estimations, before the data are revised to sort the majority of this discrepancy and balance both sides of the equation, are not usually published. Only the final measures are published, once the discrepancy is accounted for. [ back to text ]
• The labor force participation rate is calculated as the labor force divided by the working-age population. [ back to text ]
• GNP is often used to estimate total transactions as it also includes national currency transactions that originate in other countries, whereas GDP is a measure of transactions only within the particular country. [ back to text ]
• This approach was first proposed by Cagan, and then Tanzi took the method a step further. See Cagan, as well as Tanzi. [ back to text ]
• The velocity of money is the rate at which money circulates in the economy or the rate at which people spend money. [ back to text ]
• The electricity/GDP elasticity is a measure of how sensitive GDP growth is to changes in electricity consumption. If the absolute value of the elasticity is greater than 1, a larger change in electricity consumption is needed to achieve a 1 percent change in GDP; if the elasticity is less than 1, a smaller change in electricity consumption is needed to achieve a 1 percent change in GDP; if the elasticity is equal to 1, a 1 percent change in electricity consumption is associated with a 1 percent change in GDP. [ back to text ]

Bovi, Maurizio. "Shadow Employment and Labor Productivity Dynamics." Labour, December 2007, Vol. 21, No. 4-5, pp. 735-61.

Cagan, Phillip. "The Demand for Currency Relative to the Total Money Supply." Journal of Political Economy, August 1958, Vol. 66, No. 4, pp. 302-28.

Feige, Edgar L. "How Big Is the Irregular Economy?" Challenge, November/December 1979, Vol. 22, No. 5, pp. 5-13.

Restrepo-Echavarria, Paulina. "Macroeconomic Volatility: The Role of the Informal Economy." European Economic Review, August 2014, Vol. 70, pp. 454-69.

Schneider, Friedrich. "Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries." Economics: The Open-Access, Open-Assessment E-Journal, July 2007, Vol. 1, No. 2007-9, pp. 1-66.

Tanzi, Vito. "The Underground Economy in the United States: Estimates and Implications." Banca Nazionnale del Lavoro Quarterly Review, December 1980, Vol. 33, No. 135, pp. 427-53.

Tanzi, Vito. "The Underground Economy in the United States: Estimates and Implications." Staff Papers—International Monetary Fund, 1983, Vol. 30, No. 2, pp. 283-305.

Paulina Restrepo-Echavarría is an economic policy advisor at the Federal Reserve Bank of St. Louis. Her research focuses on international macroeconomics and on search and matching models of the labor and marriage market. She joined the St. Louis Fed in 2014. Read more about the author and her research .

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The Macroeconomic Impact of Climate Change: Global vs. Local Temperature

This paper estimates that the macroeconomic damages from climate change are six times larger than previously thought. We exploit natural variability in global temperature and rely on time-series variation. A 1°C increase in global temperature leads to a 12% decline in world GDP. Global temperature shocks correlate much more strongly with extreme climatic events than the country-level temperature shocks commonly used in the panel literature, explaining why our estimate is substantially larger. We use our reduced-form evidence to estimate structural damage functions in a standard neoclassical growth model. Our results imply a Social Cost of Carbon of $1,056 per ton of carbon dioxide. A business-as-usual warming scenario leads to a present value welfare loss of 31%. Both are multiple orders of magnitude above previous estimates and imply that unilateral decarbonization policy is cost-effective for large countries such as the United States.

Adrien Bilal gratefully acknowledges support from the Chae Family Economics Research Fund at Harvard University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

MARC RIS BibTeΧ

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An environmental CGE model of China's economy: Modeling choices and application

by Tsinghua University Press

Computable general equilibrium (CGE) model is an important policy guidance tool for pollution reduction and emission control objectives. An article, published in Energy and Climate Management , introduces the economic module, energy module, macroscopic closure, dynamic mechanism, algorithm and back-of-the-envelope of a CGE. Then, it shows how to extend the CGE to carbon tax and carbon trading market, energy rebound effect, environmental tax and disclosure, and carbon neutral strategies.

The general equilibrium framework of the CGE model widely used in cost-benefit analysis in the field of energy and environmental policy. Based on standard micro- and macroeconomic theories, the CGE model establishes quantitative connections between various sectors of the economy, enabling the examination of both direct and indirect effects resulting from exogenous changes in the economy, as well as their global impacts on the overall economy.

