Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy references this time around; the title is homage to a famous Sargent & Wallace paper called Unpleasant Monetarist Arithmetic...
For the column, I am grateful to a reader who motivated me to write on this issue by asking my views on the "puzzle". Although I had been eying to touch on this issue for some time, since I only write once a week for Hurriyet, and the topic is far too specific for Forbes, I would have probably pushed it under the carpet due to other "hot topics" coming in. Thanks to her, I have now solved the time inconsistency problem:)
BTW, there is an interesting story that goes along the Denizli Internet cafe adventure, if you are in for some laughs- for my stupidity, that is...
Turkish economy has recently been quite good at creating puzzles and economists not really good at explaining them.
For example, we still do not have a good idea on the source of the unidentified financing objects, the large positive numbers in the net errors and omissions of the Balance of Payments. Similarly, the inexplicable disconnect between Industrial Production and GDP is keeping confidence at bay despite the higher-than-expected December reading for the former.
The most recent puzzle has been the 2009 budget turnout, which beat most analyst forecasts, including mine, turning out to be much better than the government’s September projections as well. A simple look at the data reveals tax revenues have come out to be much higher than expected, while non-interest expenditures have actually picked up recently.
Most economists resort to accounting to explain this revenue pick-up, but accounting for holiday and working day effects does not get us far. Some also argue that the September projections were too cautious to begin with: After all, the government has been really adept at managing expectations, with the IMF saga being case-in-point, so they know too well not to disappoint. But that doesn’t explain how economists’ forecasts were so off-the-mark.
For my defense, my projections, done in haste in an internet café in Denizli before the Besiktas championship game, suffered owing to tax measures adopted during the summer. In addition, the pull-forward effect of lower taxes turned out to be significant, and corporate taxes were higher than expected, mainly on the back of banks recording record profits while banking on rate cuts.
Penciling all these factors in still leaves me a good couple of billion liras short, mostly due to domestic consumption tax revenues skyrocketing late in the year: The pick-up in activity simply cannot account for the 24 percent yearly increase in domestic value-added tax, or VAT, revenues. Interestingly, while CNBC-e’s consumption index used to do a pretty good job in predicting it, the relationship has broken down recently, hinting that the faster pace of recovery and higher consumer prices are not behind the puzzle.
There is a lot of anecdotal evidence that the Ministry of Finance, or MOF, has been showing a lot of extra effort in collecting taxes of late through the so-called VAT code system, where any firm that does business with a tax-suspect automatically finds itself on the MOF’s black list and liable to all its dealings with the suspect.
Whatever the cause, the better performance last year has made this year’s revenue targets much more realistic, but the billion-dollar question is whether the government will be able to hold down expenditures. It is true that much of the dismal 2009 expenditure performance was due to a slowdown in social security premium collections because of the sharp contraction. But the conservative personnel spending and procurement projections may be difficult to realize with elections approaching.
The same can be said of local governments and state-economic enterprises, which are projected to run an unrealistically sizable surplus. So when optimists commend the government on the fiscal rule, I see unpleasant fiscal arithmetic cleverly designed to take attention away from the real arrears in the budget, primary expenditures and non-central government items.
Call me schizophrenic if you’d like, but the recent increase in pension payments and the accompanying levy on bank branches may be a harbinger of what is to come: Discrete expenditure spending, accompanied by ad-hoc revenue patches with knockoff measures.
Needles to say, this wouldn’t be a market, investor or growth-friendly environment.
For the column, I am grateful to a reader who motivated me to write on this issue by asking my views on the "puzzle". Although I had been eying to touch on this issue for some time, since I only write once a week for Hurriyet, and the topic is far too specific for Forbes, I would have probably pushed it under the carpet due to other "hot topics" coming in. Thanks to her, I have now solved the time inconsistency problem:)
BTW, there is an interesting story that goes along the Denizli Internet cafe adventure, if you are in for some laughs- for my stupidity, that is...
Turkish economy has recently been quite good at creating puzzles and economists not really good at explaining them.
For example, we still do not have a good idea on the source of the unidentified financing objects, the large positive numbers in the net errors and omissions of the Balance of Payments. Similarly, the inexplicable disconnect between Industrial Production and GDP is keeping confidence at bay despite the higher-than-expected December reading for the former.
The most recent puzzle has been the 2009 budget turnout, which beat most analyst forecasts, including mine, turning out to be much better than the government’s September projections as well. A simple look at the data reveals tax revenues have come out to be much higher than expected, while non-interest expenditures have actually picked up recently.
Most economists resort to accounting to explain this revenue pick-up, but accounting for holiday and working day effects does not get us far. Some also argue that the September projections were too cautious to begin with: After all, the government has been really adept at managing expectations, with the IMF saga being case-in-point, so they know too well not to disappoint. But that doesn’t explain how economists’ forecasts were so off-the-mark.
For my defense, my projections, done in haste in an internet café in Denizli before the Besiktas championship game, suffered owing to tax measures adopted during the summer. In addition, the pull-forward effect of lower taxes turned out to be significant, and corporate taxes were higher than expected, mainly on the back of banks recording record profits while banking on rate cuts.
Penciling all these factors in still leaves me a good couple of billion liras short, mostly due to domestic consumption tax revenues skyrocketing late in the year: The pick-up in activity simply cannot account for the 24 percent yearly increase in domestic value-added tax, or VAT, revenues. Interestingly, while CNBC-e’s consumption index used to do a pretty good job in predicting it, the relationship has broken down recently, hinting that the faster pace of recovery and higher consumer prices are not behind the puzzle.
There is a lot of anecdotal evidence that the Ministry of Finance, or MOF, has been showing a lot of extra effort in collecting taxes of late through the so-called VAT code system, where any firm that does business with a tax-suspect automatically finds itself on the MOF’s black list and liable to all its dealings with the suspect.
Whatever the cause, the better performance last year has made this year’s revenue targets much more realistic, but the billion-dollar question is whether the government will be able to hold down expenditures. It is true that much of the dismal 2009 expenditure performance was due to a slowdown in social security premium collections because of the sharp contraction. But the conservative personnel spending and procurement projections may be difficult to realize with elections approaching.
The same can be said of local governments and state-economic enterprises, which are projected to run an unrealistically sizable surplus. So when optimists commend the government on the fiscal rule, I see unpleasant fiscal arithmetic cleverly designed to take attention away from the real arrears in the budget, primary expenditures and non-central government items.
Call me schizophrenic if you’d like, but the recent increase in pension payments and the accompanying levy on bank branches may be a harbinger of what is to come: Discrete expenditure spending, accompanied by ad-hoc revenue patches with knockoff measures.
Needles to say, this wouldn’t be a market, investor or growth-friendly environment.
Posts
No comments:
Post a Comment