Turkey may delay implementing the new spending limits policy known as the “fiscal rule” until 2012.
“The budgetary practice of 2011 will not be constituted on the fiscal rule, but it will be effective by 2012,” Turkish Industry and Trade Minister Nihat Ergün told a press conference Tuesday. “However, the government has not given up on the commitment to the fiscal rule.”
Revealing Turkey’s long-term economic ambitions, the rule consists of two main components, including a requirement that the government maintain an annual growth target of 5 percent, as well as a budget deficit of 1 percent or less of gross domestic product to reduce debt relative to the size of the economy.
The rule was first sent to Parliament on May 26 and was initially expected to be discussed before the end of the current legislative year.
Words attributed to Turkish Finance Minister Mehmet Şimşek on Aug. 5 first cast doubt on the approval of a fiscal rule. A Reuters report quoted Şimşek as saying in Helsinki that the fiscal rule might not pass when Parliament reconvenes in October. Even though Şimşek’s spokeswoman, Sibel Tokgöz, released a statement denying the Reuters report, recent statements from Ergün confirmed the current situation.
“We have analyzed the fiscal rule with the Economic Coordination Council [EKK],” said Ergün, Anatolia news agency reported Wednesday.
“We have conducted studies about how we can get results with the best and worst scenarios, formulas and different simulations,” he said.
“Studies in parallel with opinions received from professional organizations, credit rating agencies, the International Monetary Fund, the World Bank, Turkey’s chambers and exchanges and other associations have been made regarding what may be the proper formula for Turkey,” he said.
Turkey now operates according to a non-written fiscal rule, Ergün said, adding that the budget law is a fiscal rule in a sense. “The government already has a law that determines its macroeconomic equilibrium, budget deficit, amount of debt and investment, government payrolls and expected tax revenue.”
Opinions vary
Ergün said the government could propose new legislation setting budget limits as a proportion of economic output becomes more flexible, the Istanbul-based Bloomberg HT channel reported Wednesday.
The measure was delayed because some ministers objected, saying limits on spending would hurt investment, Ergün said. “During the presentation in Cabinet, investment ministries brought different opinions regarding the flexibility of the formula. Due to this situation, a discussion of the issue by those ministers has now been put on the agenda.”
Noting that investment ministries doubt whether or not the formula was flexible enough, Ergün said, “The investment ministries want to see more clearly how much flexibility this formula brings to them.”
‘Loss of prestige’
Speaking to the Hürriyet Daily News & Economic Review, Professor Esfender Korkmaz from Istanbul University said the government delayed implementing the rule in order to be able to use the budget during the referendum and general election periods to its advantage.
“The present budget enables the government to cover expenses. If the fiscal rule became law now, the government would not be able to finance extra expenditure,” Korkmaz said.
With the rule was postponed until 2012, commentators have raised a number of different opinions on the matter. Speaking to the private channel NTV on Wednesday, economist Mahfi Eğilmez, a former Treasury undersecretary, said the postponement of the fiscal rule to 2012 represented a loss of prestige for Turkey.
Meanwhile, NTV reported a top official as saying: “It is possible to increase the proportion of the budget deficit to 2 or 3 percent of GDP, which the European Union targeted. It might be a much more proper step in terms of contribution to economic growth. Demands are mainly for 3 percent.”
Turkey’s “accommodative” fiscal policy for this year and next may contribute to a wider current account deficit that would make the economy too reliant on capital inflow and may curb growth, Standard & Poor’s, or S&P, said, according to a report from Bloomberg on Wednesday.
“A possible delay in implementing the country’s so-called fiscal rule may signify greater reluctance by authorities to rein in government consumption,” S&P analyst Frank Gill said in an e-mailed response to Bloomberg.
Turkey would “somewhat tarnish its fiscal credibility” by delaying a decision to introduce new limits on budget spending and failing to implement the steps, Fitch Ratings said, according to the Bloomberg report.
“The delay and weakening of the fiscal rule by the government suggests it may run a larger budget deficit next year than planned,” Fitch analyst Edward Parker said.
“Fitch has not made a linkage between legislating the rule and potential ratings actions,” Parker said.
Moody’s Investors Service said a looser fiscal stance would adversely affect Turkey’s credit fundamentals, Bloomberg reported. The delay of the proposed fiscal rule would “deprive Turkey of an anchor for its fiscal policy, which would make it easier for the government to loosen its fiscal policy in the run-up to elections” next year, said Moody’s analyst
