How the government secretly steals your money

The government regularly prints money, which causes inflation and deteriorates the value of the country’s currency. This can be seen as a hidden tax.

Renowned economist Thomas Sowell explained that when a government has a fiscal deficit, it issues bonds to cover the shortfall.

Simply put, the government borrows money to cover its budget shortfall by issuing sovereign bonds.

However, there is a challenge. Unless the government starts to run surpluses to repay the debt, its repayments will rise, and it will need to issue more bonds to meet its obligations.

This can create a vicious cycle in which an increasing amount of money is spent on debt repayments and less on improving the country.

South Africa is facing this problem due to its rising debt burden. In 2008/09, gross loan debt amounted to R627 billion.

Fifteen years later, the government’s gross loan debt ballooned to R5.21 trillion, or 73.9% of GDP. However, this is only part of the problem.

Efficient Group chief economist Dawie Roodt said the South African government’s true debt-to-GDP ratio is much higher.

He explained that combining the state’s official debt and those of state-owned enterprises comes to around 90% of GDP.

South Africa’s rising debt has resulted in the country’s debt servicing costs increasing to roughly R1 billion a day.

This means that 22 cents of every R1 collected in tax is spent on servicing the government’s R5.46 trillion debt pile.

Debt repayments are higher than the budgets for social protection, health, and peace and security.

One of the biggest problems is that low economic growth and high interest rates have resulted in the government paying around 10% in interest on its debt.

The state’s income has only grown by 6% as tax revenue correlates closely with economic growth.

Old Mutual Wealth investment strategist Izak Odendaal said this gap started widening about a decade ago as the county’s economic growth slowed. 

The hidden tax

Roodt explained that printing more money to repay debt is an attractive option for all governments.

However, it comes at a cost. Printing money leads to higher inflation and a weaker currency. Despite these negative aspects, this is where Roodt expects South Africa to be heading.

“I think within two to three years, we will see a significant weakening in the rand as this scenario plays out,” Roodt said in April 2024.

“By how much the rand will weaken will depend on how the South African Reserve Bank and fiscal authorities behave.”

Sowell said inflation, which is caused by the central bank printing more money, should be seen as a hidden tax.

He explained that this hidden tax is not only confined to the rich, as all citizens are affected by the weaker currency.

“When the central bank prints money, it is simply stealing the value of the money which citizens have saved,” he said.

“This means that the government printing money is the same thing as a tax. However, it is an inflation tax.”

Economist Milton Friedman also said that the real tax on people is what the government spends and that it should be watched closely.

He said any deficit, where taxes do not cover government spending, results in the government either printing money or borrowing.

This results in inflation and the deterioration of the value of money. “Inflation is, from this point of view, a form of taxation,” he said.