Turkish fiscal discipline seen to be little affected by elections next year

ANKARA (Reuters) – Turkey is not expected to give ground on fiscal discipline in its 2007 budget, despite general elections next year, although the government may be tempted to boost local authority spending, economists and officials said. The Finance Ministry, treasury and state planning authority have been drafting the budget and it will be finalized during this month’s International Monetary Fund (IMF) visit to Turkey. The draft budget must be presented by October 17 to Parliament, where Prime Minister Recep Tayyip Erdogan’s government enjoys a large majority. The $10 billion IMF loan program has put great stress on fiscal discipline as the country looks to cut down on its heavy debt load and lower inflation while maintaining strong growth. «When we don’t have that (fiscal discipline), there’s no need to ask the consequences, everyone knows,» said one economist who declined to be named. A financial crisis in 2001 pushed the Turkish economy into its deepest recession since World War II. Since then it has recovered strongly, with high growth and inflation falling into single digits. However, inflation has since ticked up again and is expected to be close to double the IMF-backed target of 5 percent this year. Garanti Bank economic research director Ali Ihsan Gelberi said he believed the government would maintain the IMF’s prized target of a high primary surplus, a budget measure excluding interest payments on the country’s large debt stock. «If they don’t do this, it would be taking a very big risk. They do not want to lose the market’s confidence and allow negative developments ahead of the presidential and general elections,» Gelberi said. General elections are scheduled for November 2007, while the presidential elections will be held in May. The president is elected by Parliament. An economy official said that, as in recent years, the budget would target gross national product growth of 5 percent and a primary surplus equivalent to 6.5 percent of gross national product. Eczacibasi Securities economist Aysegul Aykol said this month’s talks with the IMF would involve tough negotiations, with attention focused on delays to some structural reforms. However the talks are not expected to produce serious problems. In July, the IMF agreed to release a tranche of $1.85 billion in loans and agreed to waive performance targets related to parliamentary approval of administrative and social security reforms and legislation to reform personal income tax. While Ankara is set to maintain fiscal discipline in the central government budget, it may make election-inspired spending on local authority budgets, said Garanti’s Gelberi. «This would not be in the first half, but in the second half. I do not think we will see any populist practices until the presidential election is over. After all, it is Parliament and not the public which will choose the president,» he said. The government presented to Parliament last month a draft law that would increase the budgets of local authorities. «After that, election spending will be made through local councils… If this law passes, local authorities will gain an amazing power over their spending,» Gelberi said. However, analysts said sectoral tax cuts were unlikely to come onto the agenda next year, given IMF opposition to such moves as it looks to increase tax revenues.