A team of energy economists by Yu Liu from Peking University in Beijing, China recently outlined the detailed content of their CGE model. This model is constructed based on the CGE model theory of the Australian Center of Policy Studies, elaborates on the main modules and equations of the Chinese environmental CGE model used, economic and emission database development, macro closure settings, solution methods, and interpretation of simulation results.

The main features of the model include:

• Following the idea of Johansen (1960), the nonlinear relationship between economic variables is converted into a rate of change form, thereby converting the nonlinear equations into a linear equation that is easy to be solved by computers;
• According to the impact amplitude Flexible selection of various solution methods, such as Johansen's one-step method, Euler's multi-step method, etc., to achieve a balance between solution speed and accuracy;
• Providing a theoretical paradigm to explain simulation results. The underlying transmission mechanism of the CGE model can be expressed using a set of simplified equations defined as Back-of-the-Envelope.

"In this review, we present the extension of the basic CGE model to multiple critical domains, encompassing dynamic analyses of carbon tax and carbon trading market, thorough consideration of the energy rebound effect, diverse impacts of environmental tax and disclosure, as well as systematic exploration of carbon-neutral strategies.

"These enhancements augment the practical applicability of the CGE model, offering more reliable support for formulating comprehensive and effective policies," said Yu Liu, senior author of the paper, professor in the College of Urban and Environmental Sciences at Peking University. Dr. Liu is also the Recipient of the National Science Fund for Distinguished Young Scholars of China and the Peking University Distinguished Professor of Boya.

Although CGE model cannot accurately quantify real-world results, it can provide crucial economic indicators and trends in production activities. "Our model still has some limitations. If you have experience or guidance in the development and application of CGE models, we sincerely welcome your valuable suggestions and assistance," Yu Liu Said.

Other contributors include Nenggao Zhu, Lingyu Yang, Xinbei Li from the School of Public Policy and Management, University of Chinese Academy of Sciences in Beijing, China; Meifang Zhou from the School of Economics, Beijing Technology and Business University in Beijing, China; Xin Wen from the School of Economics and Management, Beihang University in Beijing, China; Jinzhu Zhang from the College of Urban and Environmental Sciences, Peking University in Beijing, China.

Provided by Tsinghua University Press

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Are Markups Driving the Ups and Downs of Inflation?

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FRBSF Economic Letter 2024-12 | May 13, 2024

How much impact have price markups for goods and services had on the recent surge and the subsequent decline of inflation? Since 2021, markups have risen substantially in a few industries such as motor vehicles and petroleum. However, aggregate markups—which are more relevant for overall inflation—have generally remained flat, in line with previous economic recoveries over the past three decades. These patterns suggest that markup fluctuations have not been a main driver of the ups and downs of inflation during the post-pandemic recovery.

In the recovery from the pandemic, U.S. inflation surged to a peak of over 7% in June 2022 and has since declined to 2.7% in March 2024, as measured by the 12-month change in the personal consumption expenditures (PCE) price index. What factors have been driving the ups and downs of inflation? Production costs are traditionally considered a main contributor, particularly costs stemming from fluctuations in demand for and supply of goods and services. As demand for their products rises, companies need to hire more workers and buy more intermediate goods, pushing up production costs. Supply chain disruptions can also push up the cost of production. Firms may pass on all or part of the cost increases to consumers by raising prices. Thus, an important theoretical linkage runs from cost increases to inflation. Likewise, decreases in costs should lead to disinflation.

Labor costs are an important factor of production costs and are often useful for gauging inflationary pressures. However, during the post-pandemic surge in inflation, nominal wages rose more slowly than prices, such that real labor costs were falling until early 2023. By contrast, disruptions to global supply chains pushed up intermediate goods costs, contributing to the surge in inflation (see, for example, Liu and Nguyen 2023). However, supply chains have more direct impacts on goods inflation than on services inflation, which also rose substantially.

