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6.5 billion dollar pre-election promises now on the table!

The eyes have turned to the promises given by the AKP during the election countdown. The first agenda item is changing the code that will reset the monthly wages for civil servants and pensioners. The second on the list is fixing the bonuses for religious holidays. As good as it sounds for the wage&pension earners, the funding for all these promises should not hurt fiscal discipline.

6.5 billion dollar pre-election promises now on the table!

Now that the 24 June election is done, its time to get back to work and focus on the economy.

The eyes have turned to the promises given by the AKP during the election countdown.  The first agenda item is changing the code that will reset the monthly wages for civil servants and pensioners. The second on the list is fixing the bonuses for religious holidays.   As good as it sounds for the wage&pension earners, the funding for all these promises should not hurt fiscal discipline.

The burden is USD 6.5 billion!

The first decision announced before the election was to give a bonus of 1000 liras (USD 200) to the pensioners twice in a year; each before the religious holidays. The cost of this step is about 22.3 billion liras (USD 4.7bn). The first bonus was paid before the election, ahead of the Ramadan Holiday which created an additional burden of TL 11 billion (USD 2.3 billion) on the budget.  The second bonus in similar size is expected to be distributed ahead of the “Feast of Sacrifice” on August 21.  The cost of increasing the old age pension is 1.2 billion liras (USD 255 million). Thus, the cost of all these pre-election promises adds to 27-30 billion liras (USD 5.7-6.5 billion). Along with these measures, given that the real inflation at around 12-13 percent exceeds the target of 5 percent, inflation differentials will be paid to all the pensioners and civil servants as of July. Now, even if June inflation turns out to be zero, pensions will have to be raised by 6.39 percent and civil servants and civil servants pensions by 2.39 percent.

How about the resources?

The important question is now of course how the AKP government is planning to finance such large amounts that are set to repeat each year. Accordingly, the AKP’s story is to finance USD 6.5 billion through returns from “zoning peace”, “social security” and “tax peace”; meaning the restructuring of the accrued but unpaid debt for each.  The government ranks believe they can raise a total of 21 billion liras (USD 4.5 billion) which seems very doubtful.

In addition to the election promises, in terms of budget balances, the excise duty on fuel will also be monitored closely. With the decision taken on 18 May as the AKP’s reaction to the rising oil price and weakening lira; when the fuel price increases, the excise tax is automatically reduced and thus the price increase is not reflected to the consumers. Its effect on the budget was announced as 300 million liras (USD 60 million) for the first 15 days of the application.  Whether the new system will continue in the post-election period is to be seen; though it’s important to note in terms of budget revenues and inflation pricing of domestic prices on fuel is very important.

Tax hikes on the horizon?

Another issue that should be decided by the economy management is the expected price hike on tobacco.   It has been a while the cigarette companies have wanted to adapt their prices to the rising inflation but refrained so far given its negative impact on headline consumer price inflation already above 12 percent. Now that June inflation is to be announced on July 3rd, an automatic price adaptation is due.  A Cabinet decree is required to keep the tobacco prices as they are.  It is also unclear whether electricity prices will be hiked on 1st of July which was raised by 2.9 percent as of April 1st.  Any hikes on tobacco and electricity prices will surely have a positive impact on budget revenues and of course a negative one on inflation which is expected to continue to increase in the coming months due to exchange rate and cost pressures. The government has 10 days to decide on both.

Any changes to income tax code?

One of the issues before the elections was income tax reform. Economy management has voiced that the unregistered income will be reduced through the reform of the income tax in an effort to extend the tax base; as both are often said.  An arrangement on income tax is expected in the Turkish Grand National Assembly since 2013. The bill was renewed in 2016, but progress has not been made.

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