A matter of trust: Turkey’s budget story and the real facts about 2020

Turkey’s government announced its budget results for 2020 on Friday. The country’s new Treasury and Finance Minister Lütfi Elvan stated that the budget deficit last year was 172.7 billion liras ($23 billion), saying it remained below the government’s target of 239.2 billion liras.

Hence, by calculating the difference between the two figures, the Minister declared his government was able to post a significant saving of 66.5 billion liras last year.

Elvan said on Twitter on Monday that his administration has also taken permanent measures to improve the 2021 budget. He said it was targeting a budget deficit to GDP ratio of 3.5 percent for this year, down from 3.6 percent in 2020. He said the government would ensure balanced demand and sustainable growth thanks to “macroeconomic policies they envision to implement”.

To understand whether these important pledges are achievable, we first need to study the 2020 budget results. Last year was a tough one, when the COVID-19 pandemic brought significant fiscal deficits in many countries across the globe. So was Turkey really able to keep its fiscal deficit below target and save money to the tune of 66.5 billion liras?

Let’s rewind a little. Elvan arrived after President Recep Tayyip Erdogan unexpectedly dismissed the head of the central bank one night in early November and Elvan’s predecessor Berat Albayrak, Erdogan’s son-in-law, resigned little more than a day later in a shock statement on Instagram. Consequently, Elvan took over the New Economy Program (YEP), a legacy of Albayrak.

Albayrak announced details of the programme at the end of September. Like its predecessor a year earlier, the 2020 YEP contained unrealistic economic goals and estimates. Hence, it failed to serve as an anchor for Turkey’s ailing economy, rather fitting Albayrak’s “Alice in Wonderland” approach to economic management. Apart from the YEP’s unrealistic targets such as growth, inflation, the value of the lira and the current account deficit, Albayrak’s revision of the 2020 budget deficit target became a hot subject of discussion among local commentators.

Albayrak said the government expected consumer price inflation at the end of 2020, then just three months down the road, to slow to 10.5 percent. But inflation of 11.8 percent went in the opposite direction and ended the year at 14.6 percent. He set the government’s economic growth estimate for 2020 at 0.3 percent. Now it seems that annual growth will be close to 2 percent, thanks to a credit boom and interest rate cuts that spun the economy out of control.

The minister also forecast that the current account deficit would total 3.5 percent of GDP last year. The actual figure will be about 5.7 percent, more proof of his failure to grasp the economic realities of Turkey.

In 2019, the budget deficit totalled 126.2 billion liras. In December of that year, the government set its deficit goal for 2020 at 138.9 billion liras in the budget approved by parliament. In September, citing the COVID-19 pandemic, Albayrak almost doubled the government’s unofficial estimate for the budget deficit to 239.2 billion liras. This figure, of course, was no more realistic than the government’s forecasts for inflation, economic growth and the current account. There was never any consensus that Turkey’s fiscal deficit would increase so rapidly. However, a high deficit figure was included in the YEP as the government’s expectation.

Given the budget deficit of 126.2 billion liras in 2019, we have three figures to evaluate the government’s fiscal performance last year: the official target of 138.9 billion liras; the revised unofficial figure of 239.2 billion liras and the 2020 result of 172.7 billion liras.

If the official target had been met, the increase in the budget deficit in 2020 would have been 10 percent. Of course, achieving such a small increase was totally unrealistic in a year when inflation stood at around 15 percent because that would have meant tight fiscal policy.  Yet, we know that both before COVID-19 and after, such tight fiscal policy was nowhere to be seen. Turkey’s fiscal discipline had already been weakening, especially since 2017, a problem that now stands tall in the country’s extremely fragile economic backdrop.

Had the revised 239.2 billion lira estimate been realised, the 12-month spike in the budget deficit would have amounted to an astonishing 90 percent.  Still, Albayrak and his team depicted such a rapid widening in the estimated deficit as “business as usual” back in September, even though the increase would have meant a budget deficit of 6.1 percent of GDP. The estimate could therefore be labelled as one based on extremely loose fiscal policy in a pandemic year.

However, the amount of capital transferred from the budget to the public in the fight against COVID-19 is about 1.5 percent of GDP. Instead of subsidising the pandemic-hit economy through direct financial support, the administration chose to create a credit boom via low interest rates designed to stimulate economic activity significantly while adding to Turkey’s debt burden. But it was clear that the revised budget deficit target in the YEP meant Albayrak and his team were not forecasting the rising tax income that characterises strong economic recovery.

The 2020 budget deficit of 172.7 billion liras equates to a 37 percent increase compared with 2019. This growth in the deficit is more than twice annual inflation of 15 percent, underscoring just how loose fiscal policy was last year.

Turkey’s deteriorating economic conditions and balances meant that the central bank was forced to implement big hikes to interest rates in November and December. The rate hikes, designed to pull down inflation and stabilise the economy, underscore how the budget deficit completely failed to serve its purpose of sustainable economic growth and recovery.

Erdogan has hired Elvan due to eroding confidence in Turkey’s economic, fiscal and monetary policies. He is supposed to rebuild trust in the economy among foreign investors and Turkey’s citizens, who have been selling the lira in droves. He is now claiming that the government managed to make 66.5 billion liras of budget savings, painting its budget performance as a success.

Elvan is perhaps not aware that conjuring up such success stories, just like his predecessor, threatens his own trustworthiness. Like Albayrak, Elvan has hidden the real facts. He spoke at a time when inflation is climbing and there are more than 9 million people unemployed in Turkey’s “very successful” economy.