In this Economic Letter , we consider another factor that might drive inflation fluctuations: changes in firms’ pricing power and markups. An increase in pricing power would be reflected in price-cost markups, leading to higher inflation; likewise, a decline in pricing power and markups could alleviate inflation pressures. We use industry-level measures of markups to trace their evolving impact on inflation during the current expansion. We find that markups rose substantially in some sectors, such as the motor vehicles industry. However, the aggregate markup across all sectors of the economy, which is more relevant for inflation, has stayed essentially flat during the post-pandemic recovery. This is broadly in line with patterns during previous business cycle recoveries. Overall, our analysis suggests that fluctuations in markups were not a main driver of the post-pandemic surge in inflation, nor of the recent disinflation that started in mid-2022.

Potential drivers of inflation: Production costs and markups

To support households and businesses during the pandemic, the Federal Reserve lowered the federal funds rate target to essentially zero, and the federal government provided large fiscal transfers and increased unemployment benefits. These policies boosted demand for goods and services, especially as the economy recovered from the depth of the pandemic.

The increase in overall demand, combined with supply shortages, boosted the costs of production, contributing to the surge in inflation during the post-pandemic recovery. Although labor costs account for a large part of firms’ total production costs, real labor costs were falling between early 2021 and mid-2022 such that the increases in prices outpaced those in nominal wages. This makes it unlikely that labor costs were driving the surge in inflation.

Instead, we focus on another potential alternative driver of inflation that resulted from firms’ ability to adjust prices, known as pricing power. As demand for goods surged early in the post-pandemic recovery, companies may have had a greater ability to raise their prices above their production costs, a gap known as markups. Following a sharp drop in spending at the height of the pandemic, people may have become eager to resume normal spending patterns and hence more tolerant to price increases than in the past. In fact, growth of nonfinancial corporate profits accelerated in the early part of the recovery (see Figure 1), suggesting that companies had increased pricing power. Some studies have pointed to the strong growth in nonfinancial corporate profits in 2021 as evidence that increased markups have contributed to inflation (see, for example, Weber and Wasmer 2023). However, the figure also shows that growth in corporate profits is typically volatile. Corporate profits tend to rise in the early stages of economic recoveries. Data for the current recovery show that the increase in corporate profits is not particularly pronounced compared with previous recoveries.

Figure 1 Profit growth for nonfinancial businesses

More importantly, corporate profits are an imperfect measure of a firm’s pricing power because several other factors can drive changes in profitability. For instance, much of the recent rise in corporate profits can be attributed to lower business taxes and higher subsidies from pandemic-related government support, as well as lower net interest payments due to monetary policy accommodation (Pallazzo 2023).

Instead of relying on profits as a measure of pricing power, we construct direct measures of markups based on standard economic models. Theory suggests that companies set prices as a markup over variable production costs, and that markup can be inferred from the share of a firm’s revenue spent on a given variable production factor, such as labor or intermediate goods. Over the period of data we use, we assume that the specific proportion of a company’s production costs going toward inputs does not change. If the share of a firm’s revenue used for inputs falls, it would imply a rise in the firm’s price-cost margin or markup. In our main analysis, we use industry-level data from the Bureau of Economic Analysis (BEA) to compute markups based on the share of revenue spent on intermediate inputs. Our results are similar if we instead use the share of revenue going toward labor costs.

We compare the evolution of markups to that of prices, as measured by the PCE price index, since the recovery from the pandemic. In constructing this price index, the BEA takes into account changes in product characteristics (for instance, size) that could otherwise bias the inflation measure by comparing the prices of inherently different products over time. Similarly, based upon standard economic theory, our markup measure implicitly captures changes in those characteristics (see, for example, Aghion et al. 2023).

The post-pandemic evolution of markups

We examine the evolution of markups in each industry since the third quarter of 2020, the start of the post-pandemic recovery. Figure 2 shows that some sectors, such as the motor vehicles and petroleum industries, experienced large cumulative increases in markups during the recovery. Markups also rose substantially in general merchandise, such as department stores, and for other services, such as repair and maintenance, personal care, and laundry services. Since the start of the expansion, markups in those industries rose by over 10%—comparable in size to the cumulative increases over the same period in the core PCE price index, which excludes volatile food and energy components. However, the surge in inflation through June 2022 was broad based, with prices also rising substantially outside of these sectors. Thus, understanding the importance of markups for driving inflation requires a macroeconomic perspective that examines the evolution of aggregate markups across all sectors of the economy.

