Minister Babacan: Fiscal rule will put Turkey five steps ahead

Speaking at press conference at the Treasury Undersecretariat in Ankara, accompanied by state ministers Zafer Çağlayan and Cevdet Yılmaz, Finance Minister Mehmet Şimşek, Minister of Labor and Social Security Ömer Dinçer and Industry and Trade Minister Nihat Ergün, Babacan introduced the details of the draft fiscal rule bill.

Babacan explained that the Economy Coordination Board (EKK) had finalized the draft bill in its meeting on Monday, adding that the draft will be sent to the prime minister for an opinion and then to Parliament for deliberations and discussions. “I can say quite simply that the fiscal rule will result in the rise of a new era for Turkey’s fiscal policies exactly the same way the independence of the central bank has for monetary policies,” he stated.

Babacan summarized the most important aim of the new bill as “bringing long-term predictability to the state’s fiscal policies.” He continued, “The more concrete plans, programs and targets we can push forward and the longer terms over which we can handle them, the lower the costs of Turkey’s risk premiums will be.”

Another aim of the bill, Babacan noted, will be the provision of a sustainable concept of fiscal discipline.

The minister said the government has been working on the bill for a year in cooperation with academics and representatives of the financial sector. As a result of these studies, government bureaucrats were eventually able to set up the basic parameters for fiscal discipline. “We held consultations with the business world to see that they also lent strong support to the establishment of the fiscal rule bill. We later sent our draft to the Organization of Economic Cooperation and Development [OECD], the European Commission, the International Monetary Fund [IMF] and the World Bank to get the opinions of these prominent international organizations, too. They compared the fiscal rules in other countries with what we had prepared, and in assessing it, suggested some technical improvements. After roughly a month of studying with the international organizations, we finally came up with the final draft for the fiscal rule.”

The bill encompasses the budgets of the central government, the Social Security Institution (SGK), local administrations, special provincial administrations, companies with floating capital, the Unemployment Insurance Fund and other minor state institutions. The draft also includes some regulations pertaining to State Economic Enterprises (KİTs). “Our principles were simplicity, correctness, transparency and accountability,” Babacan noted.

The bill’s main target will be to attain a budget deficit below 1 percent of gross domestic product (GDP). A 5 percent growth rate in the GDP will be the second target, and these two targets will run in parallel with each other. Babacan explained the new mechanism introduced by the bill as follows: “We will multiply the difference of the actual deficit from the target by 0.33 with an assumption of decreasing it in the following three years. Let’s assume that our budget deficit is 4 percent in one year whereas the target stands at 1 percent, which is constant for every year. In this case, the deficit deviates 3 percentage points from the target. That means there will be an application of 1 percent fiscal harmonization in the following year. In other words, the system runs on the declining balance system. For instance, the next year we attained a deficit of 3 percent while the target still stays at 1 percent. In that case, we will be aiming to decrease our deficit by 0.67 percentage points in the following year, which is equal to one-third of 2 percent.”

Babacan also explained the other dimension of the new measures as regards the growth rate of the economy. “Let’s say Turkey grew by 8 percent in a year, which is 3 percentage points above our threshold growth rate. The fiscal rule will tell us to make savings in the coming year equal to one-third of this excessive growth. Or contrarily, let’s say our GDP grew by just 2 percent. Since we were 3 percentage points below the threshold growth rate of 5 percent, we will aim for a 1 percent greater budget deficit in the following year.”

The auditing and inspection of the bill and all relevant applications will be undertaken by the Court of Accounts (Sayıştay).