Turkey Adjusts Taxes While Holding Back Public Price Hikes

Turkey’s economic management is entering a new phase in 2026, with policies aimed at protecting citizens from excessive tax burdens while maintaining fiscal discipline. Speaking at the Turkish Grand National Assembly (TBMM) during budget negotiations, Treasury and Finance Minister Mehmet Şimşek outlined a framework that differentiates between public charges and citizen-friendly tax regulations, emphasizing fairness, disinflation, and macroeconomic stability.

Tax Policy Shift Favors Citizens

At the heart of the announcement is a key distinction: public prices and fees will be increased below the revaluation rate. At the same time, tax rules that directly benefit individuals will rise more generously. Şimşek stated, “We will increase updates in tax legislation that are in favor of our citizens, such as the income tax brackets, at the higher revaluation rate of 25.5%.”

In contrast, government-administered prices will be set within a 16–19% range, aligned with inflation targets rather than the higher revaluation rate. This approach aims to prