Transcript Slayt 1

FINANCIAL WORLD II :
PUBLIC SECTOR
Prof. Sedef Akgüngör
& FISCAL POLICY
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Public finance policies can be seperated into two
periods:
Before and after 1980
Economic development policy prior to 1980 was
primarily based on ISI(import substituting
industrialisation).
After 1980 the role of the state in the economy was
reduced continuously.
The early 1980s had witnessed a transition from
public sector to fiscal policy.
After 1980 ISI was replaced by the export-led growth
approach.
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The primary factors of the transition from the public sector
to fiscal policy can be grouped in two areas;
foreign and domestic.
On of the foreign side,strong demands and pressures came
openly and directly from the IMF and the World Bank.
These two institutions had argued continuously that the
ISI practice should be put aside,since with that policy the
economy was unable to escape from crises.
These institutions demanded a complete policy shift
towards minimum state existence in the economy
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Another factor that affected the public sector directly after
the 1990s is globalisation.
It has strengtened the policy changes towards
liberalisation in Turkey too.
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On the domestic side,there was direct and open
opposition of big businesses to the role of state in
the economy.
The new economic policies required a new
institutional set up,either with changes of
existing institutions or establishing completely
new ones.
On the 24th January 1980, a new measures of
stabilisation measures was issued
These measures were designed by the IMF and
would be implemented by the Undersecretary of
the Prime Minister.
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The 1980s started with a monopoly of political
power and completely free market oriented
economic administration,a process which was
contradictory in itself.
Since the former legal and institutional
structures were destroyed and new ones were not
immediately forthcoming,the economy fell into a
chaotic situation.
As a result the black market increased;the
underground economy spread further and
markets were left primitively free.
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Undersecretary of the Treasury and Undersecretary of Foreign Trade
were established.
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Undersecretary of Foreign Trade was designated to stimulate the new
export led policy approach.
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The role of the SPO(State Planning Organisation) was reduced.
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The legal status of the CRT(Central Bank) had been almost
continuously disputed for about two decades until the year 2000.
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The legal frameworks and institutional sets up of the regulatory and
supervisory institutions had been relatively slow.
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The PEE(Public Economic Enterprises) were left in a web of
uncertainity.
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These legal and institutional shortcomings created unstable
conditions in economic and political spheres.
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The economic crises became almost regular.
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PEE AND PRIVATISATION
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Beginning with the 1980s the role of government in
the economy became smaller.
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The most important part of the process was the
elimination of the PEE(Public Economic Enterprises)
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Since the PEE had monopolistic or oligopolistic
market powers,they could generate higher value
added per employee.
However, the PEE did not function well economically
because PEE were regularly misused by governments
after the 1950s,even during the privatisation
practices.
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Privatisation was considered one of the primary
tools of the structural adjustment program.
A logical outcome of this understanding would be
the selling of publicly owned economic units.
Just after 1980 a definitive approach for selling
the PEE was the first item on the agenda.
Public establishments were seen as one of the
most important reasons for the economic
hardships,that is the supply-shortages,black
markets and inflation.
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After changing the industrialisation policy to
export- led growth ,privatisation was easily
implemented.
The IMF and the World Bank were putting on
pressure from the outside for privatisation too.
Since the country was in a deep economic and
political crisi and urgently needed their help,
privatisation was inevitable.
The privatisation process continued with some
ups and downs until 2002,and was carried out
more intensively afterwards.
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PRIVATISATION REVENUE BY YEAR,
(MILLIONS USD)
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HOW WAS PRIVATISATION DONE?
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Privatisation Master Plan, which was completed
in 1986 was followed.
Karabük Iron and Steel and some agricultural
state farms were sold to employees.
Some of the enterprises sold their shares to
public or in specific markets.
Mostly used way of selling was
“block sales(selling as a whole)”
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There are many examples of privatisations that
were not administered properly such as Turk
Telekom and Tüpraş,which are the biggest ones.
In some cases, the sale price was even lower than
the price of land on which the PEE was
functioning.
The privatisation process started witout a
comprehensive and full legal framework being
prepared.
The legal and institutional gap was closed during
the second half of the 1990s and early 2000s.
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Privatisation was not implemented with an eye on the
long term development of the economy.
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Privatisation revenues were used for closing budget
deficits and reinvestment.
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There was no distinction between the key sectors and
the others.
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The PEE in telecommunications (Teletaş,Turk
Telekom) and energy(Tüpraş) should not have been
privatised as rapidly as they were,plus instead of the
block sale of the share of these key enterprises could
have been sold to the public at large.
On social side,many of the employees of the privatised
enterprises were fired even without having any social
safety net.
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FISCAL TOTALITY
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First,with the implementation of stabilisation
policies from the beginning of 2000s,the central
government’s total expenditures did not change
or have a decreasing trend within the GDP(gross
domestic product) ,while the ratio of revenues
remained almost the same.
As a result the revenue-expenditure gap was
almost closed ,that is to say the budget balance
was obtained.
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Second,the relative share of the constant capital
investments within the total public expenditures
decreased steadily.
Accompanied by privatisation,the public
contribution to capital formation was limited.
The lack of public affected the capital
accumulation process negatively during most of
the 1980s and 1990s.
Total capital formation slowed down.
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Third,although the public outlays were decreased
in real or rather GDP terms,public spending
areas were diversified extensively.
Fourth, during many years of the period some of
the IMF programs were in practice directly and
some indirectly.
The primary fiscal policy element of those
programs was characterised by the tightening of
expenditures.
This approach was in accordance with the
primary policy of reducing the role of the state in
the economy.
