It is not necessarily that we are spending less. It’s just that we are tapping the phone, watch or a card almost every time we buy a coffee, groceries or clothes. It is easy and convenient for the consumer, and retailers have a benefit because they don’t have to go to the bank at the end of the day with a bag of notes and coins to deposit.
Consumers like it because they don’t have to go to the ATM to get cash out in anticipation of their spending for the week ahead. The decline of cash is quite incredible.
In 2007, around 70 per cent of all retail transactions involved the use of cash. Today, it’s around 10 per cent and this proportion is still falling. The Reserve Bank of Australia (RBA) is looking at the issues associated with these trends and the very real possibility that cash usage will get close to zero in the years ahead.
The decline in cash - good, old-fashioned notes and coins - has a range of very important implications for the economy, especially how it is measured by the statisticians and how it feeds into government tax collections.
The black economy
Let’s start with the so-called ‘black economy’.
When cash is used heavily for transactions, as it was in the past, there is some slippage from recorded retail sales and GST payments to the government. There are numerous studies that show shop owners and trades people pocketing a proportion of the cash in their businesses rather than recording it - as a simple means to ‘avoid’ tax.
The Report of the Black Economy Taskforce found firms handling a lot of cash were, “skimming cash and never recording it (including by using sales suppression software), having income going into different bank accounts (and not revealing these to their tax agent or to the ATO), taking cash out of till without reporting the transaction, and keeping two sets of books and records.”
It also found many firms in this position paid some of their employees cash in hand as a means to save paperwork but also for the employer to avoid superannuation payments, and the employee to avoid income tax.
What less cash means
The move away from cash means the ability of firms to avoid their reporting and tax obligations is materially reduced. There are electronic records of all transactions.
For the economy, it is important to note that the position is unchanged. People are simply spending using electronic means rather than cash.
But, critically, how it is recorded by the Australian Bureau of Statistics (ABS) is different, simply because businesses have to comply with the electronic records of transactions, which previously went unreported, including how those data were captured when the data on retail sales, for example, were being compiled.
With 90 per cent of transactions now electronic and difficult to avoid or under-report, the measured economy will be stronger, even without additional turnover or extra activity.
All that is happening is a change in the way we pay for things and how businesses now report those transactions. In simple terms, registered and reported growth in retail spending is stronger now than when there was more cash, simply because of higher business compliance rates, rather than activity being genuinely stronger.
What it means for economic policy
This is a critical issue for policy makers as they analyse the economy relative to how they interpreted it a decade ago.
When looking at a time series of data, it means the economy now is weaker relative to the growth being recorded by the ABS. This is why there is pain in the business surveys yet the RBA is judging the economy to be resilient.
This is likely to be a reason why the RBA surprised most economists during 2023 by continuing its aggressive interest rate hiking cycle – the data was telling them to do it, even though businesses were saying activity was weakening.
This, it could be argued, is why monetary policy was over-tightened in 2023. The RBA was looking at the hard data that was being boosted by compliance as cash usage fell, even though the actual economy was weakening.
In other words, in the ‘old days’, the ABS under-reported economic activity relative to today, simply because there has been a slide in cash usage and a rapid increase in the use of electronic transactions.
This could also explain the better budget outcomes as firms increasingly declare income and, as a result, pay company tax, GST and the income tax of staff previously paid in cash.
As the use of cash continues to decline, expect these trends to remain in place.