Government’s debt has been increasing each year since 2008. The reason boils down to two simple concepts that everyone is familiar with: spending too much, earning too little or a combination of the two. The current pandemic looks set to worsen our levels of debt.
A country’s debt is typically measured as a percentage of GDP* to make it easier to compare amongst different sized countries – for example, it would be unfair to compare our GDP to that of the US as they’re much larger than us. Our debt-to-GDP ratio was 69% last year with some analysts predicting it to rise above 90% by 2023.
How can we reduce this ratio?
Government needs to focus on increasing tax compliance and reducing unnecessary/irregular expenditure. Finding new ways to tax citizens, regulating levels of government expenditure and placing limits on certain expenditure are other ways government can reduce its debt burden.
There is another simpler, yet slightly controversial method which can be implemented through the South African Reserve Bank (SARB) – physically printing more money. However, contrary to popular belief, the SARB is not owned by government, which means that they can’t simply order them to print more money. The SARB is one of seven reserve banks globally which has both government and private individuals as shareholders.
Implications of printing money?
If you print more money, you increase the supply of notes and coins in South Africa, but it doesn’t necessarily increase the number of goods and services in the economy. This means that there is more money chasing fewer goods and services which results in inflation – paying more purchases at shops and online.
If it spirals out of control, it may also lead to hyperinflation – like in Zimbabwe in 2008. The Zimbabwean government resorted to printing money in an effort to pay off its debt and counter the slowing economic output at the time. This is one of the reasons why many reserve banks and governments of their respective countries are independent. Some even prevent their reserve banks from lending money to the government to preserve their independence.
Interesting fact about the SARB
Apart from printing the notes and coins we use to make purchases with, the SARB is also responsible for issuing Krugerrands – one of the most popular gold coins in the global market.
They are a popular investment option for private individuals because of their size and value – they’re easy to store and you can buy them in small quantities. The first Krugerrand was minted in 1967 and was responsible for around 90% of the world’s gold production 13 years after the first coin was minted. Nowadays things look very different as South Africa’s total gold production has only had a mere two years of positive growth since 1994.
📚 Word of the Week*
GDP – Gross Domestic Product. The total value of goods and services produced by a country in a given time period – usually one year.