Ignacio de la Torre. Professor. IE Business School
25 July 2014
European countries have found a solution to the problem of their battered public coffers having discovered that if they add revenues from prostitution, drugs and contraband to their GDPs, they can make their deficits appear far smaller
The heading of a cover story of the Financial Times from the year 2006 read “The oldest profession in the world raises Greece’s GDP by 25%”.
As I already commented some years ago (see article El Confidencial) , the UK article explained that the Greek government, incapable of stemming its permanent fiscal deficit in order to bring it closer to the Maastricht objectives, had decided to use a denominator (the size of its GDP) to solve the problem. Hence it decided to include a calculated figure for paralegal activities such as gambling and prostitution, which significantly expanded its GDP, thereby enabling it to cover up the time bomb of Greek sovereign debt for a few months more.
In my 2008 article I suggested that governments would sooner or later follow Greece’s example in an attempt to reduce the “optical” size of the debt, given that it is measured as a percentage of GDP. Six years later, just like 2,000 years ago, the Greeks are once again pioneers in the West, and several European governments have proceeded to include such gamely changes in their accounts, to give their deficit and debt a cosmetic makeover by raising their GDP by between 1 and 5%*. As McCoy has stated ( See article El Confidencial) little by little, and after the positive recommendations with regard to the United Nations, statistics offices started to confirm the convenience of including paralegal activities (prostitution in Spain is not legal or illegal, it is paralegal) or illegal activities ( like drug consumption) in the calculation of GDP. The statistical argument is that GDP can be measured as the sum of spending and investment carried out by different agents in an economy. If you ignore, for example, spending on drugs or prostitution, then statistics presume that said spending has been put into savings, which is incorrect because it would increase the level of savings (which is not used to calculate GDP) and would reduce consumption (which is used), and therefore does not reflect reality.
These changes will be mandatory in 2016, so we are already starting to compile some very juicy statistics. After several countries signed up to include these figures (Estonia, Austria, Slovenia, Finland, Sweden and Norway), the UK has now proceeded to include consumption associated with prostitution and drugs, thereby raising its GDP by 10 billion pounds sterling, which, together with other adjustments, has raised its GDP by some 5%. Figures compiled by the UK’s Office for National Statistics show that there are some 61,000 prostitutes exercising their profession in Great Britain, rendering approximately 21 services a week costing 67 pounds a time**, which means that on average every British male aged between 15 and 65 years avails of said services once a quarter.
Italy has also quickly announced that it too will proceed to make the same changes, although it would also include contraband. Spain has also given in to pesky demands that it should sensualize the size of its GDP, and, in addition to other changes, including the way it calculates R&D, it has announced that it will now be including prostitution and drugs. Hence Spain’s GDP is expected to grow by between 2.7% and 4.5% with retroactive effect (which is only to be expected given that we are talking about the oldest profession in the world). Given that Spain’s floating tourist population is higher than that of its residents (60 million compared to 46) I would venture that when the figures finally come out they will be horribly higher than those of the UK, because the average rate at which such services are used here is based on the number of citizens who are registered with local councils, while Spain has the second largest tourist population in the world, which will massively inflate prostitution and drug consumption figures that are supposedly per “resident” capita.
So how exactly are these figures going to “rescue” Spain? They will do so because the government has agreed to a budget stability plan with the EU, and the deficit objectives established in this plan are measured not in terms of the amount of Euros spent over and above revenues (as in most families), but in terms of a deficit based on the GDP. The EU is annoyed with Spain at the moment for having announced a putative reduction in tax without consulting them. How can the numbers add up? The reply, once again, lies in the fun way they calculate the denominator (i.e. the way Spain has managed to increase the size of its GDP). Hence, the oldest profession in the world is set to play a key role in the controversial reduction of taxes in Spain.