Mystery over £50bn lost to shadow economy

Little known about the whereabouts of a huge number of banknotes in circulation, watchdog says

AS MUCH as £50billion worth of banknotes could have disappeared into the “shadow economy”, the spending watchdog has found. The number of notes in circulation hit a record high of 4.4 billion in 2020, but it is estimated that less than a third are regularly being used for cash transactions, according to a report by the National Audit Office.

The NAO said little is known about the remainder − thought to be worth approximately £50billion − but suggested that it could be held overseas, in undeclared household savings pots or have been swallowed up into the “shadow economy”.

This is generally considered to include income from illicit services such as drug dealing, prostitution or undeclared work to avoid paying tax. The NAO said that government bodies “have little reliable information to quantify how much is likely to be held where”.

Gareth Davies, head of the audit office, also warned that the “fragmented” approach being taken by the Government and other bodies to protect access to cash risked the creaking system being left behind.

He said: “As society progresses towards the wide use of digital payments, the use of cash in transactions is dwindling. It may become harder for people to access cash when they need it and those without the means to pay digitally will struggle if cash is not accepted. HM Treasury now works more closely with public bodies in the cash system to achieve the Government’s goal of safeguarding access to cash.

“However, the approach is fragmented, and it is not clear that the action being taken will keep up with the pace of change.”

A decade ago cash was used in six out of 10 transactions, but in 2019 this had dropped to just three in 10.

However, estimates suggest that as many as two million people rely on having access to cash to go about their daily lives. The NAO said older people and those on low incomes are particularly likely to rely on cash.

The decline in cash usage has put pressure on the system as many of the costs associated with it are fixed, including bank branches and ATMS.

In the two years to December 2019, there was a 17 per cent decrease in the number of free-to-use cash points, but the NAO warned that the proportion is falling faster in more deprived areas.

The Government said in March that it will legislate to protect access to cash for the most vulnerable.

A spokesman for the Treasury said it is working closely with other authorities to “ensure a joined up approach, which has already resulted in greater protections for ATMS”.

Coin production shrank by 65 per cent in the past decade to 383 million UK coins a year in 2019-20, from about 1.1 billion in 2010-11.

The Royal Mint also has no plans to produce new 2p or £2 coins for at least 10 years as they are overstocked, the NAO report said.