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Speaking on Newsnight yesterday evening, David Gauke, exchequer secretary to the Treasury, remarked that cash in hand work was “morally wrong.” While it is refreshing to hear a senior government official talk about the much sidelined issue of the informal economy, my sense is that Gauke’s momentary intervention was somewhat blunt and ill advised.

True, the informal economy ostensibly represents a major challenge for the UK. It diminishes the country’s tax revenues, taking away from the government coffers something in the region of £35 billion every year. It creates unfair competition for the many businesses that are fully compliant, eroding their incentives for innovation and growth. It also leaves informal workers vulnerable to unexpected traumas due to a lack of financial protection. Indeed, since few are contributing to pension schemes, many of those working under the radar face the all too realistic possibility of poverty when they enter old age.

Yet this perspective on the informal economy is a rather shallow one at best. If we continue to think of its impact in large aggregate terms we are in danger of clumping together the motivations and life stories of a vastly disparate group of people. Yes, there are many informal workers out there who engage in undeclared work to manipulate the system for their own personal greed, the most recent case being the plumber convicted last week of a £50k tax evasion. But there are also huge numbers who operate under the radar out of no choice of their own and for whom business registration is out of reach. Whether it be market stall holders, tutors, gardeners or even tech start-ups, there are many forgotten entrepreneurs who are forced out of the formal economy through a messy cocktail of factors, including burdensome taxes, complex benefits and a dearth of financial credit.

An upcoming RSA and Community Links report will argue that business registration is not always a simple decision for people to make but rather a long and occasionally tough journey that takes time and effort to finish. The goal for government, business and wider society should be to aid hidden entrepreneurs as they navigate this route and to help them complete the various milestones along the way, from setting up a bank account, to securing financial credit to finally becoming VAT registered. We may even have to collectively agree that the informal economy is a legitimate, albeit temporary, state for entrepreneurs to operate within until they have the wherewithal to formalise their businesses.

All of this requires and merits further thought. What we can be confident of saying, however, is that these budding entrepreneurs would fare much better without the kind of heavy-handed blanket punitive measures such as tough penalties, negative advertising campaigns and intensive inspections that we've become so accustomed to. If we continue to rely too heavily on deterrence measures, we are in danger of stamping out the entrepreneurial spirit of our hidden entrepreneurs which the country is arguably in desperate need of.

So while we owe some thanks to Gauke for shining a light on the shadow depths of the informal economy, it is perhaps not the kind of attention it really needs or indeed deserves.

To find out more about the RSA's thinking in this area, stay tuned for our upcoming report, Untapped Enterprise.

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