Is the government preparing for negative rates by restricting cash payments?

What is it?

In the 2018-19 budget, the federal government announced it would introduce an economy-wide cash payment limit of $10,000 for payments made or accepted by businesses for goods and services.

Transactions equal to, or in excess of this amount, would need to be made using the electronic payment system or by cheque.

For all intents and purposes, the so-called “Black Economy Taskforce” recommended this action to tackle tax evasion and other criminal activities.

Public submissions on the proposal closed last month with a reported implementation date for the economy-wide cash payment limit, via the Currency (Restrictions on the use of Cash) Bill 2019, from 1 January 2020 and for certain AUSTRAC reporting entities from 1 January 2021.

What do I think it is?

The truth of the matter is I don’t think this policy has anything to do with the black economy.

In fact, it has everything to do with the government preparing for a zero or negative interest rate environment.

That’s because an International Monetary Fund (IMF) policy on a nil or below cash rate is a recommendation to restrict the movement of cash out of banking systems.

In essence, it’s a phasing out of cash, with a preference for everyone to pay for goods and services via their debit or credit cards.

So, rather than stamping out the cash economy, the proposal in my opinion aims to shore up our economy in times of financial turmoil.

Why restrict cash withdrawals?

A number of countries have already followed the IMF policy when their interest rates fell below zero, such as Japan and Greece, and restricted the amount that people could withdraw – of their own money remember – from a bank.

The reason why they would implement this policy is to prevent a run on banks from people whose money is losing value because of negative interest rates.

In such a situation, self-funded retirees – along with a myriad of others – would likely withdraw most of their cash to prevent it from reducing in value any further.

The end result of that is the banking system may literally run out of money – and that is not a good situation for anyone, especially not for our economy.

That’s why I believe that is the mainstay of the bill – and not to supposedly sideswipe the black economy.

Why negative rates won’t happen here

I actually don’t think Australia will ever see a negative interest rate environment because we’re simply spending so much money on infrastructure – to prevent such a thing from happening.

In fact, in the developed world, per capita, we are spending the most on infrastructure.

If you look at the “Crane Index”, which is the number of cranes in the skyline, there are 756 cranes in operation in Australia at the moment, which is far superior to most other economies.

The government is still holding on to the promise of a budget surplus as well.

Plus, our exports are booming thanks to our lower dollar, and we’re experiencing a mini resources boom as well.

Business sentiment is also tracking relatively well.

However, via this policy, the government is still preparing for the possibility of negative interest rates, which may be a smart thing to do, but will ultimately be unnecessary in my opinion.

By Victor Kumar, Right Property Group.