Monday, July 19, 2010

Weekly Hurriyet Column: A fiscal of liras

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. I went for a movie reference + wordplay (fiscal-fistful; I know I am not very creative) this time around for the title.

As for the column, I don't have much to add to the column for a change, except that I have short post that summarizes, with the appropriate hyperlinks, all I've said about the fiscal rule since it first surfaced in September. 

By the way, obviously, I was not the only one who had something to say about the fiscal rule. Roubini Global Economics has a neat summary of some recent and other not-so-recent stuff on the fiscal rule, including a few musings from your favorite Turkey economist (subscription-only, but highly-recommended if you can afford it).
Anyway, on to the column:

This past week was not a good one for fiscal optimists, with the release of the June central government budget figures and the surprising piece of news that the fiscal rule had been postponed until October.

If you are to believe the majority of research reports, fiscal performance remains strong. It sure does, if you forget that the 23 percent yearly increase in tax revenues is mostly due to the weak base of last year. With the pace of growth slowing down and base effects dying out, tax collection is not likely to be as strong going forward.

On the other hand, there is some increase in non-interest expenditures on the back of transfers to social security institutions and local governments. I try not to make too much of one month of data, but it is nevertheless my civic duty to note that those two items recorded their highest levels this year.

It is also important to emphasize that the unassuming end-year target of 0.3 percent of GDP consolidated government sector, or CGS, primary deficit is likely to be met, although CGS is already roughly in balance, according to your friendly neighborhood economist’s calculations. But it is exactly this modest goal that has been threatening the viability of the fiscal rule, which was brushed under the carpet at least until October.

Coincidence or design

Using the formula for the fiscal rule, this year’s deficit goal and growth forecasts of 6 percent and 4 percent for this year and the next, it turns out that the government would have to make around 3 percent of adjustment in 2011 - an election year. Since most of the adjustment in the fiscal rule is front-loaded by design, a more aggressive adjustment for this year would have meant a realistic one for the election year. In other words, the government has shot itself in the foot with this year’s fiscal goal.

Such a lax target does not make sense in terms of economics, either. The IMF actually warned implicitly and as tactfully as it could at end of May by stating that, while suitable when conceived in the midst of the crisis, the ambition of the 2010 primary balance target had been overtaken by the stronger 2009 outturn and upward revisions to 2010 growth and inflation forecasts. According to the Fund, adhering to the original target would now imply no structural improvement this year, while macroeconomic conditions and external developments argued for a structural tightening. But a word is enough to the wise, while drums and clarions would be insufficient to the unwise.

Anyway, it would not be too much to assume that the PM’s advisers know enough Excel to have gone through these calculations and might have been tempted to advise on the enactment of the fiscal rule after the elections. I declared the fiscal rule as dead before it was born, but such a complete U-turn would surprise even a disciple of the dismal science like me and rattle markets.

As I argued back in September, the cost of messing up the fiscal rule would be enormous, much more than having no rule at all. In this regard, the Medium-Term Economic Program would need to be disclosed as soon as possible, with growth and deficit projections realistic as well as in line with the fiscal rule. That would soothe markets ahead of a heavy Treasury redemption schedule. Then, we’ll have to wait until October to see if the fiscal rule would be enacted then and whether the 2011 budget would be in line with the fiscal rule and Program projections.

I really would like to stay optimistic and give the benefit of doubt to the government, but you know what they say: First time's an accident, second time's a coincidence, third time's a trend. This past week took us beyond the first two posts already.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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