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Turkey: Budget deficit widens by spending increases that exceed taxes

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According to the October budget data announced by the Ministry of Treasury and Finance; The central government budget, which had a deficit of 23.6 billion TRY in September 2021, had a deficit of 17.4 billion TRY (1.74 billion USD) in October 2021. The budget had a deficit of 4.89 billion TRY in the same period of last year. As stated in the Monthly Budget Realizations Report, the primary surplus, which was TRY 6.9 billion in October 2020, became TRY 3.1 billion in October 2021. Budget revenues increased by 23% to TRY 114 billion, with tax revenues increasing by 25.5% to TRY 96.1 billion between October 2020 and October 2021, while general public expenditures increased by 34%, above the general inflation rate of 19.89% in the same period. It reached 131.4 billion TRY with an increase of 0.6. Expenditures excluding interest payments increased by 36.3% to TRY 117.1 billion, driven by the 94.4% increase in government expenditures for the purchase of goods and services, followed by personnel expenditures approaching nearly 30%.

 

When we look at the cumulative data of 2021; In the January – October period, it was observed that the budget had a deficit of 78.5 billion TRY. It is seen that the budget, which had a deficit of 145.5 billion TRY in the 10-month period of the previous year, displayed a more positive outlook compared to the previous year. While a primary deficit of 25.9 billion TRY was recorded in January – October 2020, this year a primary surplus of 78.1 billion TRY was realized. Budget revenues increased by 34.3% between January – October 2020 and January – October 2021 to 1,104.6 billion TRY, while budget expenditures increased by 22.3% to 1,183.1 billion TRY in the same period. In the same period, the increase in tax revenues was 38%, reaching 904.5 billion TRY. Non-interest budget expenditures, on the other hand, increased by 21% and amounted to TRY 1,026.5 billion.

 

The Treasury posted a 5.24 billion TRY cash budget deficit and 8 billion TRY non-interest TRY in October. Turkey ran a budget deficit for the second consecutive month in October, and the gap widened compared to the previous year as expenditures outstripped tax collection. According to the government’s latest economic program, the budget deficit is estimated to equal 3.5% of gross domestic product in 2021. Minister of Treasury and Finance, Mr. Lütfi Elvan, on the other hand, stated last week that we can close this year with a budget deficit/GDP ratio below 3.5%. The data presented in the October report show that there is a linear movement between tax revenues and expenditures, but expenditure trends are more prominent. This may indicate that government expenditures may be at the forefront of the growth path in order to maintain the 5-5.5% band set forth in the MTP in the coming years. Increasing economic activity will likely support an increase in direct taxes and corporate taxes. On the income side, we also observe the contribution of debt restructuring revenues transferred from last year’s pandemic period this year.

 

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On the indirect taxes side, in addition to the decrease in disposable income due to the inflation effect, there is a loss of SCT due to the scale mobile system developed against price increases in petroleum products. The VAT discount, which was given as a support against the pandemic in certain product and service groups, has been restored. The possibility of using savings measures in the public sector against inflation and which of the increase in public expenditures in order to support growth will be directly related to the realization of the budget targets. We think that fiscal policy may still be active at this point. Our expectation is that the budget deficit/GDP ratio will be 3.6% this year and 3.5% next year, and the budget deficit to national income ratio will decrease to 2.6% as of 2024. In the MTP, these targets are foreseen as 3.5% for 2021 and 2022, 3.2% for 2023 and 2.9% for 2024.

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