The economy grew excessively fast in 2022 and 2023, driven by very expansionary fiscal and monetary policies. This led to significant imbalances including historically high levels of inflation. Following May 2023 elections, the policy mix has started to normalise. Restrictive monetary and fiscal policies have helped to stabilise financial markets, boosted confidence, and reduced uncertainty. To fully leverage the improving international sentiment, Türkiye should maintain prudent macroeconomic policies until inflation is firmly on track to meet targets. Long term fiscal sustainability and the credibility of the government’s fiscal strategy will require structural reforms to improve spending efficiency, expand tax revenues, and promote inclusive growth.
OECD Economic Surveys: Türkiye 2025
Abstract
1.1.1. Economic activity is moderating
Türkiye has been the fastest-growing economy in the OECD over the last two years (Figure 1.1, Panel A). The economy expanded by 5.3% in 2022 and 5.1% in 2023. Strong support from expansionary fiscal and monetary policies boosted consumer spending to historic highs. However, these policies led to unsustainable developments, creating significant internal and external imbalances, as evidenced by rising inflation, a widening current account deficit, a negative level of net international reserves excluding swaps (the difference between official gross reserve assets and net short-term currency drains), and a decline in the value of the Turkish lira. Following the May 2023 elections, the government started a process of normalising macroeconomic policies to pull Türkiye’s economy back onto a sustainable path. Fiscal and monetary policies have rightly become restrictive, which has contributed to the economy’s slowdown in 2024. Year-on-year GDP growth dropped from 6.5% in the first quarter to 2.4% in the fourth quarter of 2024. On the other hand, the more conventional policy approach has improved investor sentiment and has eased the risks around the outlook, as imbalances have been reduced. The current account deficit has been decreasing, the exchange rate has stabilised, and net international reserves excluding swaps turned positive for the first time since early 2020. In addition, foreign-currency swaps with local banks have been fully unwound.
Before the macroeconomic normalisation, domestic demand had been the main driver of economic growth in 2022 and 2023 (Figure 1.1, Panel B). Real household consumption in this period grew at an unprecedented pace, by around 15% annually, the highest growth rates in Türkiye's history. Sales of automobiles and durable goods exceeded historical averages in 2023, as high inflation led some households to frontload their purchases. Consumer spending in 2022 and 2023 was also supported by positive labour market developments. The number of people employed reached an all-time high in 2024 while the unemployment rate fell below 9% in the second half of the year, marking the lowest rates in a decade. While the number of workers in the manufacturing sector remained stable, the services sectors benefited from improving labour market conditions (particularly in the construction sector, tourism, and the information and telecommunication sectors), also partly reflecting structural adjustments in the economy.
Wages increased alongside those significant employment gains, with average annual growth of 88% and 114% in 2022 and 2023 respectively, well above the inflation rate in these years (72% and 54%). This wage growth was bolstered by substantial salary increases for public sector employees and significant hikes in the minimum wage. The minimum wage – earned by around half of workers in non-agricultural sectors – has been raised five times between 2022 and the end of 2024, reaching a level 459% higher in gross terms than in 2021 (against almost 400% for consumer prices). Overall, real labour compensation per employee has increased by 43% between the last quarter of 2019 and the last quarter of 2023 while the real minimum wage grew by 42% between May 2019 and May 2024 (OECD, 2024[1]).
Besides the favourable labour market developments, supportive monetary and fiscal policy boosted household spending. In 2023, the disposable income of households was supported by significant increases in pensions and social transfers to compensate for high inflation and the consequences of the February earthquakes (see below). In addition, loose monetary policy boosted loan growth, which in nominal terms in 2022 and 2023 was one of the highest in history (see below). Elevated inflation expectations led to higher demand for loans, resulting in additional hikes in money supply (CBRT, 2024[2]).
Investment grew considerably in 2023, making a significant contribution to economic growth. Beyond the increase in investments in machinery and equipment, one reason for the higher investment activity was the reconstruction following the earthquake that struck Türkiye at the beginning of 2023 (Box 1.1). A large share of post-earthquake fiscal spending was allocated to investments, primarily to rebuild the housing stock. Additionally, machinery and equipment investments were strong in 2023.
The effects of macroeconomic stabilisation policies implemented in the middle of 2023 began to take hold in 2024 as the effects of monetary tightening started to be more pronounced and household consumption slowed considerably (Figure 1.1, Panel B). Credit growth slowed (see below) and an analysis by the Central Bank examining credit card spending showed that consumption began to decelerate in the second quarter of 2024, particularly in "optional discretionary items" such as jewellery, car rentals, and electronic goods. These categories were expected to be more significantly and rapidly affected by monetary tightening (CBRT, 2024[2]). On the investment side, the effects of the reconstruction process began to fade and financing conditions also tightened due to Central Bank interest rate hikes, reducing investment activity in the first half of 2024 although construction investments continued to show strong growth.
Note: In Panel A, data are based on GDP in USD, constant PPPs (rebased, reference year 2020).
Source: OECD National Accounts Database; and OECD Economic Outlook: Statistics and Projections (database).
Combined with the effects of the post-pandemic disruptions in global supply chains, strong domestic demand, fuelled by supportive fiscal and monetary policies, along with currency depreciation and high energy prices, drove year-on-year inflation beyond 80% in the second half of 2022 (Figure 1.3). In particular, the effective nominal exchange rate fell by more than 50% between June 2021 and June 2022 and evidence from the pre-pandemic period suggests that the pass through of exchange rate to inflation is significant with a large pass through to import prices after a year (Akgündüz et al., 2019[3]). Although inflation began to ease due to base effects, consumption tax hikes to finance earthquake-related expenses in the second half of 2023 (see below) contributed to keep inflation around 50%. Rising prices are disproportionately affecting households with lower incomes: for example, households in the first income decile allocate about two thirds of their budget to food and housing—double the share typically spent by households in the upper decile (World Bank, 2021[4]). Furthermore, robust demand and elevated inflation contributed to a rise in external imbalances, and the public deficit increased substantially.
Monetary policy and other macroprudential policies appropriately became more restrictive and began to curb domestic demand in 2024, helping to slow inflation and lower inflation expectations. Inflation expectations remain significantly above the Central Bank's medium-term target of 5%, and core inflation has stayed persistently high, driven by rising prices in services. Indeed, services inflation, particularly in rents, education, health, and catering services has been relatively sticky. The empirical evidence in Türkiye indicates that persistence in services inflation is more than twice as high as goods inflation due to prevalent backward-looking pricing behaviour across services sectors (CBRT, 2024[2]).
On 6 February 2023, two large earthquakes hit 11 provinces in central and southern Türkiye. They affected an area of 110 000 km2 and 14 million people or 16% of the national population (Figure 1.2). These earthquakes and their aftershocks resulted in widespread damage and fatalities. It is one of the deadliest natural disasters in Türkiye. The death toll exceeded 50 thousand people and around 3.3 million were displaced. The earthquake wreaked damage on over half a million buildings as well as communication and energy structures and led to significant financial losses.
The government estimated that the total financial burden of the earthquakes for the country is around 9% of GDP (SBB, 2023[5]). The most prominent component (55%) is the damage to housing units, the second largest source of damage (12%) is the destruction of public infrastructure and damage to public service buildings. The earthquakes have also had significant damages on manufacturing industry, energy, and other private sector activities (11%). Further damages involve losses to the insurance sector, revenue losses of trade, and macroeconomic impacts.
The disaster had also short-term effects on economic activity through the disruption of business continuity, loss of labour and capital leading to production losses, disruption of supply chains, and a decline in total demand, with retail and wholesale trade being interrupted. The impact on 2023 growth was likely below 1% of GDP as the affected region only contributes a small share of GDP, and as part of the slowdown was compensated by increases in investment due to the reconstruction activity (SBB, 2023[5]; IMF, 2024[6]).
The fiscal burden of the earthquake amounts to approximately 8.3 percentage points of GDP over a 5-year period. The amount of earthquake-related public spending was marked at 960 billion TL (around 3.6% of GDP) in 2023. Earthquake-related expenditures were realised at 1.9% in 2024, and the earthquake-related budget allocations in the Medium-Term Program (2025-27) were marked at 0.9% in 2025, 0.7% in 2026 and 0.6% in 2027.
Share of the national population and economy of the region affected by two large earthquakes in February 2023
Note: The share of employees is based on the formal sector.
Source: Paterson, A., et al. (2023), "The Territorial Impact of the Earthquakes in Türkiye: Policy Note", OECD Regional Development Papers, No. 50.
Note: In Panel B, data are based on the CBRT Survey of Market Participants that polls real and financial sector representatives and professionals.
Source: OECD (2025), OECD Consumer Price Index; and CBRT.
Export growth turned negative in 2023 and remained weak in the first half of 2024. Demand growth from Türkiye's main trading partners slowed significantly. In addition, the relative stabilisation of the Turkish lira led to an appreciation of the real exchange rate, and may have put downward pressure on competitiveness in some labour-intensive sectors. Additionally, the earthquake affected export activities in the southern regions, which accounted for nearly one-tenth of the country's export capacity (Box 1.1). Geopolitical factors also played a role in export performance, as tensions in the Middle East contributed to weaken total exports growth in the first half of 2024.
The EU remains Türkiye’s largest export destination (Figure 1.4). In 2023, 41% of Türkiye's exported goods were destined for the EU. In terms of products, manufacturing and machinery dominate Türkiye’s exports of goods. Türkiye's manufacturing sector has shown notable progress, reflecting a positive shift toward higher value-added production and exports. Despite efforts over the past decade, the share of high-technology goods in manufacturing exports remains low (see Chapter 4), rising only from 3.1% in 2022 to 3.8% in 2023 against more than 16% on average in the OECD. Meanwhile, low-technology exports still make up about one-third of overall manufacturing exports.
Source: OECD calculations based on UN Comtrade.
By contrast, services exports improved in 2023, driven by strong tourism revenues, which increased by 12.1%. Over 57 million tourists visited Türkiye in 2023 and 62 million in 2024, surpassing the pre-COVID level from 2019 by around 10% and 20% respectively (Figure 1.5). An expanding number of tourists are visiting Türkiye for medical reasons, including treatments and procedures related to dental care, cardiac operations, or cosmetic surgeries. The share of health tourism revenue in total tourism income rose from about 1% in 2002 to 5.4% in 2023 and 5.0% in 2024 (Government of Türkiye, 2024[7]; TurkStat, 2024[8]).
Economic activity is expected to moderate in the next two years after years of strong growth primarily driven by domestic demand, but which generated imbalances posing challenges to long term sustainability. The drivers of growth will be more balanced, in line with government efforts, and the positive output gap from 2022-2024 is set to turn negative. Tighter financial conditions, along with restrictive monetary and fiscal policies aimed at rebalancing the economy in a sustainable way, will limit household consumption, while investment and government spending are also expected to weaken, especially as the effects of post-earthquake reconstruction subside. Exports are anticipated to gradually strengthen due to an improving external environment. Unemployment is expected to to remain slightly below 9%. Efforts to contain inflation will have some impact, but inflation is still projected to decline modestly throughout the forecast period to reach 17% in 2026.
Note: Data from January 2020 are based on the corresponding monthly data in 2019.
Source: TurkStat, "Visitor's tourism income, number of person and average expenditure per capita by months".
Annual percentage change, volume (2009 prices)
1. Based on working-day adjusted series.
2. Contribution to changes in GDP. Stockbuilding includes statistical discrepancy.
3. Consumer price index excluding energy, food, non-alcoholic beverages, alcohol, tobacco and gold.
* Projections for 2025 and 2026 are an update of EO116 based on the Interim Economic Outlook of March 2025.
Source: OECD (2025), OECD Economic Outlook: Statistics and Projections (database).
1.1.2. Downside risks persist
The recent shift in the economic policy framework has improved investor sentiment. The perceived creditworthiness of Türkiye has improved as evidenced by the fall in the value of Türkiye’s CDS (Figure 1.6, Panel A). The country has gained confidence from international credit rating agencies, which upgraded their ratings in 2024. Due to the improvement in the country’s risk premium, banks' external borrowing costs have decreased and access to international capital has become easier (CBRT, 2024[9]). The short-term volatility of the Turkish lira has also fallen (Figure 1.6, Panel B), and the currency has remained more stable compared to the 2022-2023 period.
Note: In Panel A, data are presented as monthly data. The higher CDS value, the higher probability of a credit default.
Source: OECD (2025), Balance of Payments (database); CBRT; and LSEG.
Türkiye’s large external financing needs have diminished. The current account deficit has been decreasing from a relatively high level (Figure 1.6, Panel C) due to weaker domestic demand in 2024, falling energy prices, and lower demand for gold, in parallel of a pickup in exports. Gross international reserves have been rising (Figure 1.6, Panel D), and net international reserves, excluding swaps, turned positive for the first time since early 2020. The current account deficit is expected to decline further, reflecting a slowdown in domestic activity but also an improvement in foreign demand. However, potential risks remain. In particular, external debt maturing within a year amounted to USD 226.6 billion in 2023, roughly 20.1% of GDP. Further fluctuations in the exchange rate could thus make debt service payments more costly and unpredictable, impacting the economic decisions of both the private and public sectors.
The risks to the outlook remain skewed to the downside. One downside risk could lie in an earlier-than-expected relaxation of the macroeconomic policy stance, which could result in higher inflation and lira depreciation. Moreover, if inflation expectations persist at elevated levels, additional monetary and fiscal tightening may be required, which would dampen domestic demand and slow economic growth.
1.1.3. Monetary policy has become restrictive
Following the May 2023 elections, a dramatic shift in the macroeconomic policy mix was initiated, led by the Central Bank's tightening of monetary policy (Figure 1.7). Since then, the Central Bank of Türkiye (CBRT) has gradually raised the policy rate (the one-week repo auction rate) by a cumulative 41.5 percentage points, reaching 50% in March 2024. Given falling inflation expectations (Figure 1.3) and increasing interest rates, the real forward rates turned from negative to positive and increased significantly beyond potential GDP growth. At the same time, the CBRT has widened the interest rate corridor to 300 basis points below and above the policy rate, allowing flexibility to adjust rates as needed before policy meetings. To curb credit growth, the CBRT has lowered monthly growth limits for loans in 2024, to 1.5% for foreign currency loans, and 2% for Turkish lira loans. In January 2025, the monthly growth limit for foreign currency loans was further reduced to 1% and to 0.5% in March. The monthly growth limit for Turkish lira commercial loans has been differentiated at 2.5% for SMEs and 1.5% for other commercial loans. Reserve requirement ratios were also raised for Turkish lira and FX deposits. In December 2024, the Central Bank cut the policy rate by 2.5 percentage points while maintaining a tight monetary stance given the decline in inflation and inflation expectations while the interest rate corridor was narrowed to 150 basis points. In January and March 2025, the policy rate was cut further by 2.5 percentage points each time as expected, and lowered to 42.5%.
Source: CBRT; and BIS.
