Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 495

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.

 

  •   8 February 2023
  • 7
  •      
  •   
7 Comments
john flynne
February 09, 2023

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

John
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- !!

GMS
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.

Darryl
February 10, 2023

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

Are they in my Apple Wallet?

Mick
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.

Darryl
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 .

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.

 

Leave a Comment:

RELATED ARTICLES

Superannuation funds should be long-term lenders

Is the Retirement Income Covenant really the right answer?

Questions remain on legislating the objective of superannuation

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Superannuation’s structural failings

Politicians are fighting over access to super, but they may be arguing about the wrong thing. The system’s three fundamental flaws have been hiding in plain sight for decades, costing Australians far more than they realise.

Avoid unnecessary CGT with this estate planning clause

A simple estate plan can create a ticking time bomb. One overlooked clause can pit spouses against children, delay inheritances, and potentially leave a family facing an unexpected tax bill worth hundreds of thousands of dollars.

Latest Updates

Superannuation

Superannuation’s structural failings

Politicians are fighting over access to super, but they may be arguing about the wrong thing. The system’s three fundamental flaws have been hiding in plain sight for decades, costing Australians far more than they realise.

Planning

The great wealth transfer myth

Why do some families preserve wealth for generations while others struggle to? As the great wealth transfer unfolds, the determining factor is often not the structure of the estate, but the preparation of those who will inherit it.

Investment strategies

What comes after bank hybrids?

For years, bank hybrids have been a cornerstone of portfolio income. With tens of billions of dollars now disappearing from the market, investors face a critical question: what comes next, and are the obvious replacements enough?

Investment insights from the US

What happens when knowledge becomes a commodity? The latest themes emerging from the US tech sector suggest AI could reshape company moats, disrupt incumbents and create winners and losers in unexpected places.

Investing

Can Berkshire thrive without Buffett?

Warren Buffett's departure marks the end of an era. But the more important question for investors is whether Berkshire's culture, discipline and capital allocation framework can survive without the man who built them.

Retirement

The Bengen 4% Rule: Lost in translation

For years, retirees have been told to focus on withdrawal rates. But the real question is far simpler: how many dollars can you safely spend? The answer may be very different from what conventional retirement wisdom suggests.

Interest rates

Super low interest rates came with side effects

For more than a decade, investors lived through an era of near-zero interest rates. With bond yields now surging, it's worth asking whether cheap money solved economic problems, or introduced a much larger set of risks.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.