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    Reducing the debt

    Fatih Özatay, PhD03 September 2011 - Okunma Sayısı: 1048

    If Turkey wants to take more efficient measures against unemployment in rainy days; it has to create a larger room to maneuver in advance.

    Emin Dedeoğlu, a friend of mine who specialized and worked for years on public finance criticized by recent commentary titled "Room for maneuver". The commentary was about how to use the revenues to be generated via the "tax amnesty" judged by the "mixed law" No 2011. The last paragraph read, "So, here is the moral of this study: It is useful to spare some part of budget revenues in good days, for rainy days ahead."

    Results are the same

    Mr. Dedeoğlu questions how budget revenues can be spared for rainy days ahead. He says, "Assume that the treasury generated more revenues than anticipated upon an extraordinary budget performance or decided to be precautious for rainy days. What does it do? There are two things to do, both of which are related with borrowing: It either increases expenditures at an amount smaller than the additional income by borrowing less, that is, it reduces the debt stock, or reduces expenditures, that is, saves. Hence, both options generate the same result."

    His remarks continue with more details. The first option he proposes about how to use the additional revenues to be generated (actually, a part is already obtained) via the tax amnesty is to reduce the existing debt stock using the additional revenue, an option that was in our mind. But he is right that I should have stated it clearly when telling the "moral of the story".

    Countries responded differently

    In the mentioned commentary, I talked about the demand-boosting measures that G-20 countries introduced or undertook to reduce unemployment that peaked along with the crisis. I stressed that these measures evidently pushed budget expenditures up and in some cases reduced tax revenues. Hence, I said, policy response by different countries could not be same unless they have the same room for maneuver for fiscal policy even if they had been affected by the crisis at the same degree.

    There are certain factors that determine how large the room for maneuver for fiscal policy will be. Chief among these is the level of public debt. The mentioned commentary revealed that developed G-20 countries which have lower national debt proportional to national income could shoulder higher levels of budget deficit and give stronger responses to the rise of unemployment. Countries with relatively higher debt, on the other hand, gave weaker responses to the crisis. Turkey was also in the second group.  So, here goes the revised moral of the story: If Turkey wants to take more efficient measures against unemployment that will climb in rainy days; it have to create a larger room to maneuver in advance in good days. One fundamental way to do this is to reduce the public debt.

    More broadly, Turkey has to ease its vulnerabilities in good days and eliminate or reduce the factors raising the risk perception against the economy in crisis periods so that the most radical measures can be initiated in rainy days.

    And a note: As long as the interest rate on deposits is higher than that on borrowing and as long as the Treasury has the right to open deposits accounts at commercial banks (excluding the Central Bank), it is technically possible to "spare" one-time revenues, the additional revenues to be generated via tax amnesty for instance, in deposit accounts. Let's wait and see whether or not this idea will be criticized by Emin Dedeoğlu.


    This commentary was published in Radikal daily on 03.09.2011