Inflation: A Hidden Tax (Part-2)

In the previous article, we discussed the mechanism by which governments all over the world can and do use inflation as a hidden tax against their populations. Now, one thing needs to be understood i.e. for inflation to occur, the government has to by definition spend more money than it makes in taxes. The system works only if the government runs a fiscal deficit since it is the accumulated debt which can be monetized by printing money. In the absence of a fiscal deficit there will be nothing to monetize.

In this article, we have listed down some of the programs that governments all over the world undertake. These programs seldom meet their desired objectives. However, they end up causing massive debt which later gets converted to inflation.

Welfare Schemes:

Welfare schemes like social security, unemployment benefits and Medicare are already bankrupt in most countries that offer them. There isn’t a country in the world which has the money to pay for the obligations that it has created by promising welfare schemes to its own citizens. Hence, now whenever the benefits of these welfare schemes become due, many governments simply borrow this money in the short term and in the long term they monetize this debt i.e. the pay it off by creating more money. Given the fact that welfare schemes in most developed countries have massive budgets, it is easy to see why this could be the cause of a massive inflationary run in the near future!

Unproductive Jobs:

Unproductive jobs, like welfare schemes are a drain on the public resources. In countries like Greece, half the working age population was involved in government jobs and many of these jobs were simply outright unproductive. The reason that these jobs existed were because the government had promised the existence of these jobs in pre-election days in exchange for votes. Needless to say that since these jobs do not add value, but wages have to be paid, sooner or later they will lead to a massive build up of debt and sooner or later, they will also contribute to inflation.


Bailouts are a fairly recent phenomenon. They were brought into the limelight when the United States government paid the bankers and other companies $700 billion to protect their businesses. This money was given out as a loan by the government and was expected to be repaid.

Now, from this news it may appear like the US government is flush with excess cash and paid out $700 billion to these corporations. That is not the case in reality! In reality, the US government itself needs to borrow $2 billion per day failing which it will not exist. Hence all the money paid to corporations has further added to the fiscal deficit and when monetized will lead to inflation.

Infrastructure Projects:

In many countries, excessive borrowing is justified in the name of infrastructure projects. Consider the case of Greece once again. The metro rail line built in the Greek capital of Athens was an economically unviable infrastructure project. However, money was still borrowed and pumped into the project. A few years later, the project could not pay off its debt by the earnings generated from the project itself. This caused a buildup of debt which experts say will sooner or later be paid off by the monetization of these debts. The reason that this monetization is taking so long is that Greece does not have complete control over the monetary policy of the Euro.

The bottom line therefore is that, while some infrastructure projects may be good for the economy, this isn’t always the case. Countries should refrain from taking on massive debt unless they are certain about the economic viability of any given project.

National Events:

Lastly, national events like World Cups, Olympics and Commonwealth games lead to massive overspending in these economies. Countries often borrow immense amount of money to fund building of sports infrastructure which may not be a priority for the development of the country. In the name of pride and promoting tourism, large amounts of money are spent without consideration as to how it will be repaid.

The above list shows the common causes which can be traced down behind the inflation that is being borne by most countries today. Under ideal circumstances the voters should be wary of the announcement of any such project by the government. However, in reality that is not the case. Most of the times, these projects are welcome despite repeated evidence that some of these projects have directly led to inflationary circumstances in the economy.

The idea is to promote a government with a balanced budget. A government that does not spend more than it makes is a government that will not feel the need to create more currency. Therefore, it is the government which will not cause inflation.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.

Managerial Economics