The tightening of monetary policy has been a welcome departure from the period between 2021 and 2023, where monetary policy was excessively accommodative. During that period, the CBRT had reduced its policy rate by 10.5 percentage points despite accelerating inflation, strong economic activity and a widening current account deficit. The real long-term interest rate based on the private consumption deflator was -63% in 2022 and -44% in 2023. To curb the ensuing dollarisation, the authorities introduced a foreign exchange-protected deposit scheme (KKM-FX protected deposit) and tax incentives to participate in this scheme. In addition to KKM, exporters were required to exchange 40% of their foreign currency revenues into liras – the share was initially set at 25% in January 2022 and raised in April 2022, and has recently been lowered to 30% in June 2024. Despite these measures, the foreign exchange reserves declined in the period of 2022-23. As the lira lost around 70% of its value vis-à-vis the US dollar between the beginning of 2021 until mid-2023, the KKM-FX protected deposits resulted in high costs. The fiscal costs related to the compensation of the KKM-FX holders reached almost 1% of GDP in the period of 2022 and 2023.
In addition to the higher interest rates, the CBRT has also recently simplified regulatory and macroprudential measures, eliminating some policies implemented before mid-2023. Interest rate caps on loans, reserve requirements based on the Turkish Lira (TL) share of total deposits, and the requirements for government bond holdings have been removed. As part of the simplification process, the CBRT has begun phasing out the KKM FX-protected scheme, including through the exclusion of KKM accounts from the TL deposit share target. Additionally, as of mid-2024, KKM returns became subject to taxation, and the minimum interest rate was progressively lowered. As a result, the share of KKM FX-protected deposit in total deposits has started to decrease from around 25% in mid-2023 to 5% in January 2025 (Aydın and Sümer, 2024[10]). The CBRT has announced that simplification steps will continue in 2025.
Confidence in the independence of the Central Bank has increased due to credible improvements in financial and monetary policies, which have positively influenced investor sentiment (see above). However, building on those successes, there is room to further strengthen confidence in the independence of the CBRT. According to the Central Bank Independence Index, which evaluates de jure central bank independence for 155 countries, the rules governing the appointment of the governor and central bank board members lag behind those of other OECD countries (CBI, 2024[11]). To address this, the appointment of the governor could be carried out by separate bodies rather than by the executive branch. Additionally, the terms of office for the governor and board members could be extended beyond the electoral cycle, and their reappointment could be limited.
The CBRT’s communication with the public has improved. The Central Bank has repeatedly emphasised its commitment to maintaining a tight monetary policy until there is a marked improvement in the inflation outlook. The CBRT provided clear guidance on the levels of monthly inflation and expectations that must be achieved before policy easing can begin. The CBRT is expecting that given tight monetary and fiscal policy, inflation will fall below 10% and close to the 5% target in 2027.
As a result of these measures, financial conditions have tightened. Deposit and lending rates are now more closely aligned with the policy rate (Figure 1.8, Panel A), and lira-denominated commercial loan growth has slowed (Figure 1.8, Panel B). Demand for housing and vehicle loans has weakened, and the use of credit card cash advances has also declined (CBRT, 2024[9]). Additionally, portfolio inflows from abroad and swap transactions with non-residents have increased rapidly. Inflation expectations have started to decrease.
Note: OECD calculations based on weekly data. The latest data point refers to 14 February 2025 in both Panel A and B. In Panel A, commercial loans exclude overdraft accounts and credit cards.
Source: CBRT; Banking Regulation and Supervision of Agency, www.bddk.org.tr; and OECD calculations.
1.1.4. Financial stability risks should be monitored closely
However, while current monetary and macroprudential measures are appropriate, this period of monetary tightening may highlight areas of risk in the corporate and household sectors, which will require careful monitoring by the authorities. On the corporate side, while corporate indebtedness is close to the OECD average (Figure 1.9), profit margins have been declining since early 2023 (while remaining above historical averages) and the share of companies able to cover at least a quarter of their total debts with annual profits has also been on a downward trend. The capacity to cover debt in foreign currency with export revenues has been improving overall (CBRT, 2024[9]). However, empirical evidence analysing the Turkish corporate sector suggest that micro firms are relatively more affected by changes in interest rates than larger firms, standing out as the most vulnerable portion of the corporate sector (World Bank, 2024[12]). Therefore, the fiscal policy measures undertaken to support vulnerable businesses will play an important role in the upcoming period to maintain economic stability (see below).
On the household side, while the debt ratio remains well below that of other OECD countries (Figure 1.9), some segments are more at risks. Retail loans, particularly those via credit cards, have been rising quickly (CBRT, 2024[9]). The ease of use of credit cards and the relatively low level of credit card interest rates in a high inflation environment from 2022 to mid-2023 contributed to a historically high level of credit card debt. During inflationary periods, credit cards have provided easily accessible financing with instalment options for durable and semi-durable goods and services. High limits granted to individuals led to spending behaviour and consumption demand that was inconsistent with their incomes (CBRT, 2024[9]). The ratio of unpaid debt to total card balance has increased and reached 13.7% in the first half of 2024. In response, authorities increased interest rates on credit card purchases and cash advances, aligning them with other types of retail loans.
Overall, the banking sector’s liquidity position appears relatively strong, with short- and long-term liquidity indicators above both legal minimums and historical averages (CBRT, 2024[9]). A strong preference for TL deposits, combined with slower TL loan growth, has reduced the loan-to-deposit ratio, positively impacting the sector’s liquidity outlook. The banking sector’s share of non-performing loans (NPL) has remained stable at a level below historical averages, as a decline in the commercial NPL ratio has offset a slight increase in the retail NPL ratio, which rose marginally following the tightening of financial conditions. Banks' medium- and long-term external debt rollover ratios have increased, with the external debt rollover ratio well above 110% (CBRT, 2024[13]; CBRT, 2024[9]). Still, banks’ asset quality could be affected by worsening economic conditions. Therefore, as was mentioned in the previous OECD Economic Survey of Türkiye, publishing banking sector stress tests could help strengthen domestic and international confidence (OECD, 2023[14]).
Note: According to the system of national accounts (SNA), debt is obtained as the sum of the following liability categories: special drawing rights (AF12), currency and deposits (AF2), debt securities (AF3), loans (AF4), insurance, pension, and standardised guarantees (AF6), and other accounts payable (AF8). Data refers to 2021 for Israel, to 2022 for Mexico and New Zealand. Unweighted average for the OECD aggregates with 37 countries in Panel A and 38 countries in Panel B. In Panel B, the household sector includes non-profit institutions serving households (NPISH). The data is not consolidated and thus include within-sector debt exposure.
Source: OECD (2024), OECD Financial indicators dashboard; OECD National Accounts database; and OECD Financial Accounts database.
The current orientation of monetary policy with a tight policy stance taking into account the trajectory of inflation expectations is appropriate. It should be maintained until inflation is sustainably on a downward path to target. While measures such as caps on credit growth were appropriate to curb demand in order to slow inflation, they also weaken the transmission mechanism of monetary policy. Therefore, when inflation is on a clear downward path, the ongoing macroprudential framework simplification should continue. Notably, the credit growth caps could be gradually removed and the requirements for exporters to exchange part of their revenues to TL could be gradually dismantled.
1.1.5. Fiscal policy is set to tighten
The government is expected to significantly lower the deficit, which has increased substantially in recent years mainly due to earthquake-related spending (Figure 1.10). The consolidation strategy involves a combination of revenue and expenditure measures (Box 1.2). Larger deficit cuts will come from the expenditure side through reduced capital and transfer spending as earthquake-related investments will largely decrease in 2025. On the revenue side, improvements are expected from measures such as the introduction of a minimum corporate tax and the removal of various tax exemptions, increases in withholding tax rates on deposits, funds, FX-protected deposits and some securities, and higher tax collection performance while combating informality.
Government net lending
Note: The shaded area refers to projected data. OECD calculations on earthquake-related spending over 2023-26 based on the reports, "Inflation Report 2024-IV" and "Medium Term Program (2025-2027)".