Figure 2 Cumulative changes in markups for salient industries

The role of aggregate markups in the economy

To assess how much markup changes contribute to movements in inflation more broadly, we use our industry-level measurements to calculate an aggregate markup at the macroeconomic level. We aggregate the cumulative changes in industry markups, applying two different weighting methods, as displayed in Figure 3. In the first method (green line), we match our industry categories to the spending categories in the core PCE price index for ease of comparison; we then use the PCE weights for each category to compute the aggregate markup. Alternatively, we use each industry’s cost weights to compute the aggregate markup (blue line). Regardless of the weighting method, Figure 3 shows that aggregate markups have stayed essentially flat since the start of the recovery, while the core PCE price index (gray line) rose by more than 10%. Thus, changes in markups are not likely to be the main driver of inflation during the recovery, which aligns with results from Glover, Mustre-del-Río, and von Ende-Becker (2023) and Hornstein (2023) using different methodologies or data. Markups also have not played much of a role in the slowing of inflation since the summer of 2022.

Figure 3 Cumulative changes in aggregate markups and prices

Moreover, the path of aggregate markups over the past three years is not unusual compared with previous recoveries. Figure 4 shows the cumulative changes in aggregate markups since the start of the current recovery (dark blue line), alongside aggregate markups following the 1991 (green line), 2001 (yellow line), and 2008 (light blue line) recessions. Aggregate markups have stayed roughly constant throughout all four recoveries.

Figure 4 Cumulative changes of aggregate markups in recoveries

Firms’ pricing power may change over time, resulting in markup fluctuations. In this Letter , we examine whether increases in markups played an important role during the inflation surge between early 2021 and mid-2022 and if declines in markups have contributed to disinflation since then. Using industry-level data, we show that markups did rise substantially in a few important sectors, such as motor vehicles and petroleum products. However, aggregate markups—the more relevant measure for overall inflation—have stayed essentially flat since the start of the recovery. As such, rising markups have not been a main driver of the recent surge and subsequent decline in inflation during the current recovery.

Aghion, Philippe, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li. 2023. “A Theory of Falling Growth and Rising Rents.”  Review of Economic Studies  90(6), pp.2,675-2,702.

Glover, Andrew, José Mustre-del-Río, and Alice von Ende-Becker. 2023. “ How Much Have Record Corporate Profits Contributed to Recent Inflation? ” FRB Kansas City Economic Review 108(1).

Hornstein, Andreas. 2023. “ Profits and Inflation in the Time of Covid .” FRB Richmond Economic Brief 23-38 (November).

Liu, Zheng, and Thuy Lan Nguyen. 2023. “ Global Supply Chain Pressures and U.S. Inflation .” FRBSF Economic Letter 2023-14 (June 20).

Palazzo, Berardino. 2023. “ Corporate Profits in the Aftermath of COVID-19 .” FEDS Notes , Federal Reserve Board of Governors, September 8.

Weber, Isabella M. and Evan Wasner. 2023. “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” Review of Keynesian Economics 11(2), pp. 183-213.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Anita Todd and Karen Barnes. Permission to reprint portions of articles or whole articles must be obtained in writing. Please send editorial comments and requests for reprint permission to [email protected]

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International paper publishes 2023 sustainability report.

International Paper announced the progress on its Vision 2030 sustainability targets and published reporting against the Sustainability Accounting Standards Board (SASB) disclosures and Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

MEMPHIS, Tenn. , May 16, 2024 /PRNewswire/ -- International Paper released its 2023 Sustainability Report, which illustrates the progress made on our Vision 2030 goals and outlines our commitment to building a better future for people, the planet and our company.

Experience the full interactive Multichannel News Release here: https://www.multivu.com/players/English/9262852-international-paper-publishes-2023-sustainability-report/

For more than 125 years, IP has championed the sustainable management of natural resources. As part of its commitment to build a better future, IP advances its Vision 2030 goals and targets in order to deliver sustainable outcomes through our businesses.

"Guided by Vision 2030, our sustainability framework, IP has continuously worked alongside customers and strategic partners to become a leader in renewable fiber-based solutions and to help facilitate a low carbon, circular economy," said Sophie Beckham , Vice President and Chief Sustainability Officer, International Paper.

