Turks aren’t afraid of anything, including crises

Turks are not afraid of anything, including crises of either the political or economic variety. They might be accustomed to facing a lot of political and economic turmoil during their lifetime, or there might be other important reasons for their courage (!). Who knows? Let us take a look at some other countries and regions.

The growth of consumer credit and household consumption has been slowing down in the United States. As a result, the household debt-to-income ratio has dropped. In spite of opening all stimulus packages, American consumers are choosing to retain the extra monetary advantages they have gained for a still-unknown future instead of spending more. It is understood that the American people are not as courageous as Turks (!) and are so afraid of their future that it is quite difficult to convince them to spend more.

What about European consumers? Individuals in countries which implement austerity measures have already begun to tighten their belts. They are naturally forced to prefer cheaper groceries and to give up unnecessary shopping. The same is happening in other European countries that have comparatively no so serious economic problems such as widespread unemployment and slowing growth. The European Commission predicts a close-to-zero increase in consumer spending in the eurozone this year compared to a 1.9 percent increase last year. It means that people in Europe are as fearful (!) as Americans for their future.

For Turkey, the International Monetary Fund says the growth rate this year will only be 2 percent. Is that an overly pessimistic estimate? Perhaps. Although there has been an important slowdown in growth, a more optimistic figure estimated by local authorities for this year is around 4 percent. In addition, there has been a considerable decrease in unemployment. As a result, although household consumption growth is slowing down and creating serious problems for business, the recently revealed data shows that private sector demand is still increasing modestly.

There might be many reasons for this situation; however, it seems necessary first to identify the problems it might create. For example, if that increase in domestic demand is quite homogeneous (meaning the both rich and poor segments spend more), there is a serious domestic savings problem. Another important point is the size of the informal economy; in Turkey, this is estimated at one-third of all transactions. As a result, a huge volume of unreported income might be another important reason for an increase in domestic demand.

Since 1950, “tax reform” has been on every government’s agenda. A personal and corporate income tax law was the first positive step. Later, however, whenever a problem appeared related to financing the widening budget deficit, some changes were made in taxation which was called “reform” but brought only deformation to the existing system. The present tax structure in Turkey is deprived of two important principles: justice and equality. The main reason is the high rate of indirect taxes.

It is not easy to estimate the real effects of this unjust tax structure on middle- and low-income families’ spending behavior. Do they cut their daily expenditures because of price increases caused by new taxes or do they decide to use their already limited savings before quitting totally? This also might be another reason for the homogenous increase in domestic demand. As a result, the steady increases in indirect taxes might destroy the savings tendency of a major proportion of the nation.

In short, it is understood that compared to previous years, the modest increase in domestic demand this year is making local businesspeople unhappy. However, even if that increase is modest, it might point out some serious problems that must scare us Turks at least this time.