The death of cash has raked in an extra £12bn for Jeremy Hunt as card and digital payments make it harder for people to dodge tax.
Richard Hughes, chairman of the Office for Budget Responsibility (OBR), said the shift away from notes and coins had proven lucrative for the taxman because it was now harder to avoid value added tax (VAT).
He said: “The death of cash has been very good for VAT receipts. The fact that people are no longer using cash has reduced the VAT gap dramatically,” referring to the difference between the amount of revenue expected and the amount of tax actually collected.
The OBR said the VAT “tax gap” has fallen from the equivalent of 0.8pc of GDP in 2005-06 to 0.3pc in 2021-22. In cash terms, it has boosted tax income by £12.1bn.
Cash was used for fewer than one-in-five transactions in 2022, according to the British Retail Consortium (BRC), down from more than half a decade ago.
Typically notes and coins are used for smaller purchases. The value of transactions involving cash is just a tenth of the total, the BRC said.
By avoiding the anonymity of cash-in-hand transactions, card payments and digital transfers make it easier for the authorities to levy the 20pc transaction tax.
Mr Hughes told a Budget event at the Resolution Foundation think tank: “The Government’s efforts to crack down on tax avoidance have also boosted the tax to GDP ratio without raising anybody’s rate, so the Government deserves some credit on working harder to collect some peoples’ tax.
“The death of cash is making that easier as well.”
Mr Hunt, the Chancellor, announced plans to give HMRC more resources to chase taxes the state is owed in Wednesday’s Budget.
He said: “I will provide HMRC with the resources they need to ensure everyone pays the tax they owe leading to an increase in revenue collected of over £4.5bn across the forecast period.”
There are currently £81.3bn worth of banknotes in circulation, according to the Bank of England, up by 44pc from £56.2bn in 2014.
Figures from the OBR also indicated that taxpayers face a £104.2bn bill to cover losses linked to the Bank of England’s money-printing programme amid warnings that a jump in interest rates could push up the cost by a further £50bn.
The Bank hoovered up almost £900bn of UK debt during the pandemic and financial crisis in an effort to prop up the economy. The process is known as quantitative easing (QE).
At the time, it generated huge profits that were transferred to the Treasury as the Bank made more money on its holdings of UK gilts than the interest it paid on reserves held by commercial lenders.
This has reversed as interest rates have surged from their record lows. The Bank has also started actively selling some of its stockpile of gilts at a loss.
“Since Bank Rate and gilt yields rose from their record lows in the second half of 2022, the Bank of England’s Asset Purchase Facility (APF) has gone from making a profit to making a loss,” said the OBR. “Having transferred £123.9bn of cash profits to the Treasury between January 2013 and October 2022, a total of £49.4bn has been transferred from the Treasury to cover losses incurred by the APF since then.”
The OBR said its current estimate of the lifetime cost of quantitative tightening as the Bank continues to reduce its stockpile of debt was £21.9bn lower than forecast in November as lower interest rates reduce the Bank’s costs.
It said the estimate was highly sensitive to changes in interest rates. If interest rates average 3.4pc in the coming year instead of the 4.4pc it was currently predicting, the lifetime cost would fall to £46.6bn, according to the OBR. By contrast, if interest rates averaged 5.4pc for the whole year, the lifetime cost would soar to £156.9bn.
The OBR cautioned that these estimates for the cost of QE were far from comprehensive because money printing “supported the economy, asset prices, and financial markets at various points of stress over the past 15 years”.
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