The extraordinary recovery performance can be utilized to get prepared for the rainy days.

To remedy the rise in the unemployment rate and the fall in production during the crisis period, developed countries in particular have loosened the fiscal policies. Tax rebates were executed, tax rates were cut and public expenditures were increased. Preceding these measure packages, they had initiated a bailout operation in order to put out the fire that surrounded the financial system. In consequence, budget deficits increased, borrowing was expanded to be able to finance the deficit and public debt hiked.

Let me provide some figures. The ratio of net public debt to national income increased from the end of 2007 to the end of 2010 from 42.4 percent to 67 percent in the US, from 81.5 to 120.7 in Japan, from 51 percent to 67.4 percent in Germany and from 38.2 to 68.8 in the UK.

The figures as provided in the IMF's World Economic Outlook published in October indicate that the debt ratios increased substantially. When the economic recovery achieves a satisfactory pace, the said countries will tighten the "way loose" fiscal policies cutting expenditures and increasing tax rates. 

Repercussions on growth

This is why the repercussions of loose fiscal policy preferences had a wide coverage in the mentioned IMF report. The economic literature on the direction of such repercussions has populated with a study published in early 1990s. Until the recent report of the IMF, there existed findings that under certain circumstances - say under high public debt - tight monetary policy measures might increase the pace of growth. However, IMF's report highlights new findings which are not at all pleasant. The report stresses that such tight policies might slowdown economic growth.

As you might have noted, what brought to debate the potential effects of tight monetary policy measures is the measures in the exact opposite direction, that is, the loose policies implemented during the crisis period. In that period developed countries have doubled or tripled their budget deficits without causing an escalation in the risk perception against their economies.

To be able to implement such policies with this peace of mind, that is, without escalating the risks, your budget must have a certain room to maneuver. To put it differently, the level of public debt must not distress the markets, compulsory budget expenditures, say interest payments, must not be chain you, and thus the budget will either have a small deficit or still maintain a surplus.

In short, you must get prepared for the rainy days when circumstances are favorable. If the economic growth is above the potential growth rate, tax revenues increase above the normal and unemployment payments diminish. That is, the budget recovers shortly. You can therefore use this extraordinary recovery performance to get prepared for the rainy days; to reduce the public debt for instance. 

A requirement for Turkey

This requirement is felt more deeply by Turkey due to the high current account deficit problem. 2010 growth will be much above the potential growth rate at 4.5 percent. One way to reduce the current account deficit is to increase public savings, that is, to reduce the budget deficit. Therefore, there are two reasons why Turkey has to tighten the budget further to get prepared for the rainy days: first, to be able to increase expenditures in rainy days without pushing up the perceived risks and second to reduce the high current account deficit.

The IMF has published many reports on fiscal policy in the period after the crisis. These reports first examined why fiscal policies must be loosened; then why it is necessary to reestablish fiscal discipline and finally what the potential outcomes of these policies would be. However, the suggestions and the analysis were generally for developed countries.

IMF's country reports also address such policy issues. The latest Turkey report is not published in the announced date. The respective countries have to give prior permission for the reports to be published. I believe the publication of the said report is of importance as it will allow us to discuss this critical issue with the lens of an international organization that has concentrated large efforts on the issue in the recent period.

This commentary was published in Radikal daily on 31.03.2011