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    Room for maneuver

    Fatih Özatay, PhD20 August 2011 - Okunma Sayısı: 1202

    It is useful to spare some part of budget revenues in good days, considering rainy days ahead.

    I was talking about the budget burden of the measures that G-20 countries introduced or undertook to introduce in the first half of 2009, when the contractionary impacts of the global crisis were felt severely in order to stimulate domestic demand even slightly and support the financial sector.

    A third factor that intensified this burden was "automatic stabilizers". In other words, when unemployment rate increased, for instance, unemployment benefits paid via the budget increased automatically in the context of the legislation in effect without requiring any additional decision. I will consolidate the mentioned three factors under the heading "additional budget expenditures."

    The first finding to stress in the light of the figures I provided on Tuesday is that, additional budget expenditures undertaken or announced to be undertaken as of the end of May 2009 as a ratio of GDP were much higher in developed countries than developing countries: 17.1% to 6.6%, respectively.

    There are two underlying reasons here: first, the financial crisis predominantly hit the financial institutions of developed countries. Therefore, the cost of bailout operations was naturally high in these countries. The reason that matters for the purpose of this commentary is that developed countries had a larger room for maneuver for raising budget expenditures without raising the risk perception against their economy. That is to say, their budget means were more abundant.

    The developing countries in the G-20 are: Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. Figure 1 below shows the ratio of additional budget expenditures in each of these to their respective GDP in which the ratio grows as you move to east. And the vertical axis shows the ratio of public debt to their respective GDP in which public debt increases and room for maneuver narrows as you move to north. The state in each country is represented with small quadrangles.

    The expected correlation is as follows: Wider the room for maneuver (lower the debt ratio), stronger the response to the crisis will be. That is, the policy response by the country with the highest debt ratio will be closest to the east zone of the figure. The figure proves this expectation right. The thick line in the northwest-southeast axis represents this relationship.

    Evidently, the measures introduced during the crisis is related with the extent to which the mentioned country is affected from the crisis was well as the room for maneuver. It is possible to conduct a more comprehensive analysis taking this factor into account; however, this will push the limits of a commentary. I will settle with stressing that such analysis does not change the focus of this commentary: countries with lower public debt ratio were able to introduce stronger measures to tackle with the crisis. The same analysis can be conducted as well by referring to the budget deficit or central bank reserves, which give similar results.

    So, here is the moral of this study: It is useful to spare some part of budget revenues in good days, considering rainy days ahead. A recent remark by Deputy Prime Minister Ali Babacan, highlighted in yesterday's Radikal is promising in this sense. He maintained that 19 billion TL of the additional revenues to be generated via the tax amnesty would be spared for rainy days. This would be a step in the right direction.

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    Figure 1. The ratio of additional budget expenditures to GDP (horizontal axis, %) and the ratio of public debt to GDP (vertical axis, %) in developing G-20 countries


    This commentary was published in Radikal daily on 20.08.2011