THE black economy does Britain good because it helps to keep poor people off the breadline and develop their “entrepreneurial skills”, a report commissioned by the Government has found.

Efforts to stamp out moonlighting — including a year-long £5 million advertising campaign — were misguided because tax dodges were a way of providing the needy with a financial safety net, the study commissioned by John Prescott’s office found.

The Government has set a target of halving benefit fraud by 2006; last year it hired 500 extra investigators and set up a £1 million benefit fraud hotline. But the report said that this approach was focused only on the negative aspects of cash-in-hand work.

Instead the Government should look at coaxing illegal workers and tax dodgers into the mainstream, by raising the amount they could earn while claiming benefit and allowing asylum-seekers to work. It also suggested cutting the tax on cigarettes, and licensing cannabis and prostitution.

Cash-in-hand work is far more extensive than most estimates, forming the cornerstone of many households’ economic survival, the researchers, Mel Evans and Stephen Syrett of Middlesex University, said. An investigation for the Treasury by Lord Grabiner in 2000 showed that people who worked while claiming benefits defrauded the State of up to £2 billion per year.

But the report accused the Government of ordering a crackdown while having no clear idea of the actual extent of the problem. The Government estimates that the black market accounts for 1.4 per cent of GDP. The report said that most British experts put the figure at 10 per cent.

A spokeswoman for the ffice of the Deputy Prime Minister said that the report would not lead to a softening of the crackdown. It was commissioned for the department’s Neighbourhood Renewal Unit, which is meant to find ways to help the poorest people to find work. The research examines the barriers poor people face in switching to lawful work, she said.

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