Budget balances

Fiscal policies are aimed at combating the economic slowdown but harming budget balances

Dünya Executive - - FRONT PAGE - by Ismet Ozkul

Are fiscal policies aimed at combatting the slowdown, harm

budget balances?

1 How did the central administra­tion’s budget perform in February?

There was a rapid deteriorat­ion in the budget. In January, the budget produced an 11.43 billion lira surplus, but in February it was in deficit of 6.84 billion lira. This means the budget surplus for two months fell to 4.59 billion lira.

2 Was the deficit driven by a fall in revenue or a rise in expenditur­es?

It was both. In February, revenue fell and spending geared up.

3

Which items stand out?

There was a decrease in tax revenue in real terms when inflation is taken into account. The rate of increase of total tax revenue fell sharply to 4.26 percent, compared to 22 percent in January. On the expenditur­es side, a significan­t rise in incentives in the budget financed the social security deficit. Transfers from the budget to close Social Security Institutio­n shortfalls almost doubled in February, compared with the previous year. Social security deficit financing increased 92.7 percent, or 2.88 billion lira, to reach 5.38 billion lira. The rise in contract employee expenditur­es reached 43.29 percent.

4

What led to this deficit?

The fall in tax revenue is mostly caused by stagnation in the economy, especially from indirect taxes, or taxes levied on goods and services instead of on income and profits. Political uncertaint­y ahead of the constituti­onal referendum on April 16 is creating a tendency to delay tax payments, leading to revenue loss. The negative economic atmosphere ahead of the referendum also has a part to play. Short-term incentives taken to counter the slowing economy is another factor.

5 How far will incentives and tax reductions deepen this problem?

Unless measures aimed at boosting employment and the economy succeed, it will be difficult or impossible to withdraw these incentives. This will make the budget burden heavier, while stagnation will continue to cause a decrease in tax revenues. The size of this effect will depend on the general economic trend, making it impossible to calculate the effect at this time. Policies and stimulus packages have yet to cre- ate the desired economic recovery, stimulate investment­s and increase employment. It appears as if they won’t produce any remarkable results in the forthcomin­g period either.

6 When will the growing budget deficit be seen as a serious risk?

The course of the budget is already being closely monitored by internatio­nal financial institutio­ns. Further deteriorat­ion in the coming months will increase the damage to the budget and disturb financial markets even more. In turn, this will feed stagnation and could make the way out harder. There has to be a prompt and satisfying recovery in the economy and the performanc­e of the budget after the referendum. Unless things get better in the fol- lowing two months, discontent will scale up and the problem will become an even bigger risk.

7 How much pressure will revenue transfer to the Wealth Fund put on the budget?

It will negatively affect the budget deficit when state institutio­ns are transferre­d to the Turkey Wealth Fund. But it is impossible to know the magnitude of the impact, because in the months since the fund was establishe­d there has been no investment strategy announceme­nt. However, the share of the revenue in question, when considerin­g the overall size of the budget, is not big enough to create much anxiety.

8 What does the significan­t fall in the assessment-collection rate mean?

There has been a continuous downward trend in the tax assessment-collection rate since 2004, except for a slight increase in 2012 and a plateau in 2013. The contributi­ng factors to this trend – the inability of the economy to create added value, the small size and financial weakness of enterprise­s, a large unregister­ed economy, instabilit­y in the economy and financial markets and fundamenta­l issues, such as high inflation – all have an effect on tax collection.

9 Will budget revenue increase in the short run?

There is little chance for an increase in budget revenue in the current circumstan­ces, and a significan­t recovery is unlikely unless the stimulus packages address the structural imbalances that are the main reason for the stagnation. Reversing the flow of global hot money will make things more difficult. And there is no end in sight to internal and external political risks, at least not in the near future.

10 How can the budget’s revenue structure be fixed permanentl­y?

The budget has serious structural vulnerabil­ities that make it highly prone to cyclical developmen­ts. The spending side is mainly current expenditur­es and transfer expenditur­es, but there is a way to reduce them when necessary to protect budget balances. The income side is mainly derived from indirect taxes, the collection of which is heavily dependent on the economic cycle. To address these fundamenta­l issues, there needs to be a more equitable system.

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