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WHY SHOULD TURKEY CONTINUE WITH STRONG FISCAL ADJUSTEMENT? LESSONS DERIVED FROM THE PAST AgAR PASLI, Mediha M.S., Department of Economics Supervisor: Associate Prof. Dr. Nadir &Ouml / CAL November 2006, 87 pages Turkey managed to produce a strong fiscal adjustment during the period of 1999-2005 with the annual average of close to 5 percent. Moreover, with the help of this tight fiscal stance, Turkey&rsquo / s public debt has been reduced from the peak of 90.5 percent of GNP in 2001 to 55.8 percent in 2005. Although this is a major achievement both in terms of the size and the speed, the challenge for Turkey is now to continue with fiscal adjustment in order to further reduce its public debt level which still poses a sizeable vulnerability risk for the economy. Therefore, in order to provide an answer to the sustainability question, this thesis first aims to (i) measure the fiscal adjustment in Turkey at the general government level during 1999-2005 period, (ii) analyze sources of fiscal adjustment based on the economic classification, institutional breakdown, and cyclical and structural components. After understanding size and sources of adjustment, the reduction in public debt will be decomposed into its parts including the contribution come from primary surplus. This will shed light on whether Turkey could still rely on those factors for further reduction in public debt in the future.

The current fiscal policy does not differentiate capital expenditure from current expenditure. Since the global deficit target is fixed according to the present fiscal policy rule, the non financial expenditure becomes pro cyclical, and the public investment is adjusted to meet the targeted deficit. As a result, the public investment has dramatically decreased which, in turn, has affected the international competitiveness and the economic and social development of the Peruvian society. This paper proposes: 1) change the public expenditure policy public investment by eliminating its pro cyclical bias; and 2) redefining the system of fiscal accounting. To meet this purposes the budget must be divided in two parts: the current budget with a saving or primary surplus target, and the investment expenditure based on a rule of directing the public debt only to finance this kind of expenditure over the economic cycle. This is the so called Public Investment Golden Rule. To this Golden Rule is added other according to which the ratio of public net debt must be sustainable during the economic cycle. Finally, it’s proposed to adopting the new IMF accounting system. The Golden Rule becomes pretty velar in the context of this new system. When the operational result becomes equal to cero, the net investment becomes equal to the public debt. Hence, the null operational result according to the new accounting system is the only one which is consistent with the Golden Rule. / La actual política fiscal no diferencia los gastos de capital de los gastos corrientes. La regla vigente de fijación de metas globales de déficit convierte al gasto no financiero en una variable procíclica, y la inversión pública es la que se ajusta para cumplir las metas de déficit. Esta política fiscal procíclica ha reducido la inversión pública a niveles mínimos sin precedentes históricos, conspirando así contra el desarrollo y la competitividad del país. En este trabajo se propone: 1) cambiar la política de gasto, eliminando el sesgo procíclico de la inversión pública; y 2) rediseñar la contabilidad fiscal. Para ello el presupuesto público debe dividirse en dos partes: uno de gasto corriente, con una meta de ahorro o de superávit primario corriente anual, y otro de gasto de inversión basado en una regla de destinar el endeudamiento, a lo largo del ciclo económico, a financiar solo el gasto de inversión y no el gasto corriente. Esta es la Regla de Oro de la Inversión pública. A esta regla se le adiciona otra según la cual la deuda neta del gobierno como porcentaje del PBI debe mantenerse, durante el ciclo económico, en un nivel sostenible. Asimismo, se plantea rediseñar la contabilidad fiscal sobre la base del nuevo sistema de contabilidad del FMI. Con este sistema, la Regla de Oro se hace aún más comprensible: cuando el resultado operativo es igual a cero, la inversión neta sería exactamente igual al endeudamiento. Por tanto, el único resultado coherente con la Regla de Oro en esta nueva contabilidad es que el ahorro corriente o resultado operativo sea nulo sobre el ciclo económico.