ISTANBUL BLOG: Fiscally frightening? Let’s talk up some tightening

ISTANBUL BLOG: Fiscally frightening? Let’s talk up some tightening
Simsek (left) holding his press meeting on May 13 with Vice President Cevdet Akcay. / Turkish government
By Akin Nazli in Belgrade May 13, 2024

Turkey’s finance minister Mehmet Simsek on May 13 held a press conference to release a “savings package” that is supposed to cut budget spending. He also gave a powerpoint presentation.

Lately, the finance industry has raised concerns suggesting that Simsek’s fiscal policy has not been supporting the central bank’s widely praised monetary tightening cycle.

The Erdogan regime is, however, not in a position to cut its spending. It has long-term contracts for mega-infrastructure projects and, what’s more, is among the most corrupt governments in the world.

Neverthless, there are officials who indulge in accounting tricks with the budget figures that are coupled with fake GDP numbers to help cut the budget deficit to GDP ratio. Simsek must surely have his suspicions as to who they are.

The finance minister has not, meanwhile, forgotten to tend to the finance industry’s insecurities without giving reassurances that his stance is built on “orthodox” or “market friendly” economics.

For 1Q, Simsek released a budget deficit of Turkish lira (TRY) 513bn, doubling the TRY 250bn deficit recorded a year ago.

In his 2024 budget, he is planning to release a TRY 2.7 trillion deficit. For 2023, Simsek budgeted with a TRY 659bn deficit but released a TRY 1.4 trillion deficit.

Given that actual inflation in the country stands above 100%, a doubling of the deficit in the budget is actually not an anomaly.

“Further spending cuts, alongside efforts to ensure that monetary tightening is effective at cooling demand, are still needed to lower inflation in the coming years,” Liam Peach of Capital Economics wrote in a note to investors in response to Simsek’s press meeting.

In general, the finance industry is demanding more but is also happy with the attention paid by Simsek to the calls for fiscal tightening.

In his “savings package”, Simsek is supposed to pause new vehicle purchases and hires as well as purchases and construction of new buildings for a three-year period.

Public spending on goods and services will be cut by 10% and investments by 15%. New public sector personnel recruitment will be limited to replacing those retiring.