I suppose it was a couple of years ago. Back then, I was of the opinion that "Turkey does not necessarily need the IMF. The way to get rid of the IMF is to take rapid steps in the direction of rule-based fiscal policy." However, then we had not experienced the 2008 global crisis or wasted the budget funds for the sake of elections as was done over the 2008-2009 period. The PIGS issue which substantially occupies the agenda nowadays, was not existent at all. Back then, I wrote many commentaries on this issue. Also TEPAV published policy notes. And then these times came. Today, let us make a contemporary contribution to the 'how must the fiscal rule be' discussion. Let me explain why I think that the fiscal rule framework the Treasury currently works on is wrong. Let me explain why the rule must be imposed on cumulative budget expenditures instead of on budget balance.

The first point to underline is that Turkey is not the first and the only country that will introduce rule-based fiscal policy. Fiscal responsibility codes have been in effect in Brazil, Chile, and Israel for long. These came forth as elements of the search for credibility and stability and are still in effect. In this context, the UK implements an informal "Code of fiscal stability". Similarly, the High Council of Finance in Belgium acts in order to ensure the credibility of public accounts. Moreover, wise men committees in Denmark, Sweden and Netherlands, which assure the public that public accounts reflect the truth, are established to fulfill this end and are active. Furthermore, TEPAV Fiscal Monitoring Group is working with the same purpose since 2005. Therefore, 'there is nothing new under the sun.' We are not reinventing any wheels. This I believe should be taken as the first point to keep in mind in consideration with the fiscal rule discussions.

Second, there are quite a lot of discussions going on throughout the European Union with respect to a "fiscal policy board" to establish a fiscal rule and its credibility. In the period ahead, ongoing developments in countries like Greece, Portugal, Spain, and Italy (PIGS) will most probably be built on this old literature and things that were infeasible yesterday will most likely become more doable. IMF conditionality of yesterday seems to be replaced by a new EU conditionality particularly in the process of enlargement. If things go like this, conditionality will not change in terms of their content. We can even expect that the IMF will be promoted as the guardian of EU's negotiation process as a whole. The crisis, particularly the new one emerging from the PIGS, implies that fiscal rule will play a big role in this "new" normal. At least this is what I see. And let this be the second point to state.

When assessed with this lens, it becomes important how the fiscal rule will be defined and implemented and how the credibility of the fiscal rule will be secured. Fiscal rule should basically be evaluated along with the growth strategy of a country and the sustainability of growth in that country. If the European Union (EU) convergence process is to continue, we can expect that Turkey's current account deficit grows. High current account deficit implies that the country grows beyond its means. A country growing at a pace beyond its means through the impact of rapid financial-commercial integration implies that the country is highly dependent of foreign savings. This, in its nature, is a phenomenon threatening the stability of growth. At this point, fiscal rule must be considered as an important element fostering the stability of growth. So, fiscal rule is also important in this sense. This is the third point to state.

And the discussion on which the rule should be built. As it is not possible to increase in the short term domestic savings in order to secure stable growth, fiscal discipline in public sector becomes an important public policy tool to this end. Taking the public budget as a whole, it can be claimed that Turkey should expand the tax base and build its expenditures on solid grounds. Nonetheless, this is not doable in the short term. Given that general elections will be held in 2011, Presidential elections in 2012 and local elections in 2014, it does not seem possible that the share of direct taxes in public revenues will be increased at the expense of reducing the share of indirect taxes through a comprehensive tax reform. And this would be the fourth point.

Under these circumstances, a fiscal rule to be imposed on the public budget balance cannot limit public expenditures as stressed in recent presentations by the Treasury. Such an option would only lead to the continuity of the patching period in fiscal policy as we are used to see in the recent period. It confuses us and limits the predictability. In that case, imposing the fiscal rule on the sum of public expenditures will be quite to the purpose.

Those knowing their target do not need to concern about which road to take. Turkey's problem is that the administrators do not state openly what they are attempting to do.

This commentary was published in Referans daily on 23.02.2010