It is just like a joke; the issue occurs as in the Hodja Nasreddin story. We are referring to the rapid deterioration in the 2009 budget and saying "there is a need for a fiscal rule that will state how the existing deficits will be closed"; and look what we heard: the government has sent a law draft to the Great National Assembly (GNA) to violate the only fiscal rule in effect. As per the 31st article of the law also known as "mixture law", it is at issue to rise the "borrowing limit" introduced under the No 4749 Law on Public Finance and Debt Management up to five times. The draft is now examined by the CNA Budget Planning Commission and will be submitted to the General Assembly next. In the meanwhile, let us tell you what we think: This approach is not favourable. Let us see why.
Fifth Article of No 4749 Law on Public Finance and Debt Management, titled 'Borrowing, Loan and Guarantee Limit' says "Net borrowing corresponding to the difference between the sum of initial allowances defined in the budget law and the amount of estimated revenues can be made. Borrowing limits cannot be modified." So, what does this article ensure? It fixates the rise in the domestic debt stock of the Treasury directly to the difference between two figures given in the Budget Law as accepted by the GNA. This in fact is a "soft fiscal rule" as also emphasized in the Fiscal Monitoring Report published by TEPAV Stability Institute. Why is it so? It is not clearly defined in the law what type of a sanction will be implemented if the borrowing limit is "accidentally" exceeded in practice. But after all, it is a fiscal rule. What does it say? It says that the Treasury cannot issue bonds or bills in its own will and discretion exceeding the difference between the revenues and expenditures stipulated in the budget law. It cannot undertake prospective payment liabilities beyond the plans. The net rise in prospective payment liabilities solely targets to finance the current year budget. What does this ensure? Doubtlessly, it tries to ensure what all types fiscal rules try to; to ensure the transparency of public accounts and thus the sustainability of public borrowing. Or, do we have to say "it tried to ensure"? So, the government responds to saying "we need a solid fiscal rule" by violating the already implemented "soft fiscal rule". It must really be a joke.
But, why does the government act this way? Of course out of necessity. And the necessity is apparent: 2009 Budget Law approved by the GNA last year estimated 10 trillion TL of budget deficit. However the amount of deficit was announced as 50 trillion in the Pre-accession Economic Program. Why? We guess, back then when the 2009 budget was prepared the belief that the global crisis will not hit Turkey was prevalent. But that it was not the case become apparent in April. Pre-accession Economic Program was a document that acknowledged the current crisis affected Turkey. However, coupled with the rise in budget deficit led by the crisis, the need for an excuse to maintain public finance with a legitimate method was clarified. So, under these circumstances, how would the borrowing requirement beyond the "borrowing limit" be met?
What is that a "normal" administration that is aware of the presence of borrowing requirement should do? As Minister of Finance Mehmet Simsek recently quoted from Master Keynes, it is to say "If data does not validate what I think; I change what I think. What else would you do?" It is to design an additional budget for 2009. It is to revise figures which are obviously wrong already. It is to save TEPAV's Fiscal Monitoring Report and economy analysts from saying "fiscal framework is catastrophic" by looking at the "made up budget" figures. It is obvious that, as the reference point is made up; there is no other option than saying "fiscal framework is catastrophic". However, the world has changed. And the "made up budget" does not pay regard to this change. Furthermore, this way all economic actors can be given the chance to have an opinion about how much the public sector is planning to collect and spend in this period. Indeed, this would be the best for everyone. Nonetheless, it seems that the situation is not explained to Honourable Prime Minister with a proper language. "No need; he might get angry. God forbid."
So, what happens in this case? Everyone goes on to treat a series of figures known to be made up by all like the "2009 Public Budget". On the other hand, on March 28, 2002 the only fiscal rule directed to ensure the credibility of the public debt management is abolished within the scope of stability measures. On top of it, this is done in an environment where everyone resourceful about the issue says "we need a dynamic discipline approach and a solid fiscal rule covering 2010-2011-2012 to secure the sustainability of public borrowing." This is done badly. Things are made worse while trying to make them better.
Let us see why things are made worse. First, scaling up the borrowing limit will damage the transparency of public accounts. Yes; today there exists an "abnormal" factor: 2009 public budget is made up. But, for God's sake admit that you cannot explain this to a foreigner. "Do you remember Davos?" But considering the future, for instance in 2010 budget, the link between the borrowing management of the Treasury and the current year budget of the public sector will be broken. Just as in old unhappy days, public sector debt stock will start to rise for payments the details of which cannot be seen in the accounts. Do you remember the old "security on account" and "non-cash security sale" practices? Remember how transparent we were back then. Similarly, this borrowing limit modification will damage the transparency of public accounts. This is the first point. Second, this is retrogression. The situation that was changed in 2002 comes back again. Or, is it possible that the 2010 budget also will be a made up budget? Third, given the gradual deterioration in the public budget stemming from the economic slowdown posed by the global crisis, public borrowing will be the public budget item that must be closely monitored during the forthcoming period. It is bad that public borrowing item loses transparency in such a period.
What does it mean if an Administration that insists upon not signing an agreement with the IMF sacrifices the only fiscal rule of the country for a made up budget just because of the persistence in "the crisis did not hit Turkey" argument? The problem of Turkey is about the timing of the election.
This commentary was published in Referans daily on 16.06.2009
