Dirty truth about what cash is really being used for in Australia

Australian banknotes are now just as likely to be used for illegal black market activities – such as buying drugs – as everyday cash transactions, a new report has found.

The Reserve Bank estimated 7 to 11 per cent of cash now in circulation was used for shadow economy transactions, either to evade tax or buy illicit drugs.

With consumers overwhelming using cards to pay for goods, just 9 to 12 per cent of banknotes in circulation were used for everyday transactions like buying groceries or paying for a takeaway coffee.

Australian banknotes are now just as likely to be used for illegal black market activities as everyday cash transactions, a new report has revealed (pictured is a stock image of a drug deal)

Australian banknotes are now just as likely to be used for illegal black market activities as everyday cash transactions, a new report has revealed (pictured is a stock image of a drug deal)

Hoarding was the biggest use for cash, with 55 to 80 per cent of banknotes in circulation stored away for emergency use rather than kept in a bank.

Then there are lost banknotes, estimated at 5 to 9 per cent of cash in circulation. 

The Reserve Bank report by economists Patrick Elkington and Rochelle Guttmann noted the black economy demand for cash had increased during the pandemic to be conservatively worth $5.3billion, or 5 per cent of banknotes in circulation.

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Keith Wolahan, the Liberal member for Menzies in Melbourne's north-east, has warned of a totalitarian society where banks can ultimately cut Australians off completely from being able to spend money - as fewer people use cash

Keith Wolahan, the Liberal member for Menzies in Melbourne’s north-east, has warned of a totalitarian society where banks can ultimately cut Australians off completely from being able to spend money – as fewer people use cash

‘This has edged up slightly since the pandemic, although these estimates have a high degree of uncertainty,’ they said.

The report estimated tax evasion, based on banknotes, was worth  $4.2billion in June 2023.

This could include a business accepting cash to avoid having to pay the GST or paying an employee in banknotes to help someone avoid paying income tax.

By comparison, the RBA conservatively estimated $1.1billion worth of cash was used to pay and sell illicit drugs.

The Reserve Bank report also suggested the black economy could be even larger, and perhaps be worth $10billion, or 10 per cent of banknotes in circulation.

By comparison, about $9billion worth of cash was used for everyday, legal transactions, marking a $1billion fall since the start of the pandemic in 2020. 

Treasury’s Black Economy Task Force estimated Australia’s shadow economy was twice as large as an Australian Bureau of Statistics estimate.

Of all the cash hoarded in Australia, $800million was from the illicit drug supply chain, or 1 per cent of banknotes in circulation.

‘In addition, drug suppliers are also likely to hold large volumes of cash in reserve,’ the RBA report said.

The report also cited data from the Australian Criminal Intelligence Commission and the Australian Institute of Health to suggest $1.6billion worth of banknotes was used to buy illicit drugs, or almost 2 per cent of cash-in-circulation in June 2023.

Australia’s hoarded cash haul was estimated to be worth $56billion to $81billion, with this increasing since the start of the pandemic.

‘Hoarding is usually done for store-of-wealth or precautionary motives,’ the RBA said.

‘We define hoarded banknotes as those held for legitimate reasons other than financing everyday transactions or those that are lost.’

The Reserve Bank report said fewer cash transactions would reduce banking costs.

First, declining transactional velocity of cash and an increased share of banknotes that are hoarded means that most Australian banknotes will have a longer lifespan compared with the past,’ it said.

Hoarding was the biggest use for cash, with 55 to 80 per cent of banknotes in circulation stored away for emergency use rather than kept in a bank (pictured is a stock image)

Hoarding was the biggest use for cash, with 55 to 80 per cent of banknotes in circulation stored away for emergency use rather than kept in a bank (pictured is a stock image)

With consumers overwhelming using cards to pay for goods, just 9 to 26 per cent of banknotes were used for everyday transactions like buying groceries or paying for a takeaway coffee (pictured are Australian banknotes)

With consumers overwhelming using cards to pay for goods, just 9 to 26 per cent of banknotes were used for everyday transactions like buying groceries or paying for a takeaway coffee (pictured are Australian banknotes)

‘Second, fewer banknotes used for transactions will lead to lower cash processing volumes, which further increases financial pressures across the wholesale banknote distribution industry.’

A separate report by the Reserve Bank published in June last year revealed just 16 per cent of in-person transactions were done in cash in 2022, or just have the 32 per cent level of 2019 before the pandemic. 

The RBA released new figures in November showing 73 per cent of in-person transactions were now done with cards for items worth less than $10.

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