Fiscal Monitoring | June 2005 TEPAV | EPRI Ankara, 14 July 2005

Fiscal Monitoring | June 2005 Slide 2 Why Fiscal Monitoring? Budget data: an important tool in determining and evaluating fiscal policies Budget data: numerical details difficult to be followed by public (?) The need and lack of informing the public The budget monitoring mission of non- governmental organizations:  Control over governmental policies  Reference to the policy choices In Turkey tepav|epri takes an important pace to become a “budget watchdog”

Fiscal Monitoring | June 2005 Slide 3 January-May 2005 Developments Contuniation of current policies  achieving the target in primary surplus Improvement observed in May 2005 budget performance:  Income achieved from the interests of the bond exported to public banks and to the Saving Deposits Insurance Fund (TMSF) by the Treasury by non-tax revenues Risk in the expenditures: Rapid increase in social contribution transfers

Fiscal Monitoring | June 2005 Slide 4 Fiscal Monitoring Report-Content Developments in budget sizes Developments in budget finance and in the debt stock Developments in fiscal legislation

Fiscal Monitoring | June 2005 Slide 5 Fiscal Monitoring Report June 2005 Theme 1:  “Okey, fiscal dicipline, but what kind of fiscal dicipline?” Theme 2:  “what are we going to do with stability dividend? All right, but is there any stability dividend to mention?”

Fiscal Monitoring | June 2005 Slide 6 Fiscal Monitoring Report June 2005 Functions of public finance system:  To sustain fiscal dicipline  To manage public resources according to the priorities  To sustain operational efficiency

Fiscal Monitoring | June 2005 Slide 7 Fiscal Dicipline-1 The most important target indicator: Primary surplus (PS) 2005 target:  Consolidated Budget: %5  Public Section: %6,5 Is this performance permanent?  The quality and the sustainability of fiscal performance Average Primary Surplus as a Share of GDP5,10%4,20%6,40%

Fiscal Monitoring | June 2005 Slide 8 Fiscal Dicipline-2 In between precautions for once only in achieving Primary Surplus are significant. Type of Measure Average Measures effective for one year Measures economizing on expenditures Measures increasing revenues Measures effective for more than one year Measures economizing on expenditures Measures increasing revenues TOTAL 100

Fiscal Monitoring | June 2005 Slide 9 Fiscal Discipline-3 The rate of the income generating measures is over %70 An important part of these measures are made by increasing indirect taxes. The Ratio of Direct and Indirect Taxes in Selected Countries 2002 (Except Social Security Payments) Country Direct Taxes Indirect Taxes U.S Belgium England Austria France Germany Poland 4852 Korea Czech Rep Greece Portugal Slovakia Mexico Turkey OECD Total

Fiscal Monitoring | June 2005 Slide 10 Managing public resources to meet strategic priorities Strategic priorities are determined in a sound manner? Is there enough budget allocated for investing in human capital? Share of Expenditures on Education in Consolidated Budget Year Ratio (%) The Ratio of Education Expenditures in GNP (%) Year Turkey EU average 5.1

Fiscal Monitoring | June 2005 Slide 11 Operational Efficiency Falling short of sustainable expenditure reforms limits the role of the budget as an economic policy tool. Despite the decreasing expenditures on interests, the obligatory expenditures in the budget such as interests, personnel, transfers to social security system is increasing Share of Inelastic Expenditures in Consolidated Budget (%)