EKIP– Expert Club for Economics and Politics A Different Opinion
Two years after the last attempt to remove the cap on cash payments, it is time to raise the topic again. But this time, not to remove it, but to increase it, or better yet, to remove it completely. The Expert Club for Economics and Politics recently published a report in which we recommend exactly this, not just because this regulation tramples on citizens' rights, but also because there is absolutely no data to show that limiting cash payments has a tangible effect on the size of the shadow economy. And this is the only argument for its existence.
In 2018, the European Commission published a detailed report on the subject, in which it unequivocally concluded that limiting cash payments in the member states of the European Union (where there is one) is an ineffective means of combating crime, terrorism and the shadow economy. Because of this fact, the Commission in the same report withdrew its support for such regulations, considering that in the past it was the main institution that promoted their implementation within the EU. When the government tried to remove the ceiling on cash payments two years ago, the intuition of the majority of Bulgarian society was against this measure. Two years later, the European Commission also agrees.
The first problem with cash restrictions is that they do not in any way focus on the real criminal economy, where the largest unaccounted amounts and taxes missed for the treasury are actually concentrated. This is because this "hard" gray economy (which is part of the broader gray economy) includes transactions in which both parties are aware that they are committing a violation of the law and, accordingly, both parties avoid accounting for the relevant transactions to the tax authorities. When two groups conclude a drug deal, neither of them cares what the limit on cash payments is. No matter how strict it is, they will not comply with it, because they have made a conscious decision to break the law.
In addition to this type of "hard" gray economy, there is also one that can be called "soft", in which the violation of the law is unilateral. For example, a small neighborhood grocery store does not account for (partially or fully) VAT. In most cases, the average consumer of such stores is not aware of this, respectively, does not knowingly commit a violation of the law. In theory, restrictions on cash payments can have an effect precisely in this type of transactions, in which at least one party strives to comply with the law and is therefore very likely to try to comply with this regulation. However, as often happens, reality turns out to be quite far from theory.
The problem is that most such transactions are made for very small amounts. In most cases, when it comes to such transactions, we are talking about small everyday consumer purchases of about 20 BGN, a maximum of 50-100 BGN in rarer cases. In the rarest cases, we are talking about purchases worth several hundred BGN. If we are talking about transactions for over 1,000 BGN, let alone over 10,000 BGN, we are already talking about very large purchases of cars, high-quality modern equipment (computers, TVs, and the like). These are all purchases that are made rarely - once every few years by a given user, and accordingly their frequency is much lower than small purchases for 20-100 BGN.
Due to this fact, logically, we must conclude that unless it is extremely low, the ceiling on cash payments will not have a tangible effect on the "soft" (one-sided) gray economy. And this is exactly what the data shows. According to the most recent study by the multinational accounting firm Ernst&Young on the gray economy in Bulgaria, in order for the limit on cash payments to have even a minimal effect, it must be lowered to a maximum of 60 leva. In this case, a decrease in the size of the gray economy of about 1% of GDP can be expected, and that is in the optimistic scenario. If we want a more serious restriction of the gray sector, then according to Ernst&Young's calculations we must lower the ceiling to 20 leva and then we can expect a decrease of about 4% of GDP.
As should be obvious, such restrictions are completely unenforceable. Lowering the limit to 20 leva means forcing citizens to pay electronically in almost every case. Imagine going out to a restaurant and not being able to pay in cash. Or when you go to the store to do some shopping for a few days. Even the bills for electricity, telephone, water, and certainly heating, you will only be able to pay electronically.
It is difficult to even imagine how restrictive such regulation would be for the financial freedom of citizens. In addition to consumers, such an extremely harsh regulation would also have a suffocating effect on businesses, especially small, developing businesses. Yes, and at the moment there are people who, even when it comes to small transactions, prefer to pay electronically, but these people are still a minority. And most importantly, they have chosen to do so voluntarily, and not because the state is forcing them.
As we can see, in both cases, restrictions on cash payments cannot have any effect. The data is again eloquent – there is no positive statistical relationship between the implementation of limits on cash payments and the reduction of the shadow economy. We have described the data in detail in our report. In Europe, there are a number of examples of countries without any limits on cash payments, such as Germany, Austria and the Netherlands, but with very low levels of the shadow economy – ranging between 7% and 11% of GDP. There are also opposite examples. The countries with the strictest restrictions at the moment are Greece, Italy and Spain, and in these countries the shadow economy varies between 17% and 22% of GDP.
The picture in Bulgaria is clear. We have had a limit on cash payments since 2011 (15,000 leva then), which was lowered to 10,000 leva in 2015, but without this having had any tangible effect on the size of the gray sector. It continues to be around 30% of GDP. It is no coincidence that the Ministry of Finance and the National Revenue Agency never substantiate their ideas for stricter regulations with data. Because they simply do not have any. The only function that such regulations perform is to advance the lobbying interests of banks and credit card companies.
The interest here is obvious. If people are forced to use less cash and more banking services and cards, the profits of the banks increase. This is the only effect of such regulations, but it is achieved at the expense of the financial freedom of citizens, who have every right to choose how to pay. The biggest and most dangerous absurdity of such regulations is that they treat anyone who wants to pay in cash as a criminal simply because of their chosen payment method. Let's be clear - paying in cash is not a crime, but a fundamental financial right that we should never allow to be taken away from us.
The article was originally published in the newspaper "Trud"
