Despite political stalemate, fiscal discipline still on track

In this resistance, the government’s high sense of responsibility in preserving the supremacy of democracy and sovereignty of Parliament over the antidemocratic attempts of oligarchs who are resisting change and reform toward EU standards, the dedication of the government to economic reforms and other priorities of stability, the high level of trust among the public in the ruling single-party government and finally, sound management and the resulting robust figures in the public and financial sector balances have been quite decisive.

Today I want to discuss recent developments in the public sector from the viewpoint of fiscal discipline. As a reminder, since 2004-2005, fiscal discipline has almost been accomplished in the sense that (1) the budget deficit to gross domestic product (GDP) has declined to below 3 percent since 2005; (2) the public sector debt burden to GDP has been below 60 percent since 2004. Fiscal sector improvements in public sector debt continued in 2007 and by the end of the year, the debt/GDP ratio fell below 38 percent; (3) Public sector borrowing requirements realized -0.3 in 2005, -2 in 2006 and 0 in 2007; (4) The share of interest expenditures in total government revenue declined to almost 32 percent in 2007 from 97 percent in 2002; and (5) its share in GDP declined to nearly 5.5 percent in 2007 from almost 20 percent at the end of 2001.

It is apparent that the government has been quite successful in maintaining fiscal discipline even after the post-International Monetary Fund (IMF) program in 2008. As is known, Turkey had implemented a stabilization program with the IMF since 1999, a program that led to a dramatic crisis in 2001, and after a couple of changes to the major architecture Turkey continued with the same program. In fact, this program should be considered a success story in the post-crisis era thanks to the contribution of many factors, such as the single-party government’s dedication to reform measures, the EU membership agenda as an anchor, the positive economic outlook in the global economic environment, a surge in productivity in almost all categories and foreign direct investment.

By the end of the latest (19th) stabilization program, the government decided to put an end to Turkey’s long-standing relationship with the IMF and to pursue its own program. This, however, does not mean that the government will definitely deviate from fiscal discipline. As a matter of fact, the government has already announced a medium-term fiscal framework in which long term-oriented targets are fixed in order to create and keep positive expectations in the long term. In this plan, despite the fact the government decreased the rate of primary surplus to GDP to 3.5 percent in 2008, the budget deficit to GDP has been targeted at 1.4 percent (below that of 2007) and an even lower public debt burden to GDP.

When we consider the budget implementations for the first five months of 2008 (see table), we can see that the results are quite positive as we compare the government’s initial targets and the same period in 2007. To clarify my position, despite slow economic growth in 2008, a situation in which tax revenues are expected to decline, revenues rose by around 5 percent, while expenditures rose only 3 percent. In such an environment, interest expenditures, as one of the major problems in the Turkish public sector balances, continued declining dramatically. The rate of decline was more than 17 percent. Despite all of this, the government budget deficit remained around YTL 2 billion, a 38.2 percent improvement compared to the same period in 2007.

The year-end budget deficit target is YTL 18 billion. It seems that under current conditions, the year-end budget deficit will be less than YTL 15 billion. Obviously, this would be a big success in a period of such slow economic growth in both the domestic and external arenas and during a deep political crisis, leading to big uncertainties among economic agents and their decisions.