The only thing that has changed, if you ask me, is that now we are calling price increases introduced to improve indirect tax revenues  “updates.”

To which part of the world does Turkey belong? To the First World in terms of its economy, and the Third World in terms of its tax system. If indirect taxes constitute 70 percent of the total tax revenues, then we are dealing with a Third World country. Please tell me what has changed in terms of fiscal policy in Turkey. The only thing that has changed, if you ask me, is that now we are calling price increases introduced to improve indirect tax revenues “updates.” I really love this. I feel like I have stepped into an Orwellian world. Like, we say the “Ministry of Justice” when there is no justice at all!

Anyways, the Ministry of Finance has “updated” prices recently. Just like updating a computer program with a newer version, the Ministry has updated prices of certain goods. It is thanks to them that we are feeling all new. You are in luck; we are enjoying the latest version!

So, why have our lives been updated now? I would like to say, “if you cannot lower expenditures, you have to update taxes.” Actually, this summarizes Turkey’s entire adventure in its quest for stability. It has been like this since 1999. First, Turkey failed to make the reform to revise and put an upper limit on public expenditures. Even today we cannot reform public expenditures, as there is a series of elections ahead. A large part of public expenditures are frozen and meanwhile we are raising the weight of frozen expenditures further. I wrote about the increase in the number of public employees earlier. Moreover, a Süleyman Demirel-style health reform has become the black hole of the budget. Health expenditures were lowered by separating green card expenditures from the public budget and transferring them to the budget of the Ministry of Family and Social Policy. Another form of updating… Public expenditures were increased after the global crisis in 2008, but were not lowered back to pre-crisis levels.

Second, as Turkey has failed to carry out a comprehensive tax and tax administration reform, updating prices to increase indirect tax revenues has become a necessity when expenditures rise. If the state has employed your neighbor’s son or daughter, you have to pay more for fuel in exchange. That’s how the system works. What’s wrong with helping your neighbor’s son or daughter to start a family? It’s a good thing!

Third, due to the nature of indirect taxes, you pay as much as you consume. Why did the ministry need to update prices? As the economy has slowed down, consumption has decreased. But since the public administration has failed to lower expenditures, they have had to update the prices of more goods. In the case for Turkey, public expenditures are fixed and cannot be reduced. Revenues, on the other hand, depend on the level of economic activity. They decrease as the economy slows down and pick up as growth rate reaches China’s levels, for instance.

So, what is the million dollar question? Here it goes:  If the economy grows more slowly than normal in 2013, will the ministry have to update prices again? Yes, it will, unless the new public employees are laid off or the system is changed or the cost of the Demirel-style health reform is not imposed on the people, not even partially. So, the critical point is, without structural budget reforms, fiscal discipline collapses whenever growth, the building block of stability in the case of Turkey, weakens.

In this context, I would like to refer to the analysis of TEPAV economist Ekrem Cünedioğlu on the quality and diversity of Turkey’s exports. In the face of the European crisis, the quality of Turkey’s export goods has tended to deteriorate. For some time now, the export goods' basket of Turkey has not converged with those of developed countries. In other words in Turkey’s export basket, the share of goods specific to developed countries has decreased while that of goods specific to low-income countries has increased. Turkey’s exports have not become more sophisticated. A while ago, I said, “If you export to Iraq, you will become like Iraq.” And here goes: Contemporary debates on economics indicate that sophistication of exports is of critical importance for economic growth. The halt in the sophistication of export goods signals that Turkey’s growth is to decelerate in the coming period.

I am afraid that soon I will be writing, “the cause of the budget deterioration is Turkey’s export performance.” It seems this will be the structural impact of the European crisis on Turkey. The revenge of geography, ha!

This commentary was published in Radikal daily on 28.09.2012