TEPAV: "Current account deficit could have been lowered by $14 billion” TEPAV states that the fight with current account deficit requires the tightening of fiscal policy as well as of monetary policy.

ANKARA- TEPAV stressed that public savings in 2011 could have been 38 billion TL higher and said, “if public savings in 2011 are increased by 38 billion TL, current account deficit can be lowered by $14 billion, corresponding to a deficit of 8.2 instead of 10 percent in proportion to GDP.”

TEPAV released a new evaluation note titled “It is the public sector that should boost domestic savings” by Economic Policy Analyst Sarp Kalkan.

The note emphasized that Turkey’s current account deficit problem and the underlying low savings rate phenomenon have been the top items of the economic agenda lately and stressed the savings deficit of the public sector that has been endeavoring to boost private savings has been rising.

According to the note, primary expenditures were successfully kept at 18 percent in proportion to GDP during the period of tight fiscal policy between 2003 and 2008. Following the global crisis, the ratio reached 23 percent due to both the contraction of GDP and the measures initiated to stimulate markets. The expansionary fiscal policy in effect in 2009 and 2010 was extremely helpful in picking up the pieces of the economy after the crisis. In 2011, when Turkey attained a record-high growth rate beyond that estimated by the Medium Term Program, primary expenditures was not able be lowered to pre-crisis level. Hikes in temporary expenditures became permanent and primary budget expenditures in proportion to GDP reached 20.9 percent. Hikes were severe especially in personnel expenditures, government premiums to social security agency and current transfers while the rise in investment expenditures (productive capital) was weak.

Maintaining that additional fiscal space of 38 billion TL would have been created if primary budget expenditures in 2011 could have been lowered to the 2003-2008 average at 18 percent, the note continued:

“In other words, public savings could have been 38 billion TL higher. The public administration that was able to keep primary expenditures at 18 percent in proportion to GDP still has the ability to lower expenditures to the mentioned level. But it appears that policy makers have considered a significant part of the extra fiscal space as a source of finance for raising current expenditures. The preference to raise personnel expenditures and long-term share distributions over one-time expenditures made the rise in expenditures permanent.”

Citing the World Bank report “Sustaining High Growth: The Role of Domestic Savings” published in 2012 which states that Turkey can improve domestic savings by increasing public savings, the note added:

“With this perspective, we can conclude that the scope of the policy tools that can be used to improve public savings is way beyond that defined in the latest policy package. By increasing public savings in particular, overall domestic savings can be enhanced, enabling a significant progress in the solution of current account deficit problem. For instance, if public savings in 2011 are increased by 38 billion TL, current account deficit can be lowered by $14 billion, corresponding to a deficit of 8.2 instead of 10 percent in proportion to GDP.

Having missed this opportunity in 2011, it is even more critical to take an action in 2012. Enhancing public savings, that is, tightening the public budget is of vital importance for the fight with current account deficit. Nevertheless, the main principle when raising public savings must be reducing current expenditures or transfers instead of increasing taxes or cutting productive investments.

As the current picture reveals, the fight with current account deficit requires the tightening of fiscal policy as well as of monetary policy. The present level of primary expenditures signals that there is enough room for such tightening.”