The black market in Britain accounts for around 10% of GDP, or over £150bn a year, and results in billions of pounds of lost taxes according to a report from the Institute of Economic Affairs (IEA).

The think-tank maintains that high levels of government spending and front-loaded tax rises are behind the failure of individuals and businesses to register employment.

Its report, The Shadow Economy, calculates that 30m people across the EU are working without paying taxes, and says in Italy, Greece and Spain illicit activity makes up around 20% of national income, and about 14% of GDP in Nordic countries.

In comparison, Britain's black economy is smaller and has been shrinking since the onset of the financial crisis. IEA research suggests it stood at 12.2% of GDP in 2007, falling to 10.9% in 2008 before increasing slightly to 11% in 2011 and dropping back last year to 10.3%.

To reduce shadow economic activity further the institute wants to see simplified regulations to encourage tax compliance; tax amnesties to allow undeclared activities to move towards the official economy; welfare-to-work schemes to reduce benefit fraud; and an emphasis on tax morality.

The IEA also says around 55% of all shadow economy work consists of small-scale intermittent work done by family, friends and neighbours and that this could be legitimised if the government allowed people to earn up to a certain amount tax-free and without declaration.

Philip Booth, editorial director of the IEA, said: 'The government must make legal work easier and more beneficial by providing incentives for those working in the shadow economy to move into the formal sector. At the same time radical action is needed to reduce the burdens of taxation and red tape which led so many into the black market in the first place.'