First world economy, third world budget

After three patients died of HIV-infected blood last week, the chief of Red Crescent in Turkey took a hands-off attitude. “We are distributing what we are getting from society” he said “it is not us, it is society.” This totally neutral and outrageous job description reminds me the accepted motto of our Ministry of Finance. Let me explain why.

Turkey is now a modern, industrialized country. But we were like this in 1980. At that time, the level of exports was about $3 billion, 90% of it being agricultural products. Today exports are at about 130 billion dollars, 90% of which are industrial products. Since April 2009, the economy has created more than 3.5 million jobs. Notice that this job creation capacity is more than that of the European Union, Russia and South Africa put together. At the same time, Turkey has a maverick Central Bank. That much we know. So, how about the fiscal policy stance of the country? Does Turkey have a modern fiscal policy stance? No it does not. It cannot.

No matter how modern the Turkish economy has become in the last three decades, the structure of the Turkish public budget has not changed. Turkey has a first world economy with a third world budget structure. You cannot have a first class fiscal policy with a third world budget. That makes Turkey a vibrant economy with no controls attached. Rapid output recovery process with growing imbalances has taught us that. I find this a bit chilling.

Regarding the Central Bank, we have learned that having a maverick one is tiring. An unpredictable Central Bank may be good in short periods for creating “constructive ambiguity” in financial markets. However, the longer the ambiguity goes on, constructive turns destructive. Ambiguity becomes sheer uncertainty. It takes about three months for this mood transformation. That much we all have learned in Turkey. Then the Central Bank itself has become part of the problem. It is still there.

Now let me come to the issue of fiscal policy stance. In Turkey, about 65% of the budget revenue is from indirect taxes, and the share of direct taxes is too low. We do not collect much income and corporate tax, but rely on consumption taxes from oil, telecom, tobacco etc. As changing the structure of budget revenues requires a politically costly reform attempt, this was not part of the package in 2001. These things are handled one thing at a time. There had already been enough hurdles at that time. Taking structural budget measures, improving the quality of budget accounts has always been part of the rhetoric, but no action taken up till now. In the meantime, expenditures continue to increase, financed by increasing rates of indirect taxes creating distortions in the economy.
Expenditures were also financed by imposing one-off, unsustainable revenue streams. Turkey has had a rather primitive fiscal policy stance up until now, if you ask me. I find this shameful.

Does Turkey have a fiscal policy stance? Turkey has a pro-cyclical policy stance. If domestic demand is strong, if there is growth, then the budget improves. If not, there is not much room for counter cyclical policy to maneuver. Now that makes me feel that the country is like a car with no controls attached.