Economic Survey of Turkey 2008: Shifting to a pro-growth fiscal strategy

 

Contents | Executive summary  | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Turkey published on 17 July 2008.

 

Contents                                                                                                                             

A new fiscal strategy should be at the core of a confidence-building macroeconomic policy framework

After six years of very tight fiscal policies, bolstered by the agreement with the IMF which provided the central anchor, which has been decisive in restoring macroeconomic stability -- Turkey faces a fiscal policy challenge of how to strike an appropriate balance between the conflicting time horizons of important objectives:

  • preserving a rigorous fiscal policy stance while
  • strengthening the growth-enhancing public services, and
  • simultaneously reducing the most distortive aspects of the tax system.

 

With the IMF agreement having come to an end in May 2008, Turkey should put in place a credible framework to preserve the confidence gained under IMF surveillance, while delivering the necessary changes in revenue and spending composition. The government’s decision to publish fully fledged general government accounts according to international accounting standards from 2009 on will be an important step in enhancing fiscal transparency, and should be implemented according to schedule. Following the macroeconomic slowdown, which puts pressures on public finances, the transition to a new plan also needs to be supported by a robust fiscal management framework, to defuse the uncertainties of local and foreign investors. The recently announced Medium-Term Fiscal Framework provides a good guidance for the available fiscal room in the years 2008 12, but requires a broad range of measures.


Recently legislated fiscal reforms should be fully implemented and effective multi-yearly spending ceilings should be introduced

Turkey is in a strong position to move towards such a new fiscal strategy. Thanks to past fiscal restraint, public debt is on a sustainable path, and fiscal institutions are being modernised with changes in the legal and institutional framework, including a state-of-the-art Public Financial Management and Control Law. Under strong spending pressures, arising notably from the social security system, all provisions of the new law could not be fully implemented to date: spending drifts in 2007 gave warning signals of the urgency of the full implementation of the new framework. In addition, to supplement the earlier primary surplus benchmark -- which fulfilled a key role through the 2000s in bringing public debt down and putting public finances on a sustainable path, but is less useful as the only anchor for fiscal policy looking forward -- multi-yearly spending ceilings for main spending categories would be helpful. The Survey suggests that Turkey’s new fiscal institutions should be fully implemented and enforced, and complemented with effective multi-year spending ceilings.


…and should be supported with revenue safeguards

The new fiscal framework rule should not only specify the primary surplus path which is compatible with sustainability of public debt, but also the total volume and structure of revenues which are necessary to finance the expenditure programmes under the ceiling. With fiscal policy now set on a sustainable path, which is protected by the framework, policy can provide adequate countercyclical flexibility to support the economy when GDP growth and tax revenues decline cyclically, as in 2008. In order to maintain credibility in the context of the recent fiscal slippages and the transition to a new arrangement with the IMF, spending ceilings should be supported with an adequately defined primary surplus target which should be adjustable in the case of exceptional circumstances.


Both the modernisation of fiscal institutions and strong political will are needed for the success of the new fiscal strategy

Both on the expenditure and tax revenue sides, the new fiscal strategy will need adequate fiscal institutions as well as a strong political stance. Strong commitment of policymakers is in particular needed to:

  • clarify and enforce Turkey’s top spending priorities, such as in the critical areas of infrastructure investment and education both for the young and adult population;
  • shift to more cost-efficient supply arrangements in key public services, where the status quo is generally costly as well as difficult to monitor and calls for more market-responsive provision, including through competition among private sector suppliers;
  • reduce the most distortionary tax wedges, notably by continuing to cut mandatory social security contributions, while closing the most blatant tax loopholes and strengthening tax enforcement; and
  • fully implement the recently voted social security reform, and promote a less fiscally costly mandatory public scheme, which is complemented by larger voluntary private saving , in order to preserve the sustainability of the social security system and reduce distortionary tax wedges.

 

Recent fiscal developments

 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Turkey 2008 is available from:

 

Additional information                                                                                                  

 

For further information please contact the Turkey Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Rauf Gönenç, Rina Battacharya, Olcay Culha and Cafer Kaplan, under the supervision of Andreas Wörgötter. Research assistance was provided by Béatrice Guérard.

 

 

 

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