Those wondering when Turkey's credit score will be upgraded must start thinking about how Turkey's public savings can be improved.

Public finance was the top priority agenda item of the last week both in Pakistan and the USA. The United Kingdom, Bolivia and Algeria have recently taken similar steps to improve public savings. Turkey also has followed this path to improve public savings and has raised oil prices. The qualifications of the steps taken to this end give hints about the quality of the public finance system in a country. According to this, there are two types of countries: those with a modern public finance system and others. Turkey is among the latter. This is the first thing those wondering why Turkey's credit score has not been upgraded should check.

The Pakistani government, similar to its Bolivian and Turkish counterparts, pushed up oil prices to improve budget revenues. Then the Pakistani people poured into streets in protest. The Muttahida Quami Movement declared that it would quit the government. The raise was reversed as the government faced the risk of dissolution. Similarly, in Bolivia Evo Morales reversed the 82 percent hike in oil prices. Turkey did not.

In the USA, Secretary of Defense Robert Gates declared that defense expenditures would be cut. The defense budget, which stood at US$533 billion even after the reduction in expenditures, will be cut an additional US$78 billion over the next five years. The US government seeks to improve public savings through introducing tax measures and restricting public expenditures.

The Pakistani government too makes effort to improve public savings. The ratio of interest expenses to budget revenues reached 33 percent by 2009 as IMF data reveal. This was the result of the narrow tax base rather than high interest expenses: only 2 percent of the population pay income tax. The government cannot impose taxes on wealthy people with political power and instead increases the indirect tax burden on regular goods, for example, oil. Tax revenues recover even if you push up oil prices. Pakistan and Turkey have the same revenue collection strategy. What can I say?

Let us take a look at the share of interest expenses in the overall budget revenues in the US. After all, they too implement measures to improve public savings. The ratio of interest expenses to overall budget revenues is 5.6 percent. Thirty-three percent in Pakistan and 5.6 percent in the US: not even comparable. The American government also introduces measures, just not the same approach as Pakistan uses. In America, they either elevate the tax rate imposed on already taxed earnings or introduce cuts in some spending programs. This is what determines whether or not a country has a modern system of public finance.

So what are the circumstances in Turkey? Please read the new policy note by TEPAV analyst Ozan Acar. As IMF data reveal, the ratio of interest expenses to budget revenues is as high as 14.4 percent. In any case, Turkey and Pakistan have a similar problem: budget revenues and tax revenues as a component are relatively low compared to the size of the economy. In the USA, for instance, the said proportion stands at 5 percent despite the heavy load of interest expenses. The share of interest expenses in budget revenues is 13.5 percent in Greece, which is struggling in a budget crisis; 7.3 percent in Portugal; 4.4 percent in Ireland; and 3.7 percent in Spain. How about that? European countries suffering from severe budgetary problems have fewer problems than Turkey with respect to their budgets. With respect to what? Their budgets. Funny, isn't it?

Those wondering when Turkey's credit score will be upgraded must start thinking about how Turkey's public savings can be improved. This also could be useful in reducing the current account deficit. Two birds with one stone: the credit score would definitely move up, then. Where did you think the oil price hike originated?

This commentary was published in Radikal daily on 11.01.2011