The election economy
Aiming to provide economic relief, the new bag law takes wide-ranging populist measures ahead of the June 24 elections. Here’s a breakdown:
The AK Party has set the tone for its economic policy to win the election, and it is risky
1 What does the package have for pensioners?
The bag law includes a bonus of TRY 1,000 for each eid holiday, totalling TRY 2,000 annually. The number of people who will be granted the bonus per year exceeds 11.5 million. The law also increases allowances for the elderly who do not have a pension, raising the TRY 266 monthly allowance for 600,000 people to TRY 500.
2 What does the regulation on social security contain?
All receivables of the Social Security Institution (SGK), especially unpaid insurance premiums and fines, will be restructured. People will be able to pay bi-monthly in 6-18 installments so the payout period of the debts will be up to three years. The interests of the structured debts will be rearranged according to the domestic PPI, making them more advantageous for borrowers. Those who pay the whole amount in two instalments will be exempted from up to 90 percent of the interest.
3 What are the regulations on tax liabilities?
The bag law also restructures tax debts and penalties. A new tax amnesty will be implemented quickly. Customs duties and penalties will be restructured as well as unpaid income, corporate taxes and tax fines.
4 What does the amnesty on fines involve?
Any kind of administrative fine will be able to be restructured. Fines related to the Road Transport Law, traffic fines, fines for illegal passes from bridges and highways, penalties for military service and population registers, transactions, Radio and Television Supreme Council fines and election penalties will benefit from the relief.
5 What are the regulations for young people?
Borrowers who are not able to fulfill the repayment of tuition fees and student loans will also benefit from debt restructuring. In addition to these, there is a provision in the bag law directed at young, firsttime entrepreneurs between the ages of 18 and 29 who will have their insurance premiums paid to pension fund for the self-employed (Bag-Kur) by the state for one year.
6 What does the construction amnesty involve?
All unauthorized buildings constructed contrary to the rules in effect will be granted amnesty with the bag law. Unlicensed buildings and buildings that are contrary to building licenses and annexes or contrary to the construction legislation will be registered even if the decision of destruction is taken. The fines assessed in this context will be withdrawn. This regulation is criticised in part because it essentially rewards illegal behaviour.
7 Any other incentives besides the bag law?
The government has taken similar decisions that do not require legislation and can be made by the decision of the Council of Ministers. Noteworthy among these is support provided to the construction industry. The VAT rate on property sales has been reduced from 18 percent to 8 percent until October 31, 2018 while title fees has also been reduced from two percent to 1.5 percent of the value of the property.
8 Why is the government taking these steps?
The government’s explanation for the amnesty decisions is to put an end to informal housing agreements and to revive economic activities by solving problematic tax and premium debts. However, it is clear that the most important reason for these regulations, covering the most comprehensive populist practices so far, is the presidential and parliamentary elections to be held on June 24. The elections are crucial for their potential to change the democratic system in Turkey, The AK Party wants to win both the presidential election and the parliamentary majority. However, polls suggest that this is not guaranteed. Moreover, the rapidly rising exchange rates, high inflation and unemployment weaken support for the government. Thus, populist incentives are deemed necessary.
9 How will the budget be affected by these decisions?
Government spokesmen say that the cost of these decisions will be TRY 24 billion. The pensioner bonuses alone will cost TRY 23 billion. The increase in the payments to the elderly for the rest of the year is well over TRY 1 billion. The figure gets even bigger when you factor in cancelling administrative fines and tax and premium penalties. The government believes that restructuring unpaid tax debts will allow people to pay their debts and thus put money into government coffers but it is obvious that the collections made this year will be far from enough to cover a burden exceeding TRY 24 billion.
10 What will be the effect on the economy?
The first impact of this package will be to increase the budget deficit. The increase in the budget deficit will increase the pressure on interest rates because it will be evaluated as further monetary policy loosening. Thus, hot money inflow will be affected negatively. Global developments spurring outflows from emerging markets may affect Turkey even more. Ultimately, Turkey’s economy will be pushed into an even more fragile state.