In Italy, prostitutes and illegal drugs could shrink the deficit

Italy has a new way to shrink its budget: drugs and prostitutes. And it might not be as crazy an idea as it sounds.

The basics are this: Italy’s Prime Minister Matteo Renzi has committed himself to keeping Italy’s 2014 deficit to 2.6 percent — a target the European Commission recommended for the nation still reeling from the recent sovereign debt crisis. The most straightforward ways to bring the budget deficit down as a share of GDP might seem to be cutting spending or increasing revenues. But if GDP grows, that’s a third way of shrinking the deficit.

And GDP will get a boost when the country starts counting prostitution and illegal drugs, as Bloomberg reports. Italian statistical agency Istat announced on Thursday that it would include prostitution and illegal drugs in its count of 2014 GDP. Italy will also start counting research and development in its GDP calculation. The country is including them in order to comply with EU rules aiming at better measuring the national economy, the CBC reports. However, counting all of these things will also give the nation a bit more wiggle room to hit its budget target.

As for how much of a boost this will provide, that’s uncertain right now. One expert consulted by Bloomberg said the impact on GDP would be “hard to quantify.” However, Eurostat will still have to approve the change, according to Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, DC.

He adds that it may not be as strange as it might sounds for Italy to include parts of the informal economy in its GDP calculations, because the country’s informal economy could be so sizable that not counting it could be significantly inaccurate.

“It’s probably true that Italy obviously has a large mafia problem and has a long history of tax evasion, et cetera, and has a much larger informal sector,” he says. “So you should arguably make some sort of adjustment if you really want to have GDP reflect the total production of goods and services in the economy.”

In addition, the question of exactly what GDP is is not set in stone. Just last year, the US started including research and development, as well as artistic creations in its GDP calculations. And GDP also has often been criticized for the other valuable things it doesn’t include as value added to the economy: the informal sector, yes, but also volunteer work and the services provided by stay-at-home parents. And some people think GDP, which only counts finished products, should be scrapped in favor of a measure that includes the intermediate steps in production processes.

All of which is to say that while it might be easy to laugh at this new math, it’s also an inherently tricky matter measuring the size of a national economy.