Turks brace for tax hikes as Ankara scrambles to bridge budget gaps
Under fire over a tax-hike plan, Turkey’s government says it needs fresh funds for security and defense amid rising risks in the region.
A balanced budget or “fiscal discipline” used to be the shiniest side of Turkey’s economic showcase to foreign investors. Over the past two years, however, the showcase has gotten dusty and scratched. The budget deficit has reached 2% of gross domestic product (GDP), double what it used to be, and it could climb further to 3% of GDP if measures are not taken. For Turkey, the budget deficit comes atop a chronic current account deficit. The simultaneous increase of the two — known as a “twin deficit” — is seen as a sign of growing risks that deter foreign investors, who are of crucial importance for Turkey.
The Turkish economy relies heavily on short-term portfolio investments, or “hot money.” The road map the US Federal Reserve laid out on Sept. 20 makes emerging economies like Turkey less attractive to short-term investors, and the Turkish currency has already weakened. The dollar, which was worth about 3.4 Turkish liras at the end of August, traded for more than 3.55 Turkish liras at the end of September.
Political tensions over the Sept. 25 independence vote in neighboring Iraqi Kurdistan has added to Turkey’s regional risks, sharpening the dollar’s upward trend.
All those factors call for economic adjustments at home, and the budget deficit is not something that the ruling Justice and Development Party (AKP) can ignore.
