Turkey's Public Sector Finances and EU Perspective

Abstract

In contrast to the sharpened policy preferences for sustainable public finances in the EU, Turkey’s post-1990 policy process did not feature a credible political commitment to fiscal consolidation. Turkey postponed the fundamental change in its macroeconomic and public finance strategy until the early 2000s, and undertook these reforms only after experiencing a severe financial crisis. This paper reviews the patterns of fiscal adjustment against the backdrop of the main macroeconomic trends in the 1990s and early 2000s, and identifies the main strengths and pitfalls of the fiscal reform strategy. Based on assessments of projected debt dynamics, the paper highlights that persistent primary surpluses are required in the medium-run in order to ensure a credible pace of public debt reduction. Moreover, the composition of fiscal adjustment needs to be modified in favor of a greater reliance on direct taxes in order to enhance the durability of the fiscal adjustment and further reform of the social security system is needed to reduce the social security deficits that impose a growing burden on the budget.