International Paper reported pursuant to the Task Force on Climate-related Financial Disclosures (TCFD) and also responded to CDP's (Carbon Disclosure Project) Climate Change, Forest and Water Security questionnaires to transparently disclose risks and opportunities in those core areas of sustainability.

Learn more about how International Paper address these risks in the Sustainable Operations and TCFD Index sections of this report and see the Annual Performance Summary for more information.

About International Paper International Paper (NYSE: IP) is a global producer of sustainable packaging, pulp and other fiber-based products, and one of the world's largest recyclers. Headquartered in Memphis, Tenn. , we employ approximately 39,000 colleagues globally who are committed to creating what's next. We serve customers worldwide, with manufacturing operations in North America , Latin America , North Africa and Europe . Net sales for 2023 were $18.9 billion . Additional information can be found by visiting internationalpaper.com.

View original content: https://www.prnewswire.com/news-releases/international-paper-publishes-2023-sustainability-report-302145608.html

SOURCE International Paper

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Cost of living help and a future made in Australia

Strengthening medicare and the care economy.

Building a better health system than improves outcomes

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High‑quality health services through Medicare

Boosting access to essential health services

Building a better healthcare system

The Government is investing $2.8 billion to continue its commitment to strengthen Medicare. This includes the $1.2 billion package to address pressures facing the health system, which provides:

• $882.2 million to support older Australians avoid hospital admission, be discharged from hospital earlier and improve their transition out of hospital to other appropriate care.
• $227 million to deliver a further 29 Medicare Urgent Care Clinics and boost support for regional and remote clinics. This will increase the total number of clinics across Australia to 87. Since commencing last year, existing clinics have already provided almost 400,000 bulk‑billed visits.
• $90 million to address health workforce shortages by making it simpler and quicker for international health practitioners to work in Australia.

Rohan’s daughter Zoya has been  off school with a runny nose and a cough. By 6pm, she is lethargic and has a fever.

Rohan is concerned because his regular GP is now closed. Instead of waiting for hours at the emergency department, he takes Zoya to a Medicare Urgent Care Clinic, without having to make an appointment. 

During the bulk billed visit, Zoya is diagnosed with an infection by the doctor and prescribed appropriate medication. Rohan and Zoya leave within an hour of arrival. Zoya makes a full recovery.

Improving health outcomes

Almost half of Australians live with a chronic condition. This Budget will provide $141.1 million for research and services for people living with chronic conditions, including bowel and skin cancer, diabetes and dementia.

To improve health outcomes, the Government is providing:

• Support for Australians to enjoy healthier, more active lives by investing $132.7 million in sport participation and performance programs.
• $825.7 million to ensure Australians can continue to access testing for and vaccinations against COVID‑19. The Government is also ensuring continued access to oral antiviral medicines on the Pharmaceutical Benefits Scheme.
• $41.6 million over two years to continue funding for alcohol and other drug treatment and support services, including the Good Sports alcohol management program for community sporting clubs.

The Government is allocating an additional $411.6 million (for a total $1.6 billion over 13 years) through the Medical Research Future Fund to continue existing research and introduce two new research missions for low‑survival cancers and reducing health inequities.

Improving access to medicines

The Government is investing $3.4 billion for new and amended listings to the Pharmaceutical Benefits Scheme, which means eligible patients can save on treatment costs.

By expanding the Closing the Gap Pharmaceutical Benefits Scheme Co‑payment Program, eligible First Nations patients will have free or cheaper access to all Pharmaceutical Benefits Scheme medicines.

Australians will benefit from $141.1 million to support and expand the National Immunisation Program.

Mental health support

The Government’s $888.1 million mental health package over eight years will help people get the care they need, while relieving pressure on the Better Access initiative and making it easier to access services.

A free, low‑intensity digital service will be established to address the gap for people with mild mental health concerns. From 1 January 2026, Australians will be able to access the service without a referral and receive timely, high‑quality mental health support. Once fully established, 150,000 people are expected to make use of this service each year.

The Government is improving access to free mental health services through a network of walk‑in Medicare Mental Health Centres, built on the established Head to Health network. The upgraded national network of 61 Medicare Mental Health Centres will open by 30 June 2026. They will provide clinical services for adults with moderate‑to‑severe mental health needs.