Source: OECD (2024), OECD Economic Outlook 116 database; CBRT, Inflation Report 2024 - IV (November 8, 2024); and Presidency of Strategy and Budget and the Ministry of Treasury and Finance, Medium Term Program (2025-2027).
The planned reduction in the deficit is appropriate for strengthening market confidence, for building fiscal buffers to address potential future crises, and for stabilising the macroeconomy. With multipliers estimated at around 0.4–0.5, the consolidation will have an impact on economic growth, which is expected to fall from 3.5% in 2024 to 2.6% 2025 (see above).
Achieving planned targets will be challenging in a high-inflation environment, as inflation-sensitive wages and pensions account for a significant share of expenditures. The success of the fiscal plan will ultimately depend on aligning fiscal policy decisions with the direction of monetary and structural policies. Effective coordination between these policies is crucial to achieving a sustainable reduction in the deficit that is both economically sound and politically viable.
It is also important that the minimum wage setting (as well as public sector wage indexation) does not run counter the macro-economic stance. Türkiye has a country-wide minimum wage set by the Minimum Wage Determination Commission, an independent tripartite body encompassing representatives from the government, employer, and employee organisations. In case employer and employee representatives disagree, the institutional set-up of this Commission implies that the government sets the minimum wage. Independent expert commissions, as used to determine wage increases in several OECD countries, are well placed to consider and make the necessary links between minimum wages and policy areas.
Türkiye’s government debt-to-GDP ratio is relatively low compared to other OECD countries and maintain the country at a low risk of sovereign stress in the short term, but its structure makes it vulnerable to shocks. Türkiye’s higher interest rates make domestic borrowing more expensive, and debt servicing costs have risen (TMTF, 2024[15]). Additionally, as of the end of 2024, 56.1% of the debt is denominated in foreign currencies, which could further strain the debt trajectory if the Turkish lira depreciates, although this share has recently been on a downward trend (Figure 1.11, Panel A). Finally, the average maturity has shortened recently form around five years to 4 years (TMTF, 2024[15]). It was already lower than the world median (more than 7 years) (World Bank, 2024[16]) and the average maturity on new external debt commitments is among the lowest across large middle-income countries (Figure 1.11, Panel B). This speeds up the passthrough of higher interest rates and exposes Türkiye to new variations in funding costs and rollover risk.
Note: In Panel A, data are based on long-term debt (maturity more than one year) converted in USD at end-2023. See BIS for more details.
Source: BIS (2024), Debt Securities Statistics (database); and World Bank (2024), External Debt Statistics database.
Moreover, contingent liabilities pose additional risks to fiscal policy, highlighting the need to strengthen the framework for supervising and monitoring public-private partnerships (PPPs). Currently, the government provides guarantees, including repayment guarantees and minimum revenue, which are included in the budget of related institutions. While Türkiye discloses information on contingent liabilities according to the International Public Accounting Standards, information on the size, structure, and risk composition of the overall PPP portfolio could continue to be improved (IMF, 2024[6]; European Commission, 2023[17]; European Commission, 2023[18]). As recommended in the previous OECD Economic Survey, closely monitoring contingent liabilities and improving fiscal transparency further would help mitigate these vulnerabilities. Türkiye should publish a regular Fiscal Policy Report to fully disclose risks related to public financial liabilities (OECD, 2023[14]).
The importance of future fiscal policy, risks, and the potential of structural reforms can be illustrated by three scenarios for the long-term trajectory of the public debt ratio (Figure 1.12):
No Policy Change Scenario - The above-mentioned risks highlight the importance of government consolidation efforts. If the government fails to meet its planned target, and the deficit remains at its 2024 level, the debt will rise significantly. In this scenario the deficit will remain at 4.7% of GDP, and in the medium-term additional ageing-related spending will increase the debt even further.
The MTP scenario - Meeting the government's targets outlined in the Medium-Term Program (MTP) will help keep the public debt stable in the short term. The deficit will be reduced to 2.6% by 2026 also thanks to the consolidation package (Box 1.2), which will help to keep the debt stable in the short term. However, in the medium term, public debt is projected to increase further due to ageing-related spending, which is expected to grow by around 2 percentage points between 2030 and 2040 (Guillemette and Turner, 2018[19]).
The Reform scenario - Meaningful and sustained reduction in the debt-to-GDP ratio would require a more comprehensive approach. This would include stronger fiscal reforms to make the deficit reduction sustainable, coupled with structural reforms to boost economic growth 5 (Box 1.3). The reform scenario would not only improve living standards, but would put debt on a downwards trajectory which is more resilient to potential future shocks.
General government debt, Maastricht definition
Note: The no-policy change scenario assumes a deficit at the level of 2024 of 4.9%, with macroeconomic indicators based on the forthcoming OECD Economic Outlook 116 database and the OECD long term database. The Government's Medium-Term Program scenario assumes that the deficit will fall to 2.6% in 2026 in line with the Medium-Term Program. The reform scenario assumes higher growth based on the OECD Economics Department Long-term Model and lower deficit, deriving notably from reforms proposed in this Survey (see Box 1.3).
Achieving the government’s fiscal target requires substantial consolidation contributing to a reduction of the deficit of nearly 3 percentage points of GDP between 2023 and 2026. In this regard, the government already implemented and proposed a number of measures both on the expenditure and revenue side:
On the revenue side, the contribution comes from the increase in tax rates.
Türkiye has introduced two major tax packages, one in 2023 and the other in 2024. Major changes involved:
The VAT rates were increased. The intermediate rate was raised from 8% to 10% and the standard rate was raised from 18% to 20%. The SCT rate on gasoline and diesel were raised significantly to 5 TL per litre.
The corporate tax rate applicable to financial institutions was increased from 25% to 30%.
A minimum corporate tax of 10% is set on corporate income for all domestic companies.
On the expenditure side, savings will be achieved not only through cuts, but also through the effective and efficient use of existing resources. Major changes involve:
Restrictions on new public spending, including new hires, rents and purchases or leasing of vehicles.
Efficiency in Public Investments: Public investment appropriations will be reduced by 15% and no new projects will be accepted into the public investment program.
A 10% cut will be applied to allowances for goods and services, except in areas related to earthquake relief and other essential needs.
Increasing the efficiency of expenditures on the Public Fleet by standardising the number and the use of vehicles, and encouraging the inter-institutional use of public vehicles.
Reducing expenditures on urban lighting through the use of LED.
Table 1.3 presents estimates of the fiscal impacts of key reforms recommended in this Survey. Additional expenditures arise from boosting green investment, and increasing expenditure on childcare services while expenditure reviews provide efficiency gains. Additional revenues are obtained via more efficient VAT collection and the taxation of carbon. The quantification is merely indicative and does not account for behavioural responses.
In addition, tax revenues would increase by 0.3% of GDP by 2030 due to dynamic effects of reforms on GDP growth (Figure 1.13).
Fiscal savings (+) and costs (-), % current year GDP
1. Bolstering childcare services: increasing spending in pre-school education to the level of OECD average (see Chapter 2).
2. Linking of retirement age to life expectancy and reducing the replacement rate, while increasing other social benefits (see below and Chapter 2).
3. Improving business regulation: reducing by half the gap in the product market regulation index between Türkiye and the OECD average (see Chapter 4).
4. Boosting green investment: Investment in new low-carbon electrical capacity, based on the OECD energy transition scenario (see Chapter 3 and Guillemette and Château (2023[20])).
5. Improving efficiency through expenditure reviews (see below): Annual savings at 0.13% of GDP comparable to the saving targets set in expenditure reviews in New Zealand (Treasury of New Zealand, 2023[21]). The saving programme should take place throughout 5 years.
