Fatih Özatay, PhD - [Archive]

Again on tax cuts 23/08/2009 - Viewed 1427 times

Here comes another commentary on the developments in automotive sector as it became a tradition following the special consumption tax (SCT) cut decision introduced in March for some sectors. I have been writing on this topic every month mainly because: budget resources did not allow us to do much against the employment and production reducing impacts of the global crisis. However, it was obvious that there was also a need for domestic demand boosting policies. In that case, the reasonable option was to direct limited budget sources to areas that can boost production to the highest level possible.

Automotive sector exported a significant proportion of its production. On the other hand, in particular considering automobiles, a substantial proportion of the domestically purchased automobiles were imported. SCT cut did not affect the prices of the imported vehicles. On the other hand, the cut lowered the prices of the imported vehicles. Therefore, it was emphasized at this column that the tax cuts will not affect production considerably whereas it will encourage imports.

Automotive sector is an important industry for Turkey in particular when the sub-industry is also considered. Nonetheless, I opposed to the tax cuts mainly with this reason despite the importance of the sector. Furthermore, I said that temporary tax cuts would backdate the demand of people willing to purchase an automobile in the future. It made more sense to purchase the automobile in the present as far as they could afford it instead of waiting and purchasing it after the termination of tax cuts and at higher prices. However, this implied not a rise in total demand for vehicles but backdate of the demand.

Of course, in a climate where the confidence to the economy decreases and ambiguities about the future continues, tax cuts alone were expected to have had a limited impact on boosting demand as in such a climate people would not be secure about their future, they would tend to save a buck or two or not to contract debts. In that case, trying to boost demand without improving the confidence in the economy would not work. So, the obvious inference was: in general, to expect tax cut policies to prove fruitful, it was necessary to implement them as a part of a comprehensive economic program.

Table 1 compares monthly production and importation figures for 2008 and 2009. The comparison solely includes automobiles as the production and importation figures for this vehicle explains clearly what I mean. Please examine carefully the importation figures. Following the tax cut decision made in mid-March, imports go up considerably. What is more, imports rise rapidly compared to the first half of 2008, where the impacts of the crisis were not apparent and where imports were already high. On the other hand, imports decrease rapidly in July when SCT rates were revised back to a level close to that before the cut.

The message table delivers considering production is quite apparent. Tax cut ensures some certain stimulation; rate of fall in production compared to the previous year is limited to a certain extent. But, that is it. The real impact of the cut is on imports. The moral of the story is: Decisions about the economy must not be made 'in haste' because otherwise these 'insignificant details' are missed out.

Table 1: Automobile production and import levels (units)

This commentary was published in Radikal daily on 23.08.2009