SEYFETTIN – Prime minister not convincing enough on economic plan

Prime minister not convincing enough on economic planPrime Minister Ahmet DavutoIlu made an important announcement on Thursday regarding basic economic issues like savings, productivity etc.The low level of domestic savings and the absence of improvement in overall productivity are the main handicaps that the Turkish economy is facing in its fight for economic development.

The contribution of productivity to gross domestic product (GDP) growth has been negative in recent years, while domestic savings have also decreased. As could be expected, the GDP growth declined (around 3 percent) and the current account deficit remains still quite high.

Two recent official documents, the 10th five-year plan (2014-2018) and the Medium Term Program, set ambitious targets for domestic savings and productivity. The latter program defines the increase of the level of domestic savings as a main priority and a determining factor in the economy.

The private savings ratio to GDP was more than 12 percent before the recession moved it back under 12 percent and public savings declined from more than 4 percent to less than 3 percent in 2013. The overall domestic savings ratio, 16.

6 percent in 2006, declined to 14.4 percent in 2013.

In this period investment declined from 22.4 percent to 20.

9 percent, yet the target for 2018 is 24.4 percent.

Obviously if you want to increase the share of investments in the GDP and at the same time decrease the share of current account deficit you must increase domestic savings. Indeed, the five-year plan forecasts the increase of domestic savings ratio from 14.

4 percent to 19 percent private savings from 12 to 15.3 percent and public savings from 24 to 37 percent.

No doubt those are targets difficult to reach and quite naturally we were expecting the details of policies designed to realize these ambitious targets since in the five-year plan as well as in the Medium Term Program there were only generalities and a repetition of the necessity of these targets. These details would have been announced in the Plan of Action for Increasing Domestic Savings.

This was one of the themes Mr DavutoIlu spoke on Thursday. What policies did he propose to increase savings?I must say that I could not see any consistent, robust measure in this plan of action.

The first part of the policy package promises financial education for the people. Why not? But there is no explanation of how increased financial literacy would increase household savings.

Then there are some promises about andldquosmall savings.andrdquo Rather a good measure is about incentives trough tax differentiation in the savings instruments in section 5 of the government reform plan that the prime minister announced on Thursday there are measures about encouragement of firms to participate in financial markets nevertheless, I did not understand how this encouragement would affect corporationsand#39 savings.

Then follows many sections about information of consumers regarding savings. But we do not know how this information would convince households to save more.

It is admitted that the large diffusion of credit cards in the recent past encouraged consumption, thus decreasing private savings. Therefore there is a section reserved to credit cards.

However, instead of measures we face promises about research regarding the impact of these cards on consumption. Some serious measures concern encouragement for various life insurances.

A good measure to increase private savings is for sure changes in the tax system A section is reserved to this issue. Nevertheless, there are only three points mentioned.

The first one is about research aiming to determine the impacts of the existing tax system on savings, the second, about improving the taxation system And finally, prevention of the importation of luxury goods.I cannot believe that these andldquomeasuresandrdquo would be enough to increase the private savings more than four percentage points.

We know that private savings may be increased basically trough severe reduction in tax evasion and increase of corporate profits. There was nothing in the announcement of Mr DavutoIlu on these is issues.

I hope I am mistaken. We will see at the end of 2015 if the savings, as well as investments are increasing as planned.

SOURCE: Today’s Zaman