Paper money and the hidden economy

Governments are looking to cut down on paper cash

 

Not many builders accept credit cards - for some reason they really don't like having all those receipts lying around. It isn't just the super-rich who are causing HMRC problems with their tax avoidance strategies. The so-called "hidden economy" is an equally big problem for governments across the world. And it is that untraceable folding money that enables it.

As such, governments with the biggest economic problems are increasingly looking to cut cash in circulation and encourage the use of electronic payments.

In Italy tax evasion is estimated to be 22 per cent of GDP. Part of Mario Monti's economic reforms agenda has been designed to reduce the amount of cash in system by increasing the volume of electronic payments made at the point of sale. In practice, this means imposing a cap on merchant service fees - the processing charges retailers are required to pay on card transactions. The more people use electronic payment methods, the harder it is to hide from the tax man.

The Italian government hopes to win the support of the retailers in encouraging consumers to use their cards more regularly. Winning that support is not easy - retailers like cash in their pockets like everyone else. That is why many smaller retailers still impose minimum spends for customers wishing to use their cards. But the advent of contactless payments is changing that, and in the UK, many high-volume, low value retailers (like cafes) are now encouraging people to "tap and go", even for purchases of £1 or £2.

Some governments around the world have their work cut out in the war on cash, even by Italian standards.

For the banking and payments sector Nigeria is one of the world's biggest boom markets. Debit cards and electronic payments are big business out there as the government faces the seemingly impossible task of cracking down on corruption.

This is certainly a difficult task in a country that runs on brown envelope deals, and has a reputation as a breeding ground for internet scammers. But no-one can accuse the government of half measures. The Central Bank of Nigeria is seemingly unphased and unstoppable. Arrests of senior bankers is a regular and high-profile. And unlike the Italians, they aren't interested in incentivising people to move to electronic payments methods. Their methods are altogether more direct, replacing the carrot with the stick Huge penalties are being levied on cash withdrawals of over NGN150,000 (£600) at ATMs. Businesses accepting cash payments of more than NGN 1m (£4,000) are being charged 20 per cent for the privilege. The initial results have been mixed, but what is certain is that Nigeria's government is fighting fire with fire.

 

 

Paper money: up for destruction? Getty images

James Ratcliff is Group Editor of  Cards and Payments at VRL Financial News.

Photo: Getty
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.