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Fifth, after 1980, the public deficit increased almost
continuously until the 2000s.
The PSBR(public sector borrowing requirements) or
the public sector deficit was around 1-2 percent of
GDP before 1980 and Turkey was unable to borrow.
During the 1980s this ratio increased to about 3
percent per year on average.
During the 1990s the ratio was more than 8 percent
on average.
By paying a very high rate of interest comparatively
,the country became able to borrow from abroad.
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With the financial crisis of 1999-2001, the PSPR
reached about 15 per cent of GDP during the
2000s.
The accumulation of both domestic and foreign
debts were naturally followed by increased
interest payments in the budgets.
With the stabilisation measures initiated in 2001,
the primary balance, that is balancing revenues
and expenditures by putting interest payments
aside was considered an indicator of a sound
financial structure.
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GENERAL GOVERNMENT TOTAL
REVENUES AND EXPENDITURES
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CONSOLIDATED/CENTRAL GOVERNMENT
BUDGET AFTER 2004
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The main element of public revenues is taxes.
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Total taxes over GDP is the tax burden.
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Taxes are dividen into two categories :
direct ,indirect.
Direct taxes are collected from income flows of real
and legal people.If direct taxes are linked to an
increasing rate of income,the outcome is progressive
taxation.
Indirect taxes,are paid irrespective of the economic
ability of the tax payer when an economic activity is
conducted such as selling or buying.
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Trends in taxes after 1980 followed the economic
policy that was based on the export-led approach
with the least government.
At the beginning of 1985,the VAT-value added
tax )was introduced.
In 2002,it was accompanied by the PCT( private
consumption tax).
With the establishment of the Tax Law of 1998
government aimed to reduce the extent of the
underground economy and achieve a registered
economy.
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Share of direct taxes in the consolidated budget
tax revenues was 58 percent of the total in 1981.
The subdivision of this rate was such that 48 per
cent was coming from personal income taxes and
10 per cent from corporations.
The share of direct taxes in the total was reduced
to 51 per cent in 1990, 32 per cent in 2000 and
remained almost the same afterwards.
More than two thirds of the total taxes were
indirect on average at the end of the first decade
of the 2000s.
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There was an important change in the
composition of indirect taxes.
After 2002, the SCT(special consumption tax)
gained ground within the tax system and
surpassed VAT.
There are three reasons behind this policy: to
fight against inflationary pressures; to lower the
tax burden of the businesses and to tax luxurious
consumption.
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On the other hand, the share of indirect taxes in
the total increased.
With the introduction of new tax laws in
2006,corporate income tax decreased from 30 per
cent to 20 per cent and the tax rate on interest
incomes reduced similarly.
It is argued that, the investment climate of the
country has improved.
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GENERAL GOVERNMENT DEBT
EU DEFINED, 2001-2009
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PUBLIC DEBTS
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The equality between reveues and the
expenditures is called the “golden rule” of public
finance.
When the revenues are not enough to cover
expenditures the result is a budget deficit.
According to the Maastricht Criteria ,
public debts/GDP ratio should not be higher than
60 per cent.
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DEBT ACCOUNTING
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Debt or borrowing statistics are results of what
can be termed as debt accounting.
In the analysis of borrowing,the public net debt
stock is utilized and prepared quarterlyby the
Treasury starting from 2003.
It means that all types of assets and liabilities of
the country,sometimes both domestic ad
foreign,must be taken into account.
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With the development of the process of the full
membership of the EU after 2004 a new method
of debt calculation has been practised by the
Treasury.
The EU approach takes only the central
government and the other public institutions into
account.
Most importantly, the debt stock is defined as a
total of domestic and foreign.
Both types of debt are treated on an equal
footing.
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COMPOSITION OF TOTAL BORROWINGS
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COMPOSITION OF TOTAL DEBT OF
TURKISH ECONOMY
350.0
300.0
250.0
200.0
Foreign
Domestic
150.0
100.0
50.0
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0.0
2000
2005
2006
2007
2008
2009
THE MEDIUM TERM FISCAL POLICY
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Amid the most severe global economic crisis in
September 2009, the government issued the
MTP(Medium Term Program 2010-2012) where
the macroeconomic policies of thes years were
outlined.
Although the economic policy of the country was
out of official IMF Standby Agreement after May
2008, it followed essentially the main lines of the
IMF measures.
The MTP aims at efficiency and stability in
public financing.
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For implementing the proposals and rules and achieving
targets, there is the rule of rules, which is called the fiscal
rule.
Fiscal rule is formulated as:
Da=y(at-1-a*)+k(b-b*)
Where
Da
at-1
a*
b
b*
y
k
: public deficit adjustment/GDP
: previous year pubic sector deficit/GDP
: targeted medium-long termpublic deficit/GDP
: real GDP growth rate
: long term average of the real GDP growth rate
: convergence velocity coefficient of the public deficit to
medium –long term target
: reflection coefficient of conjuncture effects
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It is stated that y and k have negative signs; a negative Da
indicates a decrease in public deficit.
With the utilisation of the Fiscal Rule the ratio of the
medium-long term public deficit to GDP is to be regulated
and adjusted so that a sustainable debt structure will be
realised.
The adjustment of the public deficit will be made by taking
two variables into account; the deficit of the previous year
and the medium-long term growth conjuncture.
When the rate of growth of GDP is higher than its mediumlong term average the adjustment coeeficient will be higher
or vice versa.
The aim of the adjustment process is to keep a stable and
sustainable growth without a disturbing level of deficit and
provide fiscal confidence at all.
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