Small firms body Isme has warned that the Government needs to take urgent action on the growing black economy before legitimate businesses are forced to close.

The illegal or so-called black economy is worth an estimated €16 billion annually, or up to 11 per cent of gross national product, according to Isme.

Isme chief executive Mark Fielding says that equates to €3.2 billion in lost taxes each year which could wipe out the current exchequer revenue shortfall and also fund infrastructure projects.

The organisation believes the number of businesses choosing to operate illegitimately will continue to rise due to the high costs of doing business, high rates of VAT and low rates of detection.

The problem is particularly bad in the construction industry, childcare and private security, according to Isme's research.

"The level of black or unobserved economic activities depends on the incentives and opportunities to cheat," said Mr Fielding. "It is vital therefore that the Government accurately monitor and police these rogue businesses and reduce the incentives to take business underground, by reviewing tax rates and the increase in public utility costs, by deregulating the labour market and cutting red tape."

"It is no coincidence that countries with a relatively low tax wedge and the least regulations have the smallest black economies," he added.

Isme has called for regulatory impact assessments of all new business regulations as well as improved enforcement of laws relating to the black economy. It is also seeking a review of the current tax regime and how it influences individuals and companies to enter the black economy.

Mr Fielding called for the Revenue, the Department of Justice and the Garda to clamp down on racketeering immediately.