Africa-Press – South-Africa. Inflation is a hidden tax that reduces the real value of people’s money and effectively transfers wealth to the government.
Although inflation is not an explicit tax levied by legislation, it is a loss of purchasing power that diminishes the real wealth and income of citizens.
This is why many economists argue that citizens should closely monitor inflation and government spending, as it is ultimately a form of taxation on them.
Nobel Prize-winning economist Milton Friedman said a budget deficit, which is commonplace in South Africa, is simply a form of taxation.
“It is hidden taxation in two main forms, through printing money and inflation or through borrowing,” Friedman said.
He urged taxpayers to keep an eye on how much the government is spending. “That is the true tax,” he said.
“Every budget is balanced, and you pay for it through explicit taxes or indirectly in the form of inflation or borrowing.”
Efficient Group chief economist Dawie Roodt said that inflation erodes the value of money, which, in turn, erodes the value of debt.
“South Africa’s Finance Minister has plenty of debt, and he wants to reduce this debt. One way to reduce debt is in a high inflation environment,” he said.
“A large percentage of state debt is actually repaid through inflation, which is terribly damaging to the economy.”
Considering that inflation is essentially a hidden tax on citizens, Roodt is in favour of South Africa’s new inflation target.
The new target of 3% with a tolerance band of 1 percentage point replaced the old target range of 3% to 6%.
While the band allows for 2% to 4%, the SARB’s policy stance, forecasts, and communication will be consistently oriented towards the 3% point target.
This should result in lower inflation in South Africa and, in the medium to long term, a more stable currency.
Reducing government spending and lowering debt
In South Africa, government spending has increased significantly since 2008, and the government has run consistent deficits for the last seventeen years.
It funded these deficits with debt. However, this money was not spent productively, which meant there was very little economic growth.
The slow economic growth and rapid increase in spending led to South Africa’s gross loan debt reaching concerning levels.
In the 2008/09 financial year, the government’s gross loan debt amounted to R627 billion. By the end of 2024, it had exceeded R5 trillion.
South Africa’s debt-to-GDP ratio rose from 24% of GDP in 2010 to over 75% in 2025.
Finance Minister Enoch Godongwana stated earlier this year that the 2025/26 financial year will see the debt burden peak at 77.9% of GDP.
Investec chief economist Annabel Bishop said the National Treasury has repeatedly issued projections for South Africa’s debt-to-GDP ratio.
However, these projections have not been met, and the debt-to-GDP ratio has been revised upward time and again.
“This has provided an issue where there are expectations of continued fiscal slippage, with most questions surrounding differences in GDP growth forecasts,” she said.
However, even if the government does manage to stabilise its debt burden in the current financial year, it will still be at unsustainable levels.
“Overall, at 77% of GDP, South Africa’s debt ratio is still not a sustainable ratio for an emerging market, that is broadly seen as being 60% or less,” Bishop said.
Another thing to consider is that South Africa’s debt ratio is even higher when the government guarantees the debt of public companies and municipalities.
That debt, over time, is likely to be transferred to the government’s balance sheet, putting it in a worse financial position.
What makes the debt burden particularly unsustainable is the country’s cost of servicing these liabilities. It spends over R1 billion a day in interest payments.
While there is positivity surrounding South Africa’s financial position, some have urged caution as the economy is not growing fast enough to sustain the state’s debt burden.
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