Budget deficit risk of around 7% of GDP


The budget has deteriorated significantly due to election spending, including the regulation on victims of the delayed pension age (EYT). Compensation for the losses of those who lost their houses and workplaces due to the earthquake is largely the duty of the public. Add to that infrastructure, hospitals, schools, etc… Estimates suggest that around 10% of GDP may be required. With the aid to be received from international institutions and additional taxes, the burden of this 10% can be reduced somewhat on the budget. Nevertheless, assuming that the expenditures will be spread over three years, the budget will run a deficit of around 3% of the GDP every year in 2023-2025 due to earthquake expenditures alone. Adding the burden from EYT and the traditional budget deficit into account, a budget deficit of around 7% of GDP could emerge every year until 2025. It is a high deficit. It can make it difficult to maintain confidence in the economy, which is essential for the success of the return to the reasonable program. What can be done? How can the risk perception arising from the budget deficit be reduced?

Turkey has an important advantage. The ratio of public debt to GDP is quite low, with 27% of GDP at the end of 2022. Therefore, we have an important room for maneuvering in fiscal policy. It is possible to convince those who see the budget deficit as a risk that the budget deficit will at least halve by the end of the third year. But how will they be persuaded? A solid medium-term fiscal policy program is essential. It should be emphasized that a deficit of 3% of GDP will disappear by itself, especially with the end of earthquake expenditures. The 4% of GDP will remain a deficit, which is okay to have for a few years. But a deficit of this size every year is a bit too much.

The first thing that comes to mind here is the Public-Private Partnership (PPP) projects. To what extent can income and borrowing guarantees for PPP projects be reduced? How much can legal actions reduce the burden on the budget? We don’t know this. Moreover, overcoming legal problems can take a significant amount of time. However, these projects should be reviewed carefully. In this way, there is the potential to reduce the budget deficit, but, on the other hand, there is another expenditure area with the potential to increase the budget deficit. Some of the existing building stock in areas with high earthquake risk needs to be rebuilt, and some of it needs reinforcement.

In this case, Turkey needs to seriously address the informal economy problem. Thus, tax revenues can be increased significantly. In the short term, such reform means that a significant number of losers will be created. To what extent will it be possible to make up for the losses? What kind of training will be required for those who have lost their jobs to be employed in new areas? Difficult questions. It’s good to work on these issues.

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