Turkey’s plan to increase spending to escape an economic slowdown is bringing its public finances under closer scrutiny, with the government’s own data painting two very different pictures of fiscal health.
A primary budget surplus reported by the finance ministry — and lauded by investors and ratings companies — turns to a deficit when calculated by the Turkish Treasury using International Monetary Fund standards. The gap between the two reached a record 37.1 billion liras ($11.9 billion) in August. The primary budget balance is the difference between spending and revenue, excluding interest payments.
The discrepancy has gained significance since Turkey announced a medium-term spending plan that, using IMF accounting, rules out a primary budget surplus until at least 2019. It also points to the real fiscal damage caused by four recent elections, officials’ growing inability to collect taxes and the economic slowdown since July’s failed coup attempt.
While it’s not uncommon for countries to use two reporting methods, the size of the gap means the finance ministry’s figures should be taken “with a pinch of salt,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Berlin. “The bottom line is that the Turkish government is overly optimistic about the future of the economy, about the budget as well as growth.”
Finance ministry figures suggest that revenue has consistently exceeded ex-interest outlays over the past decade, and it’s this official account of balanced budgets and low public debt that has held sway.
But the ministry includes privatization income or dividends from state-owned companies including the central bank, items that the IMF regards as one-time in nature and therefore excludes. Treasury calculations using IMF standards show a much smaller surplus for most of the decade, which turned to a deficit on an annualized basis in the second quarter.
The data show “an ever-increasing reliance on one-off, non-recurrent revenue, like privatizations and central bank profits, which corresponds to a structural deterioration in the underlying fiscal position,” said Murat Ucer, an Istanbul-based economist at Global Source Partners Inc.
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Evidence of fiscal fragility also appears in Turkey’s sustainable balance, a measure used by some economists to assess the government’s ability to maintain spending with its most basic income — taxes. The annualized shortfall between the two — with interest payments excluded — widened to more than 60 billion liras in the second quarter, according to a Bloomberg calculation, the biggest gap in absolute terms in data spanning a decade.
The government collected just over 70 percent of owed taxes during the first eight months of 2016 — the annual average over the past decade is 86 percent — as slower growth led to more business and households falling behind on payments. Officials have also announced tax amnesties almost yearly since the global financial crisis.
“What’s troubling here is the rising trend in ex-interest spending,” said Haluk Burumcekci, founder of Istanbul-based Burumcekci Consulting, adding that the government has been able to avoid large budget deficits by sourcing additional one-time income.
Even so, Turkey’s ratio of public debt to gross domestic product is expected to improve to around 32.8 percent by year-end from nearly 60 percent a decade ago, comparing favorably with other emerging markets. India, for example, had a ratio of just over 52 percent last year.
Similarly, economists forecast Turkey’s budget deficit will be 2.2 percent of GDP this year, compared with an average 3.3 percent for G-20 countries. The Turkish government’s own forecast is for a smaller shortfall of 1.6 percent.
“We can’t talk about a major risk at this point,” said Maya Senussi, an analyst at Roubini Global Economics.
Finance Minister Naci Agbal has said the government remains committed to “fiscal discipline,” while acknowledging that higher spending and lower tax revenue had forced it to forecast budget deficits. His office didn’t respond to questions on the sustainability of the strategy.
Finance ministry forecasts show a primary budget surplus every year, with the IMF method showing a deficit this year and next, and a balance in 2018. For the overall budget, the finance ministry expects a deficit until at least 2019.
Turkey reported a budget deficit of 16.9 billion liras in September — a record outside of the typical deficit month of December, when the government settles its full-year payments.
“A mistake in fiscal policy may take a long time to fix — extra caution is warranted and an unsustainable budget policy should be avoided,” said Sakir Turan, an Istanbul-based economist at Odeabank AS.