Daily Management Review

Fifty Percent Of Banknotes Fuel ‘Shadow Economy’ Of UK


09/18/2015


The Bank of England released its recent report which stated that almost half of the cash being circulated is involved in illegal activities.



The Guardian reports that almost fifty percent of UK’s “banknotes in circulation” are involved in illegal activities like prostitution and drug deals or else the remaining sum is “held abroad”, shows a report from the Bank of England. Therefore, it shows that only half the amount of banknote being circulated is involved in legitimate transactions while the rest funds “the ‘shadow’ economy or held overseas”.
 
The term ‘shadow economy’ covers under its wings the entire fields of “illegal activities” that ranges from “drug dealing, prostitution, smuggling, fraud” to human trafficking, cash payments to avoid taxation, and “‘off-the-books’ business deals”. In fact, Bank revealed through “an extraordinary admission”:
“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.
“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.”
 
As per the estimation, the shadow economy is equal to the ten percent of UK’s GDP which has been “reckoned to be half the level of Greece and Italy”. Moreover, the recent study conducted by the Bank follow the same path as earlier year, whereby it suggests that eleven percent of the banknotes generally circulated “are contaminated with cocaine”. Bringing up the issue of hoarding on cash, the Bank reports that people who try to evade tax and criminals alike hoard on cash. In fact, the media trumpeting about the police raids recovering “large sums” reflect the same and also “suggest the values involved may be sizeable”.
 
Nevertheless, the report also adds that as per official data, there has not been any “significant growth” in the sector of shadow economy for the past few years. Although, research indicates that apart from criminals there are others “within the legitimate domestic economy” who are in possession of “at least £3bn”, whereby the bank said:
“People may choose to save their money in a safety deposit box, or under the mattress, or even buried in the garden, rather than placing it in a bank account”.
 
Yet, the bank acknowledges that it may be only underestimating the “true situation” for all that matters. In fact, people will be surprised to learn as to what is the per head cash holding amount even for those who draw “£20 or £30 out of a cash machine at a time”. To which the Bank adds:
“There is now the equivalent of around £1,000 in banknotes in circulation for each person in the United Kingdom.”
 
Nevertheless, one could look for consolations, if that helps, knowing that Australia and the U.S have a higher equivalent over heads at “£2,500 and £1,220 respectively”. At present, the new trend of contactless payments are still “premature”, therefore, the “death of cash” owing to end of usage will take quite many years to come, although meanwhile the cash usage rate will continue to drop. The bank report also states:
“Over the next few years, consumers are likely to use cash for a smaller proportion of the payments they make. Even so, given consumer preferences and the wider uses of cash, overall demand is likely to remain resilient. Cash is not likely to die out any time soon.”





References:
http://www.theguardian.com
 







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