Financial world ii : public sector & fiscal policy

FİNANCİAL WORLD İİ :

PUBLİC SECTOR & FİSCAL POLİCY

Prof. Sedef Akgüngör

Public finance policies can be seperated into two periods:

Before and after 1980

Economic development policy prior to 1980 was primarily based on ISI(import substituting industrialisation).

After 1980 the role of the state in the economy was reduced continuously.

The early 1980s had witnessed a transition from public sector to fiscal policy.

After 1980 ISI was replaced by the export-led growth approach.

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The primary factors of the transition from the public sector to fiscal policy can be grouped in two areas;foreign and domestic.

On of the foreign side,strong demands and pressures came openly and directly from the IMF and the World Bank.

These two institutions had argued continuously that the ISI practice should be put aside,since with that policy the economy was unable to escape from crises.

These institutions demanded a complete policy shift towards minimum state existence in the economy

Another factor that affected the public sector directly after the 1990s is globalisation.

It has strengtened the policy changes towards liberalisation in Turkey too.

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On the domestic side,there was direct and open opposition of big businesses to the role of state in the economy.

The new economic policies required a new institutional set up,either with changes of existing institutions or establishing completely new ones.

On the 24th January 1980, a new measures of stabilisation measures was issued

These measures were designed by the IMF and would be implemented by the Undersecretary of the Prime Minister.

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The 1980s started with a monopoly of political power and completely free market oriented economic administration,a process which was contradictory in itself.

Since the former legal and institutional structures were destroyed and new ones were not immediately forthcoming,the economy fell into a chaotic situation.

As a result the black market increased;the underground economy spread further and markets were left primitively free.

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Undersecretary of the Treasury and Undersecretary of Foreign Trade were established.

Undersecretary of Foreign Trade was designated to stimulate the new export led policy approach.

The role of the SPO(State Planning Organisation) was reduced.

The legal status of the CRT(Central Bank) had been almost continuously disputed for about two decades until the year 2000.

The legal frameworks and institutional sets up of the regulatory and supervisory institutions had been relatively slow.

The PEE(Public Economic Enterprises) were left in a web of uncertainity.

These legal and institutional shortcomings created unstable conditions in economic and political spheres.

The economic crises became almost regular.6

PEE AND PRİVATİSATİON Beginning with the 1980s the role of government

in the economy became smaller.

The most important part of the process was the elimination of the PEE(Public Economic Enterprises)

Since the PEE had monopolistic or oligopolistic market powers,they could generate higher value added per employee.

However, the PEE did not function well economically because PEE were regularly misused by governments after the 1950s,even during the privatisation practices.

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Privatisation was considered one of the primary tools of the structural adjustment program.

A logical outcome of this understanding would be the selling of publicly owned economic units.

Just after 1980 a definitive approach for selling the PEE was the first item on the agenda.

Public establishments were seen as one of the most important reasons for the economic hardships,that is the supply-shortages,black markets and inflation.

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After changing the industrialisation policy to export- led growth ,privatisation was easily implemented.

The IMF and the World Bank were putting on pressure from the outside for privatisation too.

Since the country was in a deep economic and political crisi and urgently needed their help, privatisation was inevitable.

The privatisation process continued with some ups and downs until 2002,and was carried out more intensively afterwards. 9

PRİVATİSATİON REVENUE BY YEAR,(MİLLIONS USD)

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HOW WAS PRİVATİSATİON DONE?

Privatisation Master Plan, which was completed in 1986 was followed.

Karabük Iron and Steel and some agricultural state farms were sold to employees.

Some of the enterprises sold their shares to public or in specific markets.

Mostly used way of selling was “block sales(selling as a whole)” 11

There are many examples of privatisations that were not administered properly such as Turk Telekom and Tüpraş,which are the biggest ones.

In some cases, the sale price was even lower than the price of land on which the PEE was functioning.

The privatisation process started witout a comprehensive and full legal framework being prepared.

The legal and institutional gap was closed during the second half of the 1990s and early 2000s.

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Privatisation was not implemented with an eye on the long term development of the economy.

Privatisation revenues were used for closing budget deficits and reinvestment.

There was no distinction between the key sectors and the others.

The PEE in telecommunications (Teletaş,Turk Telekom) and energy(Tüpraş) should not have been privatised as rapidly as they were,plus instead of the block sale of the share of these key enterprises could have been sold to the public at large.

On social side,many of the employees of the privatised enterprises were fired even without having any social safety net.

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FISCAL TOTALITY

First,with the implementation of stabilisation policies from the beginning of 2000s,the central government’s total expenditures did not change or have a decreasing trend within the GDP(gross domestic product) ,while the ratio of revenues remained almost the same.

As a result the revenue-expenditure gap was almost closed ,that is to say the budget balance was obtained.

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Second,the relative share of the constant capital investments within the total public expenditures decreased steadily.

Accompanied by privatisation,the public contribution to capital formation was limited.

The lack of public affected the capital accumulation process negatively during most of the 1980s and 1990s.

Total capital formation slowed down.

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Third,although the public outlays were decreased in real or rather GDP terms,public spending areas were diversified extensively.

Fourth, during many years of the period some of the IMF programs were in practice directly and some indirectly.

The primary fiscal policy element of those programs was characterised by the tightening of expenditures.

