Back in 2015, George Osborne reportedly came within weeks of announcing plans to get rid of the 1p and 2p coin. Despite evidence suggesting that the move would have limited impact on consumers and the economy, the Chancellor’s plans were eventually shelved.
Earlier this year, the Treasury reconfirmed its commitment to retaining both the 1p and 2p coins following a consultation.
Should the UK follow the lead of several other countries such as Ireland, Australia and Sweden in scrapping their low denomination coins? Or are the 1p and 2p coins here to stay?
The arguments for scrapping 1p and 2p pieces
One of the main reasons that supports the argument to get rid of the 1p and 2p coins is that there has been a sharp decline in the use of coppers as payment.
Cash payments currently account for just 3% of all sales in the UK, as more and more people use contactless and card payments in stores. The rise in online shopping has also removed the need for cash.
Research has also found that today’s consumers are also less likely to spend coppers than in the past. A Treasury consultation document on cash and digital payments revealed that six out of every ten 1p and 2p coins are used just once before they drop out of circulation – into money boxes or down the back of the sofa.
Indeed, around 8% of coppers are thrown in the bin every year. According to the Royal Mint, there are 11,430 million 1p coins (worth more than £114 million) and 6,714 million 2p coins (worth over £134 million) in circulation and so 8% would lead to substantial waste. As the cost of replacing these coins rises, it may even cost more to mint new coins than they are worth.
This is reflected in the Royal Mint’s production of 1p and 2p coins, which roughly halved in 2016-17 compared with the previous year. Production of pennies fell from about 500 million to 288 million.
Another reason why copper coins may no longer be needed is because there has been a reduction in the number of goods which are charged at prices ending in ‘99p’.
The prevalence of item prices ending in .99 has fallen in recent years and now accounts for just over 12% of prices.
The final reason given for the abolition of copper coins is that rises in the cost of living have eroded the purchasing power of the 1p and 2p. Indeed, it can be argued that the 1p is worth less now than the halfpenny was on its abolition in 1984.
Could getting rid of copper lead to higher inflation?
One of the arguments against scrapping the 1p and 2p piece is that it would lead to price increases and inflation, as the cost of goods could be rounded up by a retailer.
The argument goes that as retailers tend to price items just below round numbers (.49 or .99), they would end up rounding their prices up more frequently than they rounded them down (to the nearest 5p – the next lowest denominated coin that could be given in change).
However, experts have argued that the impact on consumers would be minimal. For example, in other countries that have removed their low denomination coins, such as Argentina or Australia, prices have been rounded up on the final bill rather than on individual items.
In fact, if you buy more than one item at a time, the bias in the probability that your total bill will need to be rounded up rather than down actually falls.
Marilena Angeli and Jack Meaning, authors of research into the scrapping of the 1p and 2p, say there is ‘overwhelming’ evidence that the withdrawal of coppers would have ‘no significant impact on prices’.
“Price rounding would be applied at the total bill level, not on individual items and it would only affect cash transactions, which make up a low proportion of spending by value,” they say.
Decision to retain copper coins welcomed
After a lengthy consultation, the government announced earlier this year that 1p and 2p coins will remain in circulation ‘for years to come’.
The Treasury has estimated that 2.2 million people in the UK are reliant on cash, particularly the elderly, vulnerable, and those living in rural areas. Philip Hammond said that the decision to leave the current mix of notes and coins unchanged was a matter of public freedom.
“It is clear that many people still rely on cash and I want the public to have a choice over how they spend the money,” he said.
The decision was welcomed by the trade body for small businesses, which has consistently called for the status quo.
“Keeping 1p and 2p coins in circulation is the right call,” said Mike Cherry, National Chairman of the Federation for Small Businesses.
“The freedom to use pennies is still important to a lot of small firms. For many, being able to charge prices that end in 99p rather than a round pound figure can be enough to tip intrigue into a sale, particularly where lower-value items are concerned.”
Charities were another group that were delighted by the news.
Sir John Low, Chief Executive of the Charities Aid Foundation, said: “Cash is still by far the most common way people donate to charity, so the forecast in HM Treasury’s consultation document on cash and digital payments, suggesting that cash transactions will more than halve from 12 billion transactions a year to 5.8 billion between 2016 and 2026, could have a real impact on charities if people carry less cash to give away.”
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