Peak in sight
Turkey recorded a budget deficit of TRY 13,7bn (~USD 3,9bn at current market rates) in the month of June. Total deficit has reached TRY 25,2bn in H1. Government aims for a budget deficit of TRY 46,9bn (~2% of GDP) for the whole year.
- After increasing sharply in Q1 budget deficit to GDP ratio hovers around 2% since April, gaining stability.
- About TRY 9bn of social security collection was deferred to Q4, adjusting for the social security payments deficit would have stood at about TRY 16bn at the end of H1.
- Pace of expenditures have been slowing down since April, reflecting the disciplined approach. In H2 expenditures may fare in a much more controlled fashion.
- Strong economy will attract better tax collection while diminishing the need for expenditures.
- Over-stated concerns about public finances deemed far-fetched, budget discipline to prevail in the remainder of the year helping the trend to reverse.
Employment related measures are showing early results. Seasonally adjusted unemployment have decreased to 11,3% in April (most recent data). Based on the momentum of hiring further gains are probable. Employment in construction and services are at all-time highs (Figure 1). Construction, one of the leading sectors in Turkish economy accommodates 2,1 million people while services provide employment to 15 million.
Domestic demand may get a further boost by increasing employment that will end up with higher tax collection in H2. Direct tax collection increased by 5,8% (infl. adj.) YoY in Q2 reaching TRY 83bn. Last year a total of TRY 150bn was collected including TRY 15bn obtained by restructuring program. This year TRY 7,9bn has been collected so far through the restructuring program.
Growth sensitive indirect taxes have increased by 2,1% (infl. adj.) YoY in Q2 reaching TRY 162bn despite allowance for special consumption tax on certain domestic appliances and furniture. In 2016, indirect tax collection amounted to TRY 308bn for the whole year.
Due to fiscal stimulus in Q1 expenditures were pushed forward. With economic growth stabilizing above 5% the need for strong stimulus diminishes. Early signs of discipline can be seen in slowing pace of current transfers. Current transfers have increased by 13,9 (infl. adj.) YoY in June slowing from 17,3% recorded previous month (Figure 2).
About TRY 9bn in social security taxes have been postponed to Q4 as part of employment initiative. Therefore adjusting for social security related deferral, budget deficit stands at TRY 16bn. That trend seems in line with the government’s goal of TRY 46,9bn. Better than expected GDP growth further creates room to maneuver. And even a little higher deficit would not let the GDP ratio to deviate from 2% significantly. We continue to stick to our 2% year-end figure.