6. Reducing tax inefficiencies: Reducing the VAT gap to the OECD average (see below).
7. Environmental taxation: increasing the revenues from carbon pricing instruments by 2% of GDP (See Chapter 3 and D’Arcangelo et al. (2022[22])).
8. Higher revenues due to higher GDP growth relative to baseline (see Figure 1.13).
Source: OECD calculations.
Cumulative difference from baseline GDP per capita (no policy change) scenario, by policy area
Note:1) Improving business regulation: improvement of the PMR indicator to the OECD average by 2040; 2) Labour market reforms: reducing the gap vis-à-vis the OECD in labour market participation by half by 2037; 3) Pension reform: Increasing the average effective retirement ages by two thirds of life expectancy.
Source: OECD simulations based on OECD Economics Department Long-term Model.
Reforms mentioned in the Survey have significant potential to boost Türkiye’s economy. Simulations based on the OECD long-term growth model (Guillemette and Turner, 2018[19]) suggest that an ambitious reform package that would strengthen Türkiye’s regulatory framework, reduce the gap in labour market participation between men and women, and increase the effective retirement age, could boost GDP per capita by more than 10% by 2040 (Figure 1.13). This reform package would help Türkiye’s economy in its convergence process towards other OECD countries.s
Achieving the stated fiscal targets in the short term is an important prerequisite to stabilise the economy and further strengthen international market confidence while bringing the debt trajectory on a sustainable path. However, OECD evidence indicates that the structure of Türkiye's expenditure and tax revenues could be improved to be more conducive to long-term growth and reducing inequalities (Fournier and Johansson, 2016[23]) (Figure 1.14). Making public finances more efficient and inclusive would make current fiscal consolidation more economically and politically sustainable while providing additional fiscal space.
There is room to improve the efficiency of public finances. The structure of public spending, features a relatively large role of public subsidies (see Chapter 3) and a lower share of expenditure on education (see Chapter 2) for example, which is typically associated with worse growth outcomes (Fournier and Johansson, 2016[23]). More generally, government effectiveness appears to have declined in recent years: for example, Türkiye fell from the 66th percentile to the 44th percentile in the World Bank’s Government Effectiveness Indicator between 2012 and 2022. To improve long-term welfare and ensure political sustainability, it is crucial that government expenditures achieve their objectives at the lowest possible cost and that revenues and spending effectively promote economic growth. Expenditure efficiency can be enhanced through comprehensive and transparent expenditure reviews integrated into the budget process. Similarly, the efficiency of the tax system can be improved. While Türkiye relies relatively more on consumption taxation than other countries, which is typically considered to be less distortive for economic activity (Akgun, Cournède and Fournier, 2017[24]), tax revenues could be levied more efficiently by broadening the tax base and simplifying the rate structure by reducing the scope and the number of special VAT rates.
Enhancing the inclusiveness of public finances can address redistributive concerns while ensuring that the chosen fiscal path remains politically sustainable. The tax and benefit system in Türkiye is hardly redistributive despite high inequalities in market income. For example, the Gini coefficient on market incomes is the second highest in the OECD and the coefficient on disposable income is the third highest. This is reflected in a structure of public finances which is not conducive to inclusive growth, with a relatively low share of social benefits and a high reliance on flat social security contributions in the taxation of labour income. To address these disparities, expanding the coverage of income taxation and of the social safety net — two essential tools for reducing income inequality—is crucial.
1.2.1. Improving fiscal efficiency
Increasing the efficiency of spending
Improving the efficiency of public services and spending can create fiscal space to finance public priorities. A recent analysis by the World Bank suggests that Türkiye’s performance in education and health services is significantly below what other countries achieve with similar resources while the quality of infrastructure investment has also deteriorated (World Bank, 2023[25]). Improving spending efficiency would also ensure the political acceptability of taxation and public indebtedness. Today, beyond the low performance on government effectiveness indicators, the Turkish population is among the least satisfied with public services (OECD, 2023[26]).
Note: In Panel A, data for Türkiye come from the Ministry of Treasury and Finance. Unweighted average of 29 countries with available data for the OECD aggregate. “Other sectoral policies” include environmental protection, housing and community amenities, and recreation, culture and religion. In Panel B, the Value added tax also includes other general taxes on consumption. Unweighted average of 35 countries with available data for the OECD aggregate.
Source: OECD (2024), OECD Annual Government Expenditure by Function (COFOG); OECD Global Revenue Statistics; and Ministry of Treasury and Finance.
Türkiye should continue the recent implementation of a formal process of spending reviews. Spending reviews can be an effective mechanism for identifying opportunities for efficiency improvements, cost savings, and resource reallocation (Doherty and Sayegh, 2022[27]). Türkiye has officially started an expenditure review process in 2024. While the Turkish Court of Accounts provides audit reports and information on expenditures in public administrations, but the Ministry of Treasury and Finance should systematically review expenditures to eliminate inefficient ones. The OECD has provided detailed guidelines on the best practices for spending reviews based on country experiences (Tryggvadottir, 2022[28]).
The reviews must ensure broad coverage. In Slovakia and the Netherlands, targeted reviews are conducted, with the focus shifting annually to different areas potentially leading to substantial savings. For example, Slovakia achieved savings of approximately 8% from the total expenditure reviewed (Doherty and Sayegh, 2022[27]). Spending reviews completed just in the year 2020 in that country identified potential savings amounting to 1.2% of GDP in public employment and wages, defence, and IT spending (OECD, 2022[29]). Expenditure reviews in Türkiye could include expenditures via state-owned enterprises, in particular those that have been transferred to the Türkiye Wealth Fund (see Chapter 4).
The reviews should be integrated into the budget process. This integration enhances the relevance and impact of spending reviews on fiscal decision-making. In this regard, setting clear strategic objectives at the start of the process is important to ensure that the spending reviews are aligned with medium-term fiscal objectives and deliver tangible results. For example, New Zealand integrates saving targets into its spending reviews before the budgeting process begins. Ministries then conduct spending reviews to identify opportunities for achieving these savings targets, ensuring that expenditures are focused on areas of the highest priority and efficiency (European Commission, 2024[30]).
The review process should be transparent and inclusive. Terms of references, interim and final reports including implementation report data, should be made available online for all completed spending reviews. The amount of reallocation or savings made based on the findings of the Spending Reviews should also be publicly disclosed (Tryggvadottir, 2022[28]). Currently, the audit reports from the Turkish Court of Accounts provide substantial information to the Parliament on expenditures annually but the reports are not systematically debated (European Commission, 2024[30]).
Making the tax system more efficient
The efficiency of the tax system could be improved to promote growth and to increase tax collection. Statutory rates for the personal income tax, social security contributions, and VAT are broadly in line with OECD averages. However, tax bases are relatively narrow and crippled by important exemptions. For example, the number of registered income taxpayers is low (although some non-registered persons are taxed by way of withholding) and the narrow base is the major factor behind low income tax revenues: while the exemption threshold is relatively low compared to the average wage, and income tax rates are in line with OECD averages, less than 30% of the population is registered as an active personal income taxpayer compared to 60% in OECD countries on average (OECD, 2024[31]). As was outlined in the previous OECD Economic Survey of Türkiye, informal and semi-formal work practices are widespread in Türkiye and contribute to the reduction in the tax base for corporate and personal income taxes, and require reforms to the labour market to promote formal job creation going beyond direct fiscal policy measures (OECD, 2023[14]). Reducing informality would also contribute to higher revenues from consumption taxation, in particular via the value-added tax. The authorities have recognised, and emphasised, the importance of reducing informality and tax evasion to broaden the income and VAT tax bases. In particular, inspections have been intensified and broadened while leveraging the use of digital technologies and big data to improve targeting.
