Executive Education

Fallacy of Cashless Britain: A preconceived notion that disregards the Shadow economy

Britain is on its way to be cashless. An emerging British phenomenon, much-hyped since the Government introduced uncompromising security protected £5 notes and £1 coins. A recent report published in the Telegraph suggests that Britain is verging to be cashless and ranks in terms of usage as the third country behind Canada and Sweden.

Consistent with this, a report by Imperial College corroborates that Britain is leading to be cashless or at least nearly cashless. Consumers are becoming cash smart and almost 1 in 3 transactions are carried out by the non-cash gateways. Sounds terrific and promising. Our tech-savvy banks, contactless legacy and digital portals are wonderful arsenals in our armoury for winning the war on cash. All the facts and figures are based on the traceable data, whereas, we disregard a much unseen but felt presence of a shadow economy. A parallel economy that exists but unaccounted for.

No matter how we attempt to phase out the cash, and how our usage of currency is falling; the fact remains, we still use cash, just to cover “in case” scenario. There is a significant and sizable portion of people still use cash not just for “in case” scenario but they find cash use as their choice for insidious value propositions. The Bank of England reports a 10% increase in the value of the Bank of England notes in circulation during 2016, i.e. doubled its average growth rate over the past decade.

The paradox of falling transactions and rising demand for the notes is a quirky contradiction, can be explained, on the assumption that an alternative system is at work beyond our conventional knowledge. The Guardian report Britain’s shadow economy worth £150 bn, although comparatively smaller than our European counterparts.

The Institute for Economic Affairs estimated that the size of paid work not disclosed to the taxman accounts for 10% of the national income. An efficient tax system could be a solution; however, people earning lower than two-third of their median wages are more prone to tax-collusion or avoidance. In addition, we do not have any credible evidence that the government’s tax policy could make much differences as the state crackdown on shadow economy bears marginal effect. Could legalising certain informal transactions make any better? Probably, not. Since most of the transactions are unaccounted for, making them traceable and legalised would be an overriding challenge. At the same time, using policy deterrence against shadow economy may not always yield expected outcome, as the agents within the economy use primarily scattered and unrelated transactions. Therefore, the Financial Times suggest exploring parallel currency is worthwhile.

The Quarterly Bulletin 2015 Q3 pre-release article by the Bank of England concludes that—the growth in demand for banknotes has been driven by three different markets. The BoE finds:

  • The evidence available indicates that no more than half of Bank of England notes in circulation are likely to be held for use within the domestic economy for legitimate purposes. This includes cash used for transactions and for ‘hoarding’.
  • The remainder is likely to be held overseas or for use in the shadow economy. However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.

Given the nature of the pervasive shadow economy, how likely is it a cashless Britain will be achieved? How Britain could possible address the overarching issue of the shadow economy?

  • First, we need to reduce the power of banks as intermediaries and alternative monitoring mechanism should be engaged to avoid oversight of minor payments.
  • An integrated payment gateway should be developed and be made mandatory for all the businesses, i.e. small or big. Therefore, traceable indices of cash could be registered.
  • The government should implement financial literacy and inclusion, enabling unbaked or underbanked population to be cognisant of the cashless payment and its wider benefits.
  • A tighter tax-reform should be initiated and be unified with all the digital portals while channelling the funds.

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Dr. Rama Kanungo
Dr. Rama Kanungo is a Lecturer in Finance, Degree Programme Director of MSc Banking & Finance Programme, Senior Tutor at Newcastle University Business School. In addition, Rama carries the responsibility of Senior Tutor for all the programmes at London campus. He is a member of Finance, Accounting, Control & Evaluation (FACE) and Applied Econometrics (AE) group at Newcastle University Business School. Dr. Rama Kanungo is an opinion columnist for the CEOWORLD magazine.