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Why a $5 coin and not a $5 note repays public debt

Over 30 years ago we published an academic paper explaining how the replacement of the $2 note with the $2 coin in June 1988 had led to a short-term reduction in the Commonwealth Government’s recorded budget deficit. The reason was the budgetary accounting treatment of the seigniorage profit to the Mint from creating coins compared to when the Reserve Bank (RBA) prints notes.

We doubt many people have ever read that paper. It’s an arcane topic and the title (typical of academic papers of the time, or maybe reflecting our lack of imagination) was hardly ‘sexy’. But the analysis there explains why today’s government, with a massive budget deficit (and a recent change of monarch) might find introducing a $5 coin attractive.

What is seigniorage, other than a lovely word?

Seigniorage is the profit the government makes from producing fiat money (notes and coins) at close to zero cost. The public is willing to accept these in exchange for supplying the government with labour, goods and services, or assets etc of equal nominal amount. Wouldn’t we all like to create such a ‘money machine’ (and the explosion of cryptocurrencies reflects attempts by their promoters to do so).

So, if the Mint, a part of the Government, makes a $5 coin at virtually zero cost, when that coin is put into circulation, its profit of $5 is treated as revenue to the Government, reducing the budget deficit in that year. In contrast, if the RBA puts an additional $5 note into circulation (also at virtually zero cost) that is treated as a financing item, i.e., a liability in the RBA’s accounts.

Because the RBA is 100% owned by the Commonwealth Government, that $5 note is then effectively treated in the budgetary accounting as a component of Australia’s ‘national debt’. This is hard to spot because the RBA’s balance sheet is never published on a consolidated basis with that of its 100% owner.

A $5 coin would reduce public debt

This means that when a $5 note is taken out of circulation and replaced by a $5 coin, the $5 profit made on the coin is effectively treated as a reduction in the national debt through the cancellation of the note. In today’s budgetary situation, the latter effect is a $5 reduction in the recorded government borrowing requirement rather than a ‘redemption’ of public sector debt.

If, however, new $5 coins simply replace the public’s holdings of old coins of lower denominations, this budgetary effect does not occur. The same applies if reduced holdings (and use) of $5 notes outside the RBA are matched by increased holdings (and use) of higher denomination notes.

Will the government want to take this step? One perhaps minor consideration would be that the coins would have the image of King Charles on them while the existing notes (many of which would continue to circulate for some years) would feature Queen Elizabeth. Those who don’t want to see the Queen replaced by the new King on the notes might be diverted! The Royal Australian Mint says:

"Q. Who will be on Australia’s new coins?

A. The obverse of Australian coins are struck with an image of the reigning Sovereign.

Q. When will a new effigy appear on our coins?

A. Arrangements for the King Charles III effigy are still being finalised by the Australian Government."

The impact of inflation

Another consideration is that inflation since the $2 coin was introduced might mean it is time. The Consumer Price Index for 31 December 2022 is just over 130. In 1988 when the $2 coin was introduced it was around 50. So a $5 note (or new $5 coin) would be worth about the same in real terms as the $2 coin was at the time of its introduction.

Today’s circumstances mean it is more relevant that there is the opportunity for the Government to have an additional contribution to reducing the recorded budget deficit. There are today over 200 million $5 notes in circulation with an aggregate value of over $1 billion. Assuming that the Mint produced, and ‘sold’, that value of coins in one year, the recorded Government revenue (and budget deficit) for that year could increase (and decrease) respectively by that amount. It would probably be in the Government’s interest to spread the effect over two years, as happened with the $2 coin.

Do we even want coins?

Of course, whether the public would want to accept that amount of new $5 coins is problematic. Unless there was a compulsory exchange requirement (or equivalently by making $5 notes no longer legal tender by some date) it is not clear what the public demand to obtain and use such coins would be.

The public is continually moving away from physical money into electronic transactions, and in any event a $5 coin would seem likely to be regarded by many as less convenient than a $5 note. It would be well worth assessing whether the populace would appreciate such a change. Also, many may currently prefer to maintain the Queen’s image on the notes, although that preference may decline over time.

Long live the King ... and Queen

We learnt recently that King Charles III will not feature on the new $5 note, and the new design will tribute to 'the culture and history' of First Nations people, the RBA says. Perhaps a middle road which maximises ‘freedom of choice’ would make sense since having the monarch’s image on our currency is only a tradition and not a legal requirement. That could involve introducing the $5 coin (with the King’s image) while allowing the existing notes (with the Queen`s image) to remain in use and keeping the circulation in ‘good repair’ by replacing damaged and worn-out notes with new replacements, as per the RBA’s standard practice.


Owen Covick is a Research Associate at the South Australian Centre for Economic Studies, and Kevin Davis is Emeritus Professor of Finance at The University of Melbourne. Kevin’s free e-text reference book 'Bank and Financial Institution Management in Australia' is available on his website. Kevin was also a member of the Financial Systems Inquiry ('The Murray Report') in 2014.


Dave Roberts
February 13, 2023

When are we going to get real. Charles is not KCiii of Australia he is KC I Remember when the Queen was officially made Queen of Australia . We should have called her QE I. The Scots were more clever than us. No QE I on their postboxes, only QE.

February 12, 2023

Seigniorage can also be considered the forgone interest on fiat money.

For instance, if you have a $20 note in your wallet, you are not earning any interest on that note ... so this begs the question "who is"?

The answer is that the RBA is, they are getting an interest free loan from the holder of the note. The $20 note in your wallet represents an interest free loan from yourself to the RBA. The profit on that interest free loan is called seigniorage .

February 10, 2023

Yes, introduce $5 coin and get rid of 5c, 20c, $2, reduce size of 50c, and get rid of $20.
So end up with 10c, 50c, $1, $5, $10, $50, $100.

February 10, 2023

What is a $5 note? What is a coin?

Are they in my Apple Wallet?

February 09, 2023

A bit off topic. You guys have probably already seen it anyway.
Cash avoids the banks clipping the transactions each time with digital card fees.
After say a trail of about 30 transactions, and taking $50- as an example; it is now only worth about $5-.
Most of the value is now with the bank !!
Whereas if a $50 note is used instead, it is still worth $50- !!

February 10, 2023

These days, some outlets even charge you a transaction fee when you use eftpos direct debit from the savings account.

Next time I bring cash and make sure I come with the smallest denominations they are legally bound to accept.

john flynne
February 09, 2023

To do that would require some rational thought not a pop agenda


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