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    Fiscal policy can go beyond arrogance

    Güven Sak, PhD31 December 2009 - Okunma Sayısı: 1168


    The foreseeability of fiscal policy is a top priority issue for 2010. It is probable that the consequences of the wrong decisions of yesterday will be felt in 2010. The situation is serious if not impossible to solve. Problem lies in the seriousness of the government. Let us see what the issue is.

    We started to talk about the dominant trends in 2010. In the last commentary, we underlined that 2010 will be the year where the resistance of banks and non-bank corporate sector will be tested. The second issue to be regarded in 2010 is the foreseeability of public finance. It is not yet certain whether or not the government can heal the budget or what steps will be taken to this end. However, it should have been certain. Declarations on how the 2010 budget target accepted by the Parliament will be reached are highly vague. Unfortunately the problems regarding the establishment of fiscal policy credibility were deferred from 2009 to 2010. Medium Term Program alone was not able to substitute for the missing elements. The "made up" budget experience of 2009 reduced the credibility of fiscal policy down to the ground.

    The first attempt for building the credibility of fiscal policy and reversing the process was the Pre-accession Economic Program (PEP). The program said in 2009 Turkey cannot ensure positive growth and the negative growth was expected. The Medium Term Program (MTP) following the PEP posited the budget figures on a more realistic ground taking the discussion out of the "made up" budget course and moving it onto a realist path beginning with the PEP such that, 2009 forecasts of TEPAV budget monitoring group matched up with the MTP. What is the problem at this point? The problem is the 2010 figures of the budget. The reliability of these figures is what is and what should be questioned. These figures hold the potential to turn us into Treasury supervisors and push up the government debt security (GDS) interest rates. Therefore questioning the figures attentively is of great importance.

    What is the problem here? The main problem with the MTP as well as the 2010 budget is that the measures to be implemented to achieve the targets are not clearly manifested. This is also what puts the MTP far from being an economic program framework. An economic program enumerates the measures to be taken in order to reach the targets. When designing and declaring an economic program, the government puts forth a commitment that declares the steps to be taken one by one and measure by measure. This way the government puts an end to discussions. After this point in can only be discussed whether or not the mentioned measures serves the target. For the MTP, however, the first missing element is this prospective commitment. We all wonder for instance, can the Prime Minister be convinced for let's say a raise in the prices of certain SEEs or for a raise in certain taxes? The main element that reduces the credibility of fiscal policy is that the Prime Minister of Turkey will be convinced under the framework of the MTP and then will take any step. This is exactly where the main fiscal policy risks for 2010 lies. This is the first point to state.

    In this context, the second point to highlight is also pointed out above. Measures to be taken to reach the budget targets are not declared yet. The first measure declared; i.e. the change of formula for medicine procurements, is not fully understood so far. Let alone finalizing the operation; pharmacists have been successfully pushed to hustle and bustle. On the other hand, it is clear that a more skillful attitude of administration is required in the coming period. But does the current government have such skills? In our consideration, it does not. The second fiscal policy risk is related directly with the implementation skills of the government. And this was the second point.

    Third point manifests itself in the sustainability of fiscal policy. Turkey has to redesign its tax system and bring to forefront the struggle with informal economy. Composition of budget revenues must be shifted from indirect to direct taxes. Fighting against informal economy requires a series of changes from markets law to tax law as well as implementation skills. Such implementation skills constitute a significant realm of risk for the government. As recent evidence, please see the discussions on the democratic opening.

    The main precondition of fighting against informal economy is the fair operation of the tax auditing system. Tax auditing system in Turkey is not fair, however. It is directly vulnerable to political intervention. Tax audit reports, prepared in line with career planning do not impose any cost on the writer's side. Tradesmen and industrialists all around Turkey know what this implies. This is exactly why almost 95 percent of the reports concluding tax fines are dismissed by courts. And it becomes the commercial reputation damaged in consequence. Turkey cannot head its way to the premier league with a third-world tax system and tax audit mechanism. Under such a system no one wants to join the formal economy. As suitable as it is for politicians, this system is bad for the economy. This is also a risk for the fiscal policy.

    Can the credibility of fiscal policy be established rapidly by a fiscal rule? Not under the current circumstances. It is not possible to establish a foreseeable system of fiscal policy out of this riddled system. And let this be the fifth point.

    So, is the fiscal rule mentioned in the MTP nothing but imaginary? Cannot the credibility of fiscal policy be ensured in 2010? No, it can be. Credibility can be established rapidly with the help of an IMF agreement.

    We can go beyond arrogance once we stop being persistent.

    Turkey's way is not blocked.


    This commentary was published in Referans daily on 31.12.2009