For Australians with complex mental health needs, funding will be provided for Primary Health Networks to partner with GPs to deliver multidisciplinary, wraparound support services and care coordination.

Improving the aged care system

Providing quality care

The Budget provides $2.2 billion to deliver aged care reforms and continue implementing recommendations from the Royal Commission into Aged Care Quality and Safety.

The new Aged Care Act will put the rights and needs of older people at the centre of the aged care system. The new Act will provide the framework for fundamental change within the aged care sector.

More Home Care Packages

The Government is investing $531.4 million to release an additional 24,100 Home Care Packages in 2024–25. This will help reduce average wait times and enable people to age at home if they prefer to do so.

Improving aged care regulation

Funding of $110.9 million over four years will support an increase in the Aged Care Quality and Safety Commission’s regulatory capabilities.

The Government is investing $1.2 billion in critical digital systems to support the introduction of the new Aged Care Act and contemporary IT systems.

The My Aged Care Contact Centre will receive $37 million to reduce call‑waiting times for people seeking information and access to aged care.

Higher wages for aged care workers

The Government has committed to fund the Fair Work Commission decision to increase the award wage for direct and indirect aged care workers once the final determination is made. This will build on the $11.3 billion already allocated to support the interim 15 per cent wage increase for aged care workers.

The Government is providing $87.2 million for workforce initiatives to attract nurses and other workers into aged care.

Reforming the disability sector

Better and more sustainable services

Getting the National Disability Insurance Scheme (NDIS) back on track

A further $468.7 million is being provided to support people with disability and get the NDIS back on track. This includes:

• $214 million over two years to fight fraud and to co‑design NDIS reforms with people with disability, announced earlier this year
• $160.7 million to upgrade the NDIS Quality and Safeguards Commission’s information technology
• $45.5 million to establish a NDIS Evidence Advisory Committee
• $20 million to start consultation and design on reforms to help NDIS participants and people with disability navigate services.

This builds on $732.9 million provided in the 2023–24 Budget.

In December 2023, National Cabinet agreed to work together to improve the experience of participants and restore the original intent of the Scheme to support people with permanent and significant disability, within a broader ecosystem of supports. This builds on an earlier decision by National Cabinet to ensure Scheme sustainability and achieve an 8 per cent growth target by 1 July 2026, with further moderation as the NDIS matures.

Improving employment for people with disability

A $227.6 million investment will support a new specialised disability employment program to replace the existing Disability Employment Services program by 1 July 2025. This includes a modern digital platform for providers and participants. These reforms will support more people with disability into sustainable work, through a program with greater flexibility, increased individual supports, and better service quality. Eligibility will be expanded to include volunteers outside the income support system and those with less than eight hours per week work capacity.

Delivering essential services

Investing in reliability and security

Strengthening resourcing for Services Australia

The Government is delivering safer and more efficient government services for all Australians.

A $1.8 billion provision will support delivery of customer and payment services. This includes funding for frontline and service delivery staff to manage claims, respond to natural disasters and improve the cyber security environment. The Government is providing $314.1 million over two years to strengthen safety and security at Services Australia centres.

The Government is investing $580.3 million over four years and $139.6 million per year ongoing to sustain the myGov platform and identify potential enhancements. A further $50 million will improve usability, safety and security of the myGov platform and ensure Services Australia can support people to protect their information and privacy.

Strengthening the Australian Taxation Office (ATO) against fraud

There will be $187.4 million to better protect taxpayer data and Commonwealth revenue against fraudulent attacks on the tax and superannuation systems. Funding will upgrade the ATO’s information and communications technologies and increase fraud prevention capabilities to manage increasing risk, prevent revenue loss, and support victims of fraud and cyber crime.

Looking after our veterans

Veterans’ claims processing is prioritised with an additional $186 million for staffing resources and $8.4 million to improve case management and protect against cyber risk. The Government will provide $222 million to harmonise veterans’ compensation and rehabilitation legislation.

A further $48.4 million will be available for Veterans’ Home Care and Community Nursing programs and $10.2 million to provide access to funded medical treatment for ill and injured veterans while their claims for liability are processed.

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