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    That fund problem

    Fatih Özatay, PhD29 October 2009 - Okunma Sayısı: 1103

     

    You have read several times at this column that Turkey's response to the crisis is 'too late, insufficient and partially at the wrong direction'. I tried to touch upon the possible reasons for this phenomenon. Today, I would like to elaborate on one of them. You aim to implement a fiscal policy to stimulate domestic demand. Of course there are several ways to do this. But those first coming to mind are: increasing unemployment benefits, distributing additional bonuses to the retired, launching trainings to improve the skills of labor force, accelerating infrastructure investments and or cutting down taxes... Of course it is easy to list the measure; the hardest part is to create budget means necessary to realize those. In the end, budget deficit increases as you implement one or more of these.

    Of course there are also other challenges. If your budget means are limited, you have to choose between these measures. The main question is which one/ones of these measures stimulate domestic demand more and more rapidly. Once you answer this question, there is one more obstacle you have to overcome. In order these efforts not to go down the drain; the deterioration to arise in the budget must not shake the confidence in the economy. Otherwise, you make things worse and push up risk perception. In such a milieu, no one engages in a transaction and you wait more to boost domestic demand. In that case the only thing you 'achieve' will be the deterioration in the budget. The way to prevent this is of course declaring in advance the measures that will compensate for the deterioration in the budget.

    Now, let us start over. One of the possible reasons why Turkey responded to the crisis too late and insufficiently was related with the belief that budget means did not allow to. There are people who agree or disagree with this statement; I am with the second group. As I have mentioned several times before, I am aware that budget means are limited but I believe that the existing means were not utilized sufficiently in a timely manner. But at the end, it is correct that Turkey did not have the budget means that will allow the implementation of fiscal expansion with ease and inner peace. I believe everyone will agree with me in this statement.

    There is no doubt that this adverse situation also results from our mistakes. Table 1 compares the ratio of tax revenues to GDP for Turkey and selective OECD countries. Tax revenues also include social security premiums. The comparison uses 2006 figures for being the most recent one. However, the picture will not change if 2007 or 2002 figures are used.

    There are two striking points. First, Turkey's tax revenues also including social security premiums is quite low in comparison with other country groups. This becomes even more striking in comparison with the European Union and OECD total. Second, half of the tax revenue comes from indirect taxes. The ratio of indirect taxes in total tax revenue is much lower in other country groups.

    Now, everyone must sit down and think through. Under such circumstances, Turkey cannot take any step in any direction. Even if it does, this step only ensures a 4 to 5 percent average growth. If international liquidity becomes abundant, this rate increases and if not it decreases. If liquidity comes to halt as it did in the last crisis, Turkey's economy contracts. In short, Turkey becomes dependent on foreign funds in order to ensure higher growth rates. Second, while economy contracts, we can only sit down and 'watch'. We cry: "This is the best we can do, there is nothing else to do." We have to make the greatest effort to eliminate these two striking differences.

     

    Table 1: Composition of tax revenues (1006, % of GDP)

     

    Tax revenue including SSI

    Tax on income, profit, capital gain

    Social security contrib.

    Real estate tax

    Tax on goods and services

    Indirect tax ratio (%)

    OECD Total

    35.9

    13.0

    9.1

    2.0

    11.1

    30.9

    OECD America

    27.3

    11.6

    4.9

    2.3

    8.1

    29.7

    OECD Pacific

    30.5

    14.7

    4.0

    2.7

    8.6

    28.2

    OECD Europe

    38.0

    12.9

    10.6

    1.8

    12.0

    31.6

    EU 15

    39.8

    13.8

    11.1

    2.2

    11.8

    29.6

    Turkey

    24.5

    5.3

    5.5

    0.9

    11.9

    48.6

    This commentary was published in Radikal daily on 29.10.2009

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