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    What are the odds that the CB didn’t know about tax measures?

    Fatih Özatay, PhD25 September 2012 - Okunma Sayısı: 876

    The probability that the CB took its latest decisions having no knowledge of the tax revenue raising measures to come is one in thousand, if not zero.

    The latest tax regulations can be addressed from different perspectives. But first things first: it was a step in the right direction in terms of fiscal policy discipline. The decision proves that Turkey has learned by doing what troubles loosening fiscal policy can cause, especially if on a continuous fashion. Efforts were made to put deteriorated budget balances back on track. This was the “positive outlook perspective.”

    Now, let me visit the “negative outlook perspectives” one by one. The first unfavorable detail is that Turkey turns to measures of poor quality every time it faces a trouble. When trying to put down the fire after the 2001 crisis, a number of emergency fiscal policy measures were introduced. Amid the big fire, the quality of the measures was irrelevant. Now, however, there is no fire threatening Turkey. Yet, measures are of similar quality, such as raising indirect taxes. Moreover, this is not the first time such measures were chosen “under normal circumstances.” There is no need to go back much; last five or six months were full of measures of poor quality. Turkey has to establish its fiscal policy on a more sustainable framework based on high-quality tax revenues that will have lower distortive effects on the relative price structure. It must be noted that distortions in the relative price structure (that is, raising taxes in one sector instead of another) hinders the solidness of prospective decisions.

    The second thing is that efforts towards disciplining the budget are based on raising tax revenues instead of lowering budget expenditures. Over the last years, developed countries are trying to answer an old yet important question: what is the impact of fiscal consolidations on growth? Associated questions are: does the impact depend on how the fiscal discipline was ensured? Does the risk appetite against a given country change the direction of implications?  Recent economic studies (take the NBER working paper no 18336 co-authored by three economists) reveal that measures based on raising tax revenues affect output growth negatively while measures aimed at lowering expenditures do not. More precisely, tax hikes are not growth-friendly. Second, budget could have been relieved at the same degree also with an expenditure cut and without disturbing growth.

    The third one was addressed intensively by the press yesterday: the latest measures will push up inflation. Even before these, year-end inflation rate was expected to exceed the 5 percent target. Now, it will go off track even more. Yesterday, another top item on news channels was the possible reaction of the Central Bank (CB), which I found quite weird. The probability that the CB took its latest decisions having no knowledge of the tax revenue raising measures to come is one in thousand, if not zero. The CB regularly holds consultations with relevant ministers and the Treasury particularly for such policy measures. Besides, undersecretary of treasury or a representative attends the deliberation session of Monetary Policy Board meetings to express views on the budget performance, overall economic performance and on projected measures, if any. From this perspective, the planned measures, expected increase in tax revenues as a percentage of GDP, and goods and services the measures will cover are within the knowledge of the CB.

    This commentary was published in Radikal daily on 25.09.2012