Drug trade boosts Sweden’s GDP

The police’s new intelligence information from the Encrochat hacking shows that the illegal drug trade and other criminal activities can constitute a much larger part of Sweden’s economy than has previously been known. As a result, Statistics Sweden is considering “improving the calculations of the impact of illegal activities on GDP”. This constitutes SEK 15 billion (1,4 billion euro) per year, in the drug trade alone. Statistics Sweden relies on an EU directive, which requires that illegal activities be included in GDP.

Last week, Swedish weekly Nya Tider (NyT v.20 / 2021) reported that the police hacking of the encrypted communication system Encrochat revealed that drug smuggling to Sweden is ten times greater than previously thought. Statistics Sweden (SCB) now believes that the billions generated by drug sales should be included in Sweden’s GDP.

The gross domestic product is the value of all the goods and services produced in the country for use in consumption, export and investment over a period, usually a year or a quarter.

The fact that income from criminal activity is included in the calculation of “value-creating” activities that together make up GDP may be strange news to many. The truth is, however, that the criminal activities in the country have been part of Sweden’s official GDP calculations for a long time. That this is the case is due to the European system of national and regional accounts – ESA 2010.

The ESA is a common set of rules for the EU countries, which aims to equate the Member States’ calculation models that form the basis for the official national accounts in each country. The ESA will coordinate the EU countries’ application of the international rules for the design of national accounts, which are governed by a comprehensive regulatory framework developed by the UN, System of National Accounts (SNA).

ENS stipulates, among other things, that “Activities that are illegal in nature, e.g. smuggling, production and sale of drugs must be included in the national accounts”. The ESA also stipulates that the “black economy”, ie activities that may be productive and legal in themselves but are withheld from the authorities for various reasons, for example for tax reasons, must be included in the national accounts.

The value of the drug trade ‘strengthens GDP’

Nya Tider reported recently that the police’s new assessment is that the amount of drugs smuggled into Sweden amounts to 100-150 tonnes annually. Linda H Staaf, head of the Intelligence Unit at the Police’s National Operations Department, NOA, believes that the activities take place on an industrial scale and that there is good reason to believe that drug sales have increased sharply in recent years.

She also stated that it was not surprising in the least, referring to the reality that the police encounter every day in the areas in question. An example that Linda H Staaf pointed to was the so-called Vårby network in southern Stockholm, which the police have managed to infiltrate with new sources of evidence. Curiously, Interior Minister Mikael Damberg (S) says he is “very surprised” by what has emerged.

According to Europol, more than 80 percent of criminal networks use legal business structures for their criminal activities. Linda H Staaf also believes that the transport sector is an important part of the criminals ‘activities and that they use legal hauliers’ transports for their criminal activities. The same applies to money laundering of the profits from these criminal activities.

Elena Wallin, head of intelligence at the Swedish Tax Agency, believes that large parts of the criminal profits are transferred to the restaurant industry and property management, where large sums are invested in order to establish more long-term businesses. Money laundering is also done through exchange offices, real estate agents and banks, which handle large amounts, according to Wallin.

The actual value of the criminal drug gangs’ turnover and profits has starkly emerged as the result of the French police’s hacking of the encrypted service. Conservative estimates of the value indicate that it may be more than ten times the value previously assessed, or more than SEK 15 billion per year.

Taxation of illegal income

According to the Swedish Tax Agency, income from illegal activities can be taxable. It is an interesting “logic” in Swedish legislation that income that can be defined by authorities as illegal can be taxed. At the same time, this means that part of the illegal income is subsequently considered legitimate, because the criminal has been taxed.

In a legal society, all money and other assets that someone has seized through criminal activities should reasonably be subject to confiscation by the state and then, if possible, returned to the legitimate owner. The fact that the Income Tax Act can be interpreted as meaning that income from criminal activities can be taxed is, however, in line with the fact that illegal activities should be seen as “value-creating” in the context of GDP.

All this reasoning runs counter to the fundamental values ​​behind what we in everyday life call the “rule of law” and the popular expression “principles of the rule of law”, which politicians so happily bandy about when criticizing Hungary or Poland.

That the Income Tax Act does not prevent taxation of income from illegal activities is stated in the principles that the Supreme Administrative Court (HFD) has established in practice. This means, among other things, that the final assessment of whether an activity should be considered taxable or not is made in each individual case. The state of evidence in the individual case should be assessed carefully and the evidence should be evaluated in the same way as if the activity had been legal, according to HFD.

There are thus several different contexts where income from criminal and illegal activities is considered in principle legal. Many were taken aback when this information was made public in reports on Swedish Radio on 15 May this year. In one report, Helena Kaplan, head of Statistics Sweden’s department of national accounts, stated that even before the revelations about the sharply upgraded drug trade, discussions had begun to “upgrade” the GDP calculations with higher values ​​for income from criminal activities. However, the fact that these incomes are then also regarded as “value-creating” for Sweden as a nation is completely ignored in the reasoning given in the interviews.

GDP as a measure of value

GDP is frequently used as a measure of economic policy. The constant demands for growth are quantified by GDP growth, and this puts the focus on the question of whether the government even wants the criminal income to disappear, as it contributes to increasing the value of GDP because advancing GDP is an important measure of a country’s economic development, not least in comparison with other countries.

Today, Sweden is also in a bad position in terms of GDP growth in relation to other member states in the EU, coming in 24th place (2019) according to the latest information on Eurostat. In that situation, it does not seem very likely that the government will want to remove such items from the calculation base, even if they are based on the activities of criminals, which actually have a strong direct negative impact on the real economy. The paradox is that this truly negative impact on the real economy has now become a positive factor in the calculation of GDP.

Minister of Finance Magdalena Andersson and her ministerial colleagues thus benefit from the growing criminal sector, purely in terms of propaganda, in describing the effects of their own economic policy. One could even say that the government depends on it, which is certainly not an uplifting idea.