The design of consumption taxation in Türkiye is complex. Slightly less than 60% of consumption tax revenues (i.e. all taxes on production, sale, transfer, leasing and delivery of goods and rendering of services) comes from a general value-added tax (VAT). Around one third of consumption tax revenues comes from excise taxes – the highest share in the OECD – due to Türkiye’s Special Consumption Tax (SCT) on four product groups: petroleum products, motor vehicles, tobacco products and alcoholic beverages, and luxury products including durable goods. The VAT system is particularly complex due in particular to the prevalence of special rates. The standard VAT rate is 20%, but there are also two reduced rates for redistributive purposes and industrial support. A 10% rate applies, among others, to some food products, healthcare services, pharmaceuticals and medical products, food catering, and cultural services, while a 1% rate applies to food products, among others. Recent data indicate that about 67% of the tax base is subject to the standard rate, around 18% to the intermediate rate, and around 15% to the 1% rate. This complexity leads to a significant compliance burden for businesses: at over 95 hours annually, the time required to comply with VAT regulations in Türkiye is the seventh highest in the OECD, where the average is 54 hours (PwC, 2019[32]).
Simplifying consumption taxes – in particular VAT – could increase revenue and reduce economic distortions. Due to tax exemptions and special rates, Türkiye’s VAT revenue is low relative to its potential. The VAT revenue ratio compares actual VAT revenues with what would theoretically be raised if VAT was uniformly applied at the standard rate to the entire potential tax base and all revenue was collected. In 2022, it was the third lowest in the OECD (Figure 1.15). This ratio dropped from 44% in 2013 to 34% in 2019, compared to 55% in the OECD during the same period (OECD, 2022[33]). This low number reflects a combination of revenues forgone because of the deviations from the standard rate, and non-compliance.
VAT revenue ratio, 2022
Note: The ratio measures the extent to which a VAT regime collects the VAT on the natural base of the tax, i.e. on final consumption expenditure. It is computed as total government revenues from VAT divided by the product of the VAT standard rate and final consumption expenditure.
Source: OECD (2024), OECD Tax Statistics, OECD Revenue Statistics; and OECD National Accounts Database.
The effectiveness of these reduced rates should be reconsidered. They are an inefficient way to meet redistributive or sectoral-support goals and tend to benefit wealthier households (Brys et al., 2016[34]; OECD, 2010[35]). A more equitable and efficient approach would be to use direct lump-sum payments to households based on socio-economic characteristics rather than using VAT for redistributive purposes (OECD, 2022[33]). Such targeting could leverage Türkiye’s well-performing integrated social assistance system (see below, and (Adam et al., 2011[36])). Reduced rates introduced to address social, cultural and other non-distributional goals are also hard to justify on efficiency grounds: the social welfare gains of implementing such a system are unclear in practice given the potential for mislabelling and the additional administrative costs of having multiple rates (Crawford, Keen and Smith, 2008[37]).
Non-compliance and fraud are also significant issues. In 2019, VAT revenues covered only 56% of expected tax liabilities, whereas the equivalent number for the EU was estimated at 89% (World Bank, 2023[25]; European Commission, 2023[38]). This “VAT compliance gap” has also worsened in recent years and is now over 10 percentage points higher than a decade ago (World Bank, 2023[25]).
Harmonising VAT rates could reduce non-compliance by preventing misclassifications. Expanding the VAT base by taxing more goods and services at the standard rate, while potentially lowering the standard rate, could reduce economic distortions by lowering overall tax levels and removing incentives for behavioural optimisation and avoidance. Further simplification could be achieved by revising the set of exemptions. Türkiye allows more exempted transactions than a typical OECD country. The standard advice in VAT design is to have a short list of exemptions, limited to basic health, education and perhaps financial services (OECD, 2022[33]).
Beyond the VAT, changes in excise taxes – namely, the SCT – also seem warranted. Excise taxes on energy products are lower than EU minimum rates and none apply to coal, coke, or electricity (European Commission, 2023[17]). Like the VAT, the use of SCT for redistributive purposes, e.g. via the progressive structure of the excise on motor vehicles and the taxation of “luxury goods”, could be handled more efficiently by an improved income tax and benefits system (see below). The SCT on tobacco products could also be increased progressively. Despite a relatively high share of taxes, cigarettes prices are relatively low in Türkiye relative to other OECD countries, and in particular they have become more affordable in recent years. This is in part because the SCT on tobacco (and other products) is typically updated twice a year according to domestic PPI inflation. As a consequence, the increase in the tax-inclusive price has tended not to compensate the increase in household income (TEPAV, 2020[39]; TEPAV, 2020[40]). In parallel, smoking prevalence in Türkiye is the highest in the OECD (OECD, 2023[41]). Furthermore, tobacco is the fourth cause of deaths in the country, and the country has one of the highest death rates from smoking in the OECD. Tobacco contributed to a quarter of total losses of disability adjusted life years from diseases in 2021 (IHME, 2021[42]). Research indicates that increasing tobacco prices is the single most effective and cost-effective measure for reducing tobacco use (WHO, 2021[43]). Increasing tobacco prices would benefit from the strong position of Türkiye when it comes to non-pecuniary anti-tobacco measures. In particular, Türkiye was the first country to implement all of the measures recommended by the WHO in its MPOWER guidelines for tobacco control.
1.2.2. Making fiscal policy more inclusive
The tax and benefit system is among the least redistributive in the OECD, because it is narrow. In the median OECD countries, three quarters of the redistribution is done through transfers and the rest mostly through personal income taxation (Figure 1.16 and Causa and Hermansen (2017[44])). Türkiye’s share and level of public expenditures going to social protection is relatively low, in particular when excluding pensions. In 2019, the last year for which comparable data on social expenditures are available, expenditures on pensions (including survivors’) were 7.5% of GDP against 7.7% on average in the OECD. By contrast, Türkiye has the lowest old-age dependency ratio in the OECD (measured as the number of individuals aged 65 or older per 100 persons of working age) at half the OECD average. As shown in Figure 1.12 these expenditures will increase significantly as the population ages, since Türkiye has only recently started its demographic transition. Pensions expenditures represented 60% of social expenditures in 2019 against 40% in the OECD. Indeed, expenditure on other social protection is particularly low. In the same year, spending on incapacity-related, family, unemployment, and housing benefits, and other social policy areas including benefits to low-income households and other social services amounted to 1.4% of GDP against 5.6% in the median OECD country. This was the lowest level in the OECD (OECD, 2023[45]; OECD, 2024[46]). In parallel, the level of personal income taxation (excluding, therefore, social security contributions) is also low. In 2022, Türkiye raised 2.4% of GDP from the income tax of individuals against 8.2% in the OECD, although levels in 2022 (and 2023) are exceptionally low because of the delayed passthrough of inflation into income tax revenues: in 2019, revenues for the taxation of income household amounted to 3.8% of GDP against 8.0% in the OECD. The low level of income taxation in parallel with the small size of the social protection system explains the weak redistributive power of public finances in Türkiye compared to other countries despite high inequalities in market income, i.e. before redistribution.
Türkiye’s pension system is relatively generous, contributing to a high level of social contributions. The system consists mostly of a statutory, defined-benefit contributory public system including a minimum pension. Such pension systems can be broadly compared across countries on three dimensions: the contribution rate, the pension level, and the retirement age. While Türkiye's contribution rates are slightly higher than those in OECD countries on average, its parameters for replacement rates and retirement ages are notably generous ( (OECD, 2023[45]) and Figure 1.17). Consequently, Türkiye has a relatively high tax wedge (in particular for families with children due to the absence of child benefits in addition to relatively high SSCs, see Chapter 2), and its pension expenditures are similar to those of other OECD countries with significantly less favourable demographics. The defined-benefit system could be rebalanced by reducing contribution and replacement rates, and increasing the retirement age.
