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    Burden of the measures on budget

    Fatih Özatay, PhD12 March 2009 - Okunma Sayısı: 1565

     

    In my previous commentary, I stated that if the current global situation continues and a new measure package is not announced, the economy will contract by 6.5 to 8.5 percent in 2009. But, there were other scenarios as well: the rate of contraction depended on export performance, global risk-taking appetite, consumer confidence in the economy and the amount of credits extended by banks.

    Of course, it is beyond our control to change export demand and international risk-taking appetite. Again, the consumer confidence in the Turkish economy and the amount of credits extended by banks are affected by the mentioned global conditions. Therefore, the magnitude of the economic contraction in 2009 is beyond our control; but to some level.

    However, we can control the rate of contraction to a certain level: In this column, I addressed a number of measures that will limit the rate of contraction. Of course, some other measures can also be proposed. But, this is not the point. The point is the fact that economic contraction by 6.5 to 8.5 percent is not the fate of Turkey.

    There is a measure 'package' I, together with a group of experts been working on. Since my friends are not as pessimistic as I am, we set the rate of contraction in case where no measures are taken as 5.5 percent. And we tried to find out now can this rate be manipulated by means of several measures.

    The readers of this column are familiar with these measures: An international agreement that will provide external funding + payment of the foreign debt of the public sector and providing a certain amount of foreign exchange liquidity for banks out of the external fund to be received + a credit (FX credit) guarantee fund mechanism that will transfer FX to the corporate sector and that will involve Central Bank discount credits + a fund that provides guarantee for TL credits to decrease risk perception of banks + increasing the amount of unemployment aids and the number of beneficiaries + financial aid to the needy people + bonus payments for the retired people with low-income.

    For instance, if all of the listed measures are implemented, economic contraction of 5.5 percent can be decreased to 3.5 percent as of the end of 2009. Furthermore, this positive impact goes on also after 2009. And the ultimate effect of the measures is a recovery by 4.5 percent. On the other hand, the initial (here, underline 'initial') burden of the measure package on the budget corresponds to 1.5 percent of the 2009 national income.

    You can imagine the question to be posed when the measures are explained: "What about the fund requirement?" At a glance, the question makes sense. However, please think for a moment. There is no enough room to maneuver in the expenditure side of the public budget. Besides, due to the upcoming elections, the items that can be modified are already subjected to deterioration. Thus, budget deficit of 2009 will predominantly be determined by the budget revenues.

    Here lies the key point: Budget revenues have attained such a form that almost 70 percent is determined by the items like consumption expenditures pertaining to the related year; i.e. by the national income of the related year. If your basis scenario is realized and the economy contracts considerably, budget revenues will under any case decrease significantly. Under the basis scenario where current conditions go on, we estimate that budget deficit will be equal to 6 percent of national income.

    Nonetheless, if the rate of contraction is reduced through measures, the fall in tax revenue will also be limited. This additional gain from tax revenue will be recorded in 2009 budget accounts. Therefore, the budget deficit increasing effect of the abovementioned measure package will take place when the plan is initiated. Our calculations indicate that budget deficit, which initially rises by 1.5 percent of the national income in comparison with the basis scenario, is limited by 0.8 points at the end of 2009. When the national income effect deferred to 2010 is also considered, the rise in budget deficit completely disappears.

    Are you afraid that the measures, increasing budget deficit, will worsen our credit note? Then, you should take two points into consideration: First, according to the latest data, cash flow of the Treasury has deteriorated considerably during first two months of the year: Now, Turkey has a budget deficit even if interest expenditures are excluded. Furthermore, the deterioration in the primary balance in comparison with first two months of 2008 is 1.2 points in terms of the ratio to national income and the deterioration in budget balance is 2.3 percent. Though, of course, the 'extraordinary' deterioration in the budget balance is not the fault of unemployed people, it is not possible to explain this to international rating agencies.

    On the other hand, there is one thing that can be explained and it is based on the fact that the 'initial' deteriorating effect on the budget and the ultimate effect are quite different than each other. This is the responsibility of the authorities to explain this and convince the relevant bodies, not of the unemployed people.

     

    This commentary was published in Radikal daily on 12.03.2009

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