While banknotes are used daily to make legitimate payments, they can also be used to facilitate transactions in the “shadow economy”. In a recent article, the Reserve Bank of Australia (RBA) examines how banknotes are used in Australia. We focus on the role of cash to facilitate activities in the shadow economy.
What are banknotes used for?
Banknotes in circulation fall into one of the following categories:
- Banknotes that are used to facilitate legitimate day-to-day transactions in Australia.
- Banknotes that have been lost or destroyed.
- Banknotes that are used in the shadow economy (either to conceal legal transactions to avoid tax, to pay for illegal goods and services or to store wealth generated by the sale of illegal goods and services).
- Banknotes that are hoarded – that is, held, either domestically or overseas, as a store-of-value, for emergency liquidity or for other such purposes.
The RBA estimates that of all the banknotes currently in circulation:
- 9–26 percent are used for transactional purposes.
- 5–9 percent are lost.
- 7–11 percent are used in the shadow economy.
- 55–80 percent are hoarded domestically or internationally.
How are banknotes used in the shadow economy?
The challenge of tracing physical cash makes it a tool often employed to facilitate activities within the clandestine “shadow” economy. According to the Australian Bureau of Statistics (ABS), this shadow economy encompasses both:
- Underground production (where legal activities are concealed to evade taxation), and
- Illegal production (such as the manufacture and sale of illegal drugs).
Working with ABS estimates of the shadow economy, the RBA estimates that as of June 2023, the cash stock used in underground production reached $4.2 billion, while the cash involved in illegal drug transactions amounted to approximately $1.1 billion. This suggests that the total cash facilitating shadow economy transactions reached $5.3 billion, constituting just over 5 percent of the total banknotes in circulation during that period.
The Black Economy Task Force proposes a larger shadow economy, estimating it to be twice the size indicated by the ABS. Utilising this data implies that $10.5 billion in cash, or roughly 10 percent of the banknotes in circulation, is employed in shadow economy activities.
The RBA further calculates that the cash dedicated to the purchase of illicit drugs stood at $1.6 billion, representing nearly 2 percent of the cash in circulation as of June 2023. Additionally, suppliers in the drug trade likely hoard substantial amounts of cash. Data suggests that the total cash hoarded by the illicit drug supply chain may be as high as $800 million, accounting for roughly 1 percent of all banknotes in circulation.
As of June 2023, the RBA estimates that the total cash used in the shadow economy ranged from $7-11 billion, making up 7-11 percent of the total banknotes in circulation. Although these figures have seen a slight increase since the onset of the COVID-19 pandemic, it is important to note that these estimates have a high degree of uncertainty.
7–11 percent of the banknotes in circulation ($7-11 billion) are used in the shadow economy, either to conceal legal transactions to avoid tax, to pay for illegal goods and services, or to store wealth generated by the sale of illegal goods and services.