If you are not happy with the high level of current account deficit in 2010 you should have tightened the budget. This is currently missing.

Last Thursday I stated that Turkey preferred to carry out a loose fiscal policy in 2010 despite the general opinion. Today I want to prove this argument based on statistical figures.

It is not sufficient to examine the announced budget figures to understand whether or not the fiscal policy was tightened. Because most of the revenue items as well as certain expenditures items are affected by the growth level of unemployment rate regardless of the fiscal policy in effect.

For instance, tax revenues increase while the economy grows rapidly even if the fiscal policy is not changed. Or unemployment payments grow while the unemployment rate increases. Therefore, many countries announce budget figures after adjusting the movements independent of the fiscal policy. 

The first warning: budget deficit

Turkey has not yet joined this group. Still, some calculations can be made. It is easy to initiate such a practice particularly concerning revenues items. Because a substantial proportion of tax revenues constitute of indirect taxes which move in line with the national income.

The table below gives four different values for the ratio of primary budget balance to the gross domestic product (GDP) for each year. Two out of four of the figures represent "realized" numbers. Those announced by the Ministry of Finance are the budget realizations as we call it. In addition, the Undersecretariat of Treasury announces program-defined budget figures. These are calculated on the basis of non-recurring revenue and expenditure accounts. They do not take into account the privatization revenues, for instance.

As you might have noted, when non-recurring expenditures and revenues are not considered, central government budget had a deficit at 0.5 percent of the GDP. Of course, this alone does not imply whether or not the fiscal policy was tightened in 2010 compared to 2009. However, it is the first warning that the budget had a deficit after the adjustment of non-recurring effects in a year when the economy grew impressively at 8.9 percent. 

Primary budget balances worsens

Now let us take a look at the adjusted figures. Let me stress that the revision was made only in revenue items. The revision roughly goes as follows: I calculated the tax revenues that would have been generated if the economy had grown at the common level. In that case, for instance, budget revenues would have been higher in 2009.

Revised figures indicate that the budget balance worsened compared to 2009. What is more, this has been prevailing since 2006: budget deficit was higher or primary surplus was lower in each year compared to the preceding year.

Of course, it is not a must to tighten the fiscal policy each year. On the contrary, as I have also emphasized several times after the late 2008, fiscal policy had to be loosened in order to overcome the crisis as soon as possible. But if you were unhappy with the high level of current account deficit in 2010 - which was actually argued by the officials - you should have tightened the budget. This is currently missing.

This commentary was published in Radikal daily on 19.04.2011

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