We can say that one of the most important data released this week was the central government budget data. Even if the deficit is very big, there is actually no big surprise. We learned the revised budget figures in the MTP announced in September. The budget deficit, which was projected to be around TRY 659 billion at the beginning of last year, was projected to be over TRY 1.6 trillion at the beginning of September. With the data released on Monday, we have seen that the budget deficit was below the revised expectations but much higher than the targets at the beginning of the year, close to TRY 1.4 trillion.
It’s not a surprise.
Two things are not surprising. First, as every year, December is the month when all budget appropriations are released and the deficit increases strongly. Second, at the end of the year, revised targets are usually missed. Revisions are made relatively cautiously high, and if the realization is lower, this is announced as a positive result. This was not a surprise either, but in proportional and absolute terms, the increase in December was much higher than in previous years.
In December, we see that there was an expenditure of close to TRY 1.4 trillion , whereas in the previous months there were expenditures of TRY 500 – 600 billion, so it seems that all the appropriations put forward with the supplementary budget have been released. Anyway, if the appropriations are not released, they are wasted, so the use of the appropriation is generally always preferred and realized.
What accounts for the difference between the budget deficit and the cash deficit?
In the first week of each month, the Treasury announces the budget cash realizations for the previous month. The budget cash deficit was around 625 billion TL. The budget deficit was more than twice that amount. This shows that expenditure appropriations were released but there was no cash outflow. Expenditures with no cash outflow are placed in the budget escrow account and the institution receiving the appropriation is authorized to spend it within a year. Therefore, the cash outflow of the expenditure appropriation items that increased very strongly in December will take place later this year, probably in the first months of the year. Similarly, when this year’s budget comes into effect, we will see a process in which the public sector creates much stronger demand and contributes to growth than in previous years. We usually see this in election years. Last year’s deficit of around TRY 1.4 trillion, which amounted to 5.4% of GDP, and this year’s expected budget deficit of TRY 2.6 trillion confirmed this.
Earthquake, inflation and election impact
Of course, the earthquake and related expenditures had a significant impact on the increase in expenditures. In addition, an additional budget had to be made in 2022 and the deficit was much higher than the targets. In the current high inflation environment, neither households, companies nor the state can easily make forecasts and meet their budgets. It is quite normal for expenditures to exceed expectations in almost every item. An important advantage of the public sector in an inflationary environment is the increase in tax revenues. This situation, which we can call a kind of inflation tax, has a positive effect on public balances. Of course, this positivity is short-term. In an environment where high inflation has a negative impact on growth and investments in the medium term, it becomes much more difficult for the public sector to both raise tax revenues and accrue them. The fact that the budget deficit has increased so much despite the additional revenues from the inflation tax in the last two years, when growth remained relatively strong, is a reflection of inflation as well as the earthquake and the high willingness to spend during election periods.
Public support for growth
The latest budget data tells us that the public sector will support growth much more strongly in 2024. This support seems to be predominantly in the earthquake zone, urban transformation, in short, in activities related to housing, construction and infrastructure. This picture will have a negative reflection on inflation with the demand effect it creates. We can observe from the targets of the MTP that the public sector will want to balance this increasing budget deficit with tax revenues as much or even more strongly than borrowing. Therefore, this year we are likely to see developments in areas such as increasing income tax, combating informality and perhaps some additional tax collection.
Public spending should focus on cost reduction, not demand growth
As we have emphasized in our previous articles, an increase in the budget deficit is not a good thing, but in a properly designed framework, the pros of increasing the budget deficit and public debt for a while may outweigh the cons. If public expenditures reduce the cost of the private sector or economic units and create an opportunity to support exports by increasing competitiveness instead of creating demand pressure, both the inflationary effect will be reduced and growth will be supported through a more accurate channel. In the current situation, unfortunately, we observe that our budget deficits are not in the direction of cost-cutting expenditures, but in the direction of increasing demand.