This approach was in accordance with the primary policy of reducing the role of the state in the economy.

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Fifth, after 1980, the public deficit increased almost continuously until the 2000s.

The PSBR(public sector borrowing requirements) or the public sector deficit was around 1-2 percent of GDP before 1980 and Turkey was unable to borrow.

During the 1980s this ratio increased to about 3 percent per year on average.

During the 1990s the ratio was more than 8 percent on average.

By paying a very high rate of interest comparatively ,the country became able to borrow from abroad.

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With the financial crisis of 1999-2001, the PSPR reached about 15 per cent of GDP during the 2000s.

The accumulation of both domestic and foreign debts were naturally followed by increased interest payments in the budgets.

With the stabilisation measures initiated in 2001, the primary balance, that is balancing revenues and expenditures by putting interest payments aside was considered an indicator of a sound financial structure.

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GENERAL GOVERNMENT TOTAL REVENUES AND EXPENDITURES

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CONSOLİDATED/CENTRAL GOVERNMENT BUDGET AFTER 2004 The main element of public revenues is taxes.

Total taxes over GDP is the tax burden.

Taxes are dividen into two categories : direct ,indirect.

Direct taxes are collected from income flows of real and legal people.If direct taxes are linked to an increasing rate of income,the outcome is progressive taxation.

Indirect taxes,are paid irrespective of the economic ability of the tax payer when an economic activity is conducted such as selling or buying.

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Trends in taxes after 1980 followed the economic policy that was based on the export-led approach with the least government.

At the beginning of 1985,the VAT-value added tax )was introduced.

In 2002,it was accompanied by the PCT( private consumption tax).

With the establishment of the Tax Law of 1998 government aimed to reduce the extent of the underground economy and achieve a registered economy.

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Share of direct taxes in the consolidated budget tax revenues was 58 percent of the total in 1981.

The subdivision of this rate was such that 48 per cent was coming from personal income taxes and 10 per cent from corporations.

The share of direct taxes in the total was reduced to 51 per cent in 1990, 32 per cent in 2000 and remained almost the same afterwards.

More than two thirds of the total taxes were indirect on average at the end of the first decade of the 2000s.

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There was an important change in the composition of indirect taxes.

After 2002, the SCT(special consumption tax) gained ground within the tax system and surpassed VAT.

There are three reasons behind this policy: to fight against inflationary pressures; to lower the tax burden of the businesses and to tax luxurious consumption.

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On the other hand, the share of indirect taxes in the total increased.

With the introduction of new tax laws in 2006,corporate income tax decreased from 30 per cent to 20 per cent and the tax rate on interest incomes reduced similarly.

It is argued that, the investment climate of the country has improved.

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GENERAL GOVERNMENT DEBT EU DEFİNED, 2001-2009

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PUBLİC DEBTS

The equality between reveues and the expenditures is called the “golden rule” of public finance.

When the revenues are not enough to cover expenditures the result is a budget deficit.

According to the Maastricht Criteria , public debts/GDP ratio should not be higher than 60 per cent.

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DEBT ACCOUNTING

Debt or borrowing statistics are results of what can be termed as debt accounting.

In the analysis of borrowing,the public net debt stock is utilized and prepared quarterlyby the Treasury starting from 2003.

It means that all types of assets and liabilities of the country,sometimes both domestic ad foreign,must be taken into account.

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With the development of the process of the full membership of the EU after 2004 a new method of debt calculation has been practised by the Treasury.

The EU approach takes only the central government and the other public institutions into account.

Most importantly, the debt stock is defined as a total of domestic and foreign.

Both types of debt are treated on an equal footing. 28

COMPOSİTİON OF TOTAL BORROWİNGS

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COMPOSİTİON OF TOTAL DEBT OF TURKİSH ECONOMY

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THE MEDİUM TERM FİSCAL POLİCY Amid the most severe global economic crisis

in September 2009, the government issued the MTP(Medium Term Program 2010-2012) where the macroeconomic policies of thes years were outlined.

Although the economic policy of the country was out of official IMF Standby Agreement after May 2008, it followed essentially the main lines of the IMF measures.

The MTP aims at efficiency and stability in public financing. 31

For implementing the proposals and rules and achieving targets, there is the rule of rules, which is called the fiscal rule.

Fiscal rule is formulated as:

Da=y(at-1-a*)+k(b-b*)

Where

Da : public deficit adjustment/GDPat-1 : previous year pubic sector deficit/GDPa* : targeted medium-long termpublic deficit/GDPb : real GDP growth rateb* : long term average of the real GDP growth ratey : convergence velocity coefficient of the public deficit to medium –long term targetk : reflection coefficient of conjuncture effects 32

It is stated that y and k have negative signs; a negative Da indicates a decrease in public deficit.

With the utilisation of the Fiscal Rule the ratio of the medium-long term public deficit to GDP is to be regulated and adjusted so that a sustainable debt structure will be realised.

The adjustment of the public deficit will be made by taking two variables into account; the deficit of the previous year and the medium-long term growth conjuncture.

When the rate of growth of GDP is higher than its medium-long term average the adjustment coeeficient will be higher or vice versa.

The aim of the adjustment process is to keep a stable and sustainable growth without a disturbing level of deficit and provide fiscal confidence at all. 33