I would like to join others in writing on this issue; so that the readers of this column will understand that I also attended 'the meeting'.  'The' meeting was hosted by Vice Prime Minister Ali Babacan on Wednesday in Istanbul with the participation of some academics and economics columnists. You can say that as everyone has mentioned the meeting, it is not newsworthy anymore. But this is not the case exactly. The top agenda item of the meeting was 'fiscal rule'.  This is an important issue; I believe you have witnessed several times when we addressed it at this column. But I would like to address the issue once more today but this time more from the angle financial reform.

Details of the fiscal rule planned to be introduced are presented in the Medium Term Program and the website of the Treasury. So I will skip enumerating the details and address the essence of the issue, which I attach more importance to: Fiscal rule is aimed at ensuring that anyone interested in Turkey's economy sees the future with respect to fiscal policy. With a multi-year perspective, the course of the public budget deficit and debt stock is depicted. In case that the public deficit diverges from the planned level for some reason, how this divergence will be compensated for in the coming years is declared. The rule also includes an 'automatic stabilizer' mechanism: If growth rate is above the potential growth rate, savings are made for 'rainy days'; lower budget deficit is recorded. If the growth rate is below the potential; more budget deficit is given. It is assumed that the additional surplus and deficit will balance each other out in the medium term.

Now, it is clear that this practice will be beneficial for the economy if can be kept in effect for long years. You will know that the budget will be disciplined, and public debt will remain at a reasonable interval. As everyone will see the future more clearly, it will become easier to make economic decisions. For instance, the climate becomes more suitable to make investments. These are all good. But please pay attention to the 'sustainability' notion; it is the key concept here. It reads that, there is a need for a mechanism that secures sustainability. For instance, it is a common fact that government in power tends to increase expenditures in years of election. This is the case in most democratic countries. So, what will be the fiscal rule against this tendency? Will it be suspended? Another question in parallel with this is; if the current government changes and if another party takes over the power, will the latter adhere to the same fiscal rule?

These are important questions. In the context of these, a behavior pattern that will improve the possibility of the sustainability of fiscal rule can be making the necessary legal arrangements upon negotiating and reconciling with other political parties and then introducing the necessary legal arrangements. Another important question reads like this: For the fiscal rule to be credible, no one should have doubts about the budget and debt figures. So how will this be ensured? This question comes to mind as a result of the steps Greece took. It is obvious that Greece manipulated budget figures and budget deficit was shown to be much lower than the actual level. In order to ensure the credibility of the fiscal rule, it would be useful to establish an institution that will control budget expenditure and revenue figures. Establishment of such independent institution (which will be responsible to the Parliament) will improve the credibility of the fiscal rule.

This issue also has a structural dimension. Of course introduction of a fiscal rule is an important structural reform; but when combined with another structural reform it will become more applicable, credible, and sustainable. Ratio of tax revenues to national income is quite low in Turkey; substantially below the EU and OECD averages. Moreover, a substantial proportion of tax revenues are collected via indirect taxes. This is not a fair system. And the reason laying behind this problem is apparent: informal economy. It would be very useful if, while implementing the fiscal rule, a reform that reduces informal economy can be initiated.

This commentary was published in Radikal daily on 28.01.2010