SEYFETTIN – Is fiscal discipline in jeopardy?

Is fiscal discipline in jeopardy? This question may appear, at first glance, to be uncalled for since the budget deficit ratio to gross domestic product (GDP) is under 2 percent and the public debt ratio is 36 percent both figures are well below the famous Maastricht criteria set at 3 percent and 60 percent, respectively.Fiscal discipline has certainly been the main economic achievement of the Justice and Development Party (AKP) government so far Decreasing budget deficits and decreasing real interest rates re-established the economic confidence and pushed GDP growth up and the public debt ratio down.

While the high current account deficit is considered the Achilles’ heel of the Turkish economy, the public finance performance constitutes the basic anchor for macroeconomic stability.However, this performance might not continue into the near future.

The current state of the central government budget raises some concerns about the maintenance of fiscal discipline. Comparing the budget figures of the January-June period with those of the same period of 2013, one observes a remarkable increase in the deficit.

By the end of June the budget had a deficit of TL 34 billon, while there was a surplus of TL 31 billion last year as of the same date. The main driver of this deterioration has been the increase of public expenditures in real terms.

Public spending rose 13.8 percent and, excluding interest payments, it increased almost 14 percent.

Given that the inflation rate was 9 percent, this rise corresponds to a 5 percent increase in real terms.On the other hand, the increase in public revenue has been limited to 10.

2 percent, slightly above the rate of inflation. However, the alarming feature about public revenues is that tax revenues, the main source of the government budget, rose only 61 percent.

Other revenues, like those of privatizations, prevented the deficit from increasing further The decline of tax revenues in real terms, roughly 3 percent, comes from the low GDP growth since two-thirds of tax revenues come from indirect taxation, which closely correlates to the business cycle.Over the last year rising public spending became an important contributor to economic growth and prevented it from further slowing down.

This was not the case in the past. High GDP growth increased tax revenues and decreased real interest rates and allowed the AKP government to increase public spending in real terms without jeopardizing fiscal discipline.

This opportunity allowed the AKP government to improve the living conditions of the poor and the middle class by investing in public transportation, health and education. Now, with the decreasing speed of economic growth, it is likely that the easy times are over This may help us to understand the prime minister’s anger over the actual monetary policy, which he considers solely responsible for the slow growth figures.

Increasing public spending cannot remedy slow growth. In the last six years the public spending ratio to GDP, excluding interest payments, increased from 18 percent to 23 percent, while the ratio of revenues increased from 22 percent to 25 percent.

This means a 2 percentage point deterioration in the fiscal stance, and all the more since real interest rates that have reached their lower limits of around 1-2 percent do not allow further savings in interest payments. Now, interest will only decrease by decreasing the debt burden.

Nonetheless, over the last two years the public debt ratio has been stagnating at 36 percent because of both low GDP growth and rising public expenditure.The AKP faces a dilemma Either it will be obliged to stop the drift in public spending and keep the fiscal discipline alive or it will abandon this important anchor for electoral purposes.

SOURCE: Today’s Zaman