Income redistribution by the tax and benefit system, 2023 or latest available year
Note: The contribution of transfers is computed as the difference between the Gini coefficient on market incomes and the coefficient on gross incomes. The contribution of taxes is computed as the difference between the Gini coefficient on gross incomes and the coefficient on disposable incomes.
Source: OECD (2025), OECD Income Distribution Database.
Further increases in retirement ages could be considered as retirement ages for women and men are rather low in international comparison. In 2022, the statutory retirement age for men was 52 years, against 64.4 in the average OECD country. For women, it was 49 years against an OECD average of 63.6 years – close to the average for men since only nine countries feature a difference between women and men. As a consequence, the effective age of labour market exit was the fourth lowest in the OECD in 2023 for both men and women at 61.5 and 60.2 years respectively. In addition, the employment rate for 55-64 year olds in 2023, at 36%, was the lowest in the OECD and 30 points below the OECD average. Importantly, retirement ages are scheduled to increase over the next 25 years. Male workers entering the labour force in 2022 will be able to retire after a full career at age 65. However, this will remain among the lowest in the OECD and below the OECD average of 66.3. In addition, the age requirement was withdrawn in 2023 for workers who entered the labour force before it was put in place, increasing significantly the number of pensioners in the foreseeable future (see above). Türkiye is also still among the few countries which do not provide a bonus for late retirement (and which do not provide early retirement options, including after the phase in of the age reform). Finally, like for the retirement age, the nominal accrual rate has been decreased to 2% per year in a recent reform, but the effective accrual rate remains the third highest in the OECD after Colombia and Austria. While further increases in the retirement age are warranted, they should be carefully linked to life expectancy. In particular, despite low effective and normal retirement ages today, Türkiye’s lower life expectancy implies that the life expectancy at the (effective) labour market exit age for men is in line with the OECD (but one year above the OECD average for women) (OECD, 2023[45]).
Despite high replacement rates, Türkiye’s pension system is relatively unequal and does not adequately protect the elderly from poverty, although it provides better protection against poverty for pensioners relative to employed persons. The net replacement rate for high earners is the highest in the OECD, and the second highest when considering the average earner, which also results in some of the highest levels of net pension wealth. This is due to high gross replacement rates which do not vary with income, and the absence of any taxation on pension income, which also creates horizontal inequalities between workers and pensioners: Türkiye has the third largest gap in the OECD between the taxation of pensioners and workers at average earnings. Furthermore, the ceiling for pensionable earnings, at 4.24 times average earnings, is particularly high. A lower parameter typically makes other OECD pension systems more redistributive. As a consequence of this structure, despite a relatively high income of the elderly population on average compared to other OECD countries, large inequalities imply that income poverty rates at old age are in line with the OECD average and the depth of poverty (measured by the distance to the poverty threshold of the average income of poor households, where in turn poverty is defined as disposable income below 50% of the median household) is the highest in the OECD. This poverty depth is also linked to the low minimum income for the elderly poor which is not eligible for pensions (European Commission, 2024[47]).
Other social benefits are relatively well targeted, but their scope is too narrow to effectively address inequalities and poverty. As discussed above, non-pension social benefits are relatively low. Social assistance expenditure falls below the average for any of the World Bank-defined country income groups. Those benefits are typically targeted, more than in other countries. Türkiye can also rely on a well-developed e-government system, the Integrated Social Assistance Service Information System (ISAS), which integrates administrative data from various government ministries and agencies, and processes applications and payments for a large share of social protection programs. However, there are still gaps in coverage when eligibility criteria go beyond income. More importantly, the low level of benefits implies that they cover a smaller share of consumption for the poorest compared to other countries, and do not contribute to a significant reduction in inequalities (World Bank, 2023[25]). Türkiye has made recent progress in this area with the launch of the “Family Support Program” in 2022 which provides benefits based on households’ income and number of children. The program has recently been extended but is still scheduled to expire at the end of 2024. The program could be made permanent.
Broadening the income tax base would make the tax system more redistributive. In most countries, progressive income taxation is the main tax instrument for redistribution through public finances. As discussed above, revenues from labour income taxation in Türkiye are low mostly because of the high level of informality. In parallel, because social contributions are high, the tax wedge is actually relatively high, encouraging informality and thus reducing employment rates and the labour income tax base. Beyond broader policy measures to target informality such as easing labour regulations and the severance pay system, reducing the high level of social security contributions would thus contribute to broaden the labour income tax base. One possibility would be to lower pension contributions, as discussed above, for low-income workers. This would support formal employment at low cost since such reductions are likely to boost government revenues given the large elasticity of employment to its cost at those levels in countries with relatively high minimum wages like Türkiye (L’Horty, Martin and Mayer, 2019[48]). More generally, streamlining and simplifying the system of incentives, support measures and discounts on contributions which are in place today to reduce the burden for employers stemming from SSCs would provide room to reduce the tax wedge while safeguarding the financing of social security systems (OECD, 2023[14]).
Türkiye operates a dual income tax system which taxes capital income significantly less than labour income, potentially contributing to inequalities (Hourani et al., 2023[49]). As in a majority of OECD countries, capital income is often taxed separately from labour income in Türkiye. For example, interest income, dividend income, and capital gains are subject to flat taxes which can vary e.g. depending on maturity. As a consequence, the effective taxation of dividends is 25 points lower than wage income for high earners, and the gap is almost 40 percentage points for long-term capital gains. After integrating the taxation of profits under corporate taxation, the effective taxation of dividends is still 15 points lower than the effective taxation of wages. Those gaps are higher than most OECD countries and can encourage income shifting while reducing horizontal and vertical equity, given the concentration of capital income at the top of the distribution.
Note: In Panel A, Normal Retirement Age (NRA): "current" and NRA: "future" refer to retiring in 2022 and entering the labour market in 2022, respectively. For better visibility, the scale of this chart excludes the lowest observed values of 47 for both current and future ages in Saudi Arabia. Credits for educational periods are not included. In Panel B, the net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners. "Low earners" are defined as workers with half of average worker earnings and "high earners" as workers with twice the average worker earnings. In Panel C, contributions include mandatory and quasi-mandatory pension schemes. See Table 8.1 in the source document for more details on country-specific notes
Source: OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators.
References
[36] Adam, S. et al. (2011), “Taxing goods and services”, Mirlees Review: Tax by Design, pp. 149-166, https://ifs.org.uk/books/tax-design.
[3] Akgündüz, Y. et al. (2019), “Estimates of Exchange Rate Pass-through with Product-level Data”, CBRT Working Papers, https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2019/19-22.
[24] Akgun, O., B. Cournède and J. Fournier (2017), “The effects of the tax mix on inequality and growth”, OECD Economics Department Working Papers, No. 1447, OECD Publishing, Paris, https://doi.org/10.1787/c57eaa14-en.
[10] Aydın, H. and T. Sümer (2024), The Effect of Regulations to Promote the Turkish Lira Deposits on Interest Rates, CBRT, https://tcmbblog.org/wps/wcm/connect/blog/en/main+menu/analyses/the+effect+of+regulations+to+promote+the+turkish+lira+deposits+on+interest+rates.
[34] Brys, B. et al. (2016), “Tax Design for Inclusive Economic Growth”, OECD Taxation Working Papers, No. 26, OECD Publishing, Paris, https://doi.org/10.1787/5jlv74ggk0g7-en.
[44] Causa, O. and M. Hermansen (2017), “Income redistribution through taxes and transfers across OECD countries”, OECD Economics Department Working Papers, No. 1453, OECD Publishing, Paris, https://doi.org/10.1787/bc7569c6-en.
[11] CBI (2024), Data on Central Bank Independence, https://cbidata.org/index.html.
[9] CBRT (2024), “Financial Stability Report”, Vol. 38, https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Reports/Financial+Stability+Report/2024/Volume+38.
[13] CBRT (2024), “Financial Stability Report”, Vol. 39, https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Reports/Financial+Stability+Report/2024/Volume+39.
[2] CBRT (2024), Inflation Report, https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Reports/Inflation+Report/.
[37] Crawford, I., M. Keen and S. Smith (2008), “Value Added Tax and Excises”, Mirrlees Review, https://ifs.org.uk/news/mirrlees-review-value-added-tax-and-excises.
[22] D’Arcangelo, F. et al. (2022), “Estimating the CO2 emission and revenue effects of carbon pricing: New evidence from a large cross-country dataset”, OECD Economics Department Working Papers, No. 1732, OECD Publishing, Paris, https://doi.org/10.1787/39aa16d4-en.
[27] Doherty, L. and A. Sayegh (2022), “How to Design and Institutionalize Spending Reviews”, IMF How To Notes 2022 (004).
[47] European Commission (2024), “The 2024 pension adequacy report”, https://op.europa.eu/en/publication-detail/-/publication/c854e35f-2eb1-11ef-a61b-01aa75ed71a1/language-en.
[30] European Commission (2024), “Türkiye Report 2024”, https://neighbourhood-enlargement.ec.europa.eu/turkiye-report-2024_en.
[18] European Commission (2023), “Commission Assessment of the Economic Reform Programme of Türkiye (2023-2025)”, Commission Staff Working Document, https://neighbourhood-enlargement.ec.europa.eu/system/files/2023-05/T%C3%BCrkiye%202023%20ERP%20assessment%20SWD_2023_104.pdf.
[17] European Commission (2023), “Türkiye Report 2023”, D-G for Neighbourhood and Enlargement Negotiations, https://neighbourhood-enlargement.ec.europa.eu/turkiye-report-2023_en.
[38] European Commission (2023), “VAT Gap Report 2023”, https://taxation-customs.ec.europa.eu/taxation/vat/fight-against-vat-fraud/vat-gap_en.
[23] Fournier, J. and Å. Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”, OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris, https://doi.org/10.1787/f99f6b36-en.
[7] Government of Türkiye (2024), Tourism sector in Türkiye, https://www.invest.gov.tr/en/library/publications/lists/investpublications/tourism-industry.pdf.
[20] Guillemette, Y. and J. Château (2023), “Long-term scenarios: incorporating the energy transition”, OECD Economic Policy Papers, OECD Publishing, Paris, https://doi.org/10.1787/153ab87c-en.
[19] Guillemette, Y. and D. Turner (2018), “The Long View: Scenarios for the World Economy to 2060”, OECD Economic Policy Papers, No. 22, OECD Publishing, Paris, https://doi.org/10.1787/b4f4e03e-en.
[49] Hourani, D. et al. (2023), “The taxation of labour v. capital income: A focus on high earners”, OECD Taxation WPs, OECD Publishing, Paris, https://doi.org/10.1787/04f8d936-en.
[42] IHME (2021), “2021 Global Burden of DIsease”, https://vizhub.healthdata.org/gbd-results/.
[6] IMF (2024), Republic of Türkiye: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Türkiye, https://www.imf.org/en/Publications/CR/Issues/2024/10/11/Republic-of-Trkiye-2024-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-556139.
[48] L’Horty, Y., P. Martin and T. Mayer (2019), “The French Policy of Payroll Tax Reductions”, Les notes du CAE 49, https://www.cae-eco.fr/staticfiles/pdf/cae-note049-env4.pdf.
[1] OECD (2024), OECD Employment Outlook 2024: The Net-Zero Transition and the Labour Market, OECD Publishing, Paris, https://doi.org/10.1787/ac8b3538-en.
[46] OECD (2024), “Social Expenditure Database”, https://oecdstatistics.blog/2023/02/02/sizing-up-welfare-states-how-do-oecd-countries-compare/.
[31] OECD (2024), Tax Administration 2024: Comparative Information on OECD and other Advanced and Emerging Economies, OECD Publishing, Paris, https://doi.org/10.1787/2d5fba9c-en.
[26] OECD (2023), Government at a Glance 2023, OECD Publishing, Paris, https://doi.org/10.1787/3d5c5d31-en.
[41] OECD (2023), Health at a Glance 2023: OECD Indicators, OECD Publishing, Paris, https://doi.org/10.1787/7a7afb35-en.
[14] OECD (2023), OECD Economic Surveys: Türkiye 2023, OECD Publishing, Paris, https://doi.org/10.1787/864ab2ba-en.
[45] OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/678055dd-en.
[33] OECD (2022), Consumption Tax Trends 2022: VAT/GST and Excise, Core Design Features and Trends, OECD Publishing, Paris, https://doi.org/10.1787/6525a942-en.
[29] OECD (2022), OECD Economic Surveys: Slovak Republic 2022, OECD Publishing, Paris, https://doi.org/10.1787/78ef10f8-en.
[35] OECD (2010), Choosing a Broad Base - Low Rate Approach to Taxation, OECD Tax Policy Studies, No. 19, OECD Publishing, Paris, https://doi.org/10.1787/9789264091320-en.
[32] PwC (2019), “Paying Taxes 2020”, https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2020.pdf.
[5] SBB (2023), Türkiye Earthquakes Recovery and Reconstruction Assessment, https://www.sbb.gov.tr/wp-content/uploads/2023/03/Turkiye-Recovery-and-Reconstruction-Assessment.pdf.
[40] TEPAV (2020), “The Economics of Curbing Smoking in Turkey: A Scoping Review”, https://www.tepav-he.org/files/1-626a7f723d7c9.pdf.
[39] TEPAV (2020), “Tobacco Taxation Policies and Affordability in Turkey”, TEPAV Evaluation Note, https://tepav.s3.eu-west-1.amazonaws.com/upload/mce/2020/notlar/tobacco_policies_note_affordability_and_taxes.pdf.
[15] TMTF (2024), Public Debt Management Report, Türkiye Ministry of Treasury and Finance, https://ms.hmb.gov.tr/uploads/sites/2/2024/10/Web_Public_Debt_Management_Report_October_2024.pdf.
[21] Treasury of New Zealand (2023), Pre-election economic and fiscal update 2023, https://www.treasury.govt.nz/sites/default/files/2023-09/prefu23.pdf.
[28] Tryggvadottir, Á. (2022), “OECD Best Practices for Spending Reviews”, OECD Journal on Budgeting, https://doi.org/10.1787/90f9002c-en.
[8] TurkStat (2024), Tourism Statistics, Quarter III: July-September, 2024, https://data.tuik.gov.tr/Bulten/Index?p=Tourism-Statistics-Quarter-III:-July-September,-2024-53659 (accessed on 18 January 2025).
[43] WHO (2021), “WHO report on the global tobacco epidemic 2021: addressing new and emerging products”, https://www.who.int/publications/i/item/9789240032095.
[16] World Bank (2024), Sovereign debt average maturity, https://prosperitydata360.worldbank.org/en/indicator/WB+CCDFS+avglife.
[12] World Bank (2024), TEM - On the right tack, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099458505312431939/idu192f13edf11627147e918f3c10886dbf7d0f1.
[25] World Bank (2023), “Leveraging Fiscal Resources for Stability and Resilience”, World Bank Türkiye Public Finance Review, http://documents.worldbank.org/curated/en/099061223051040196/P1739790d808590290a2420a500bf6fc3b3.
[4] World Bank (2021), Getting Real? The Uneven Burden of Inflation across Households in Turkey, World Bank, Washington, DC, https://openknowledge.worldbank.org/handle/10986/36645.