Here is the rationale: Politicians mostly love to spend but hate to tax. They pursue shortsighted and deficit-based fiscal policies since their major concern is to get re-elected and not long-term fiscal soundness. They also yield to pressure from special interest groups who do not suffer the damage to overall fiscal health inflicted by their competing demands for special fiscal favors. The resulting budget deficits are either monetized by central banks, causing inflation, or financed by government borrowing, which swells public debt. Fiscal rules, spanning over 150 years, have been enacted, at either the national or subnational level, as a set of permanent, explicit and verifiable, either annual or cyclically adjusted numerical constraints on budgetary aggregates such as budget balances, revenues, expenditures or debts, to ensure the credibility and stability of public finances. (Fiscal rules that directly constrain expenditures or revenues can limit the size of government in addition to providing fiscal discipline and sovereign solvency.) They are the counterpart of inflation targeting in monetary policy to ensure price stability. Fiscal rules strengthen the framework for annual budgeting by binding politicians to actions in the long-term national interest but not always in their own short-term interests. They address the time-inconsistency problem, i.e., priorities and preferred policies of governments change over time. Together, if applied credibly and harmoniously, fiscal rules and inflation targeting can result in overall economic stability that promotes sustained growth. Specifically, a fiscal rule is a permanent constraint and a concrete indicator of fiscal outcomes expressed in transparent and verifiable terms. Its permanence refers to its being binding on future as well as current governments and parliaments. Such permanence requires broad national consensus and strong commitment across the political spectrum that can withstand significant changes in political institutions. The transparency and verifiability are provided by the fiscal rule’s construction as a numerical formula. The success of a fiscal rule, which has to be credible but also flexible to respond to shocks, also depends on how its implementation is monitored and enforced.Recent research shows that fiscal rules are neither necessary nor sufficient for fiscal discipline. Some countries with a reputation for budgetary prudence have achieved fiscal discipline without them, whereas many others with a reputation for budgetary recklessness have not achieved fiscal discipline with them. Nevertheless, they can help under the right conditions, according to evidence observed since the early 1990s. Last December the International Monetary Fund (IMF) published a 72-page staff paper titled “Fiscal Rules -- Anchoring Expectations for Sustainable Public Finances,” which offers theoretical and empirical analyses of fiscal rules. Using a new database covering the entire IMF membership, it examines the evolution, design and implementation of fiscal rules, which have become increasingly common recently. They were adopted by 80 countries, about a third of them emerging market economies, in early 2009, compared with only seven countries in 1990. (But the recent global financial crisis has forced 20 countries to either modify or suspend their fiscal rules.) Over time many of these countries have chosen a combination of fiscal rules, such as budget balance and debt target rules, in order to secure debt sustainability, over a single rule alone. On average, fiscal rules, especially combined budget balance, expenditure and debt target rules, were correlated with better fiscal performance, confirming earlier research, but they had often been implemented to lock in earlier successful consolidation efforts preceding the enactment of those rules. The higher the level of legislative support for fiscal rules, the highest level being a constitutional mandate, the more difficult it has been to reverse or abandon them. As for their enforcement, the IMF advises mechanisms that maximize the reputational cost of breaking them and mandate corrective actions since formal sanctions, although more effective than the reputational cost of reneging on a public commitment, are rarely feasible. The IMF’s latest Fiscal Monitor, issued on May 14, mentions, without offering any evaluation, Turkey’s proposed fiscal rule in its coverage of recent developments in fiscal rules. An IMF mission began last week its regular Article IV consultations in Turkey. During these consultations, the IMF mission will review recent economic developments, the outlook for the economy and the progress of structural reforms. It is expected to include its opinion on the fiscal rule in the staff report to be issued afterward.
The major requirement for the success of Turkey’s fiscal rule, relating to its permanence and transcending the technical problems of how to implement, monitor and enforce it, has been articulated by Minister Ali Babacan: “If the owner of fiscal order is just one government, then we cannot expect much from it. A wider crowd should be the owner of fiscal order. The more our business world, NGOs and media protect the fiscal order, the healthier its implementation will be. Otherwise, it will not have much of a meaning,” The problem is that -- forget about such an ideal national consensus -- no agreement was reached between the ruling Justice and Development Party (AK Party) and the opposition parties before the announcement of the fiscal rule. It is doubtful, given the deplorable record of the opposition parties in rejecting any significant constructive engagement with the AK Party, that such an agreement will be reached when Parliament, possibly next month, debates and enacts the fiscal rule. So, the question is, assuming that the AK Party was itself genuinely committed to the fiscal rule and wished to maximize the rule’s permanence, why didn’t it include the rule among the constitutional amendments, recently passed by Parliament, but without opposition support, that will be voted on in a referendum in September? I am still skeptical that the fiscal rule, even if successful initially, will outlast this AK Party government. I hope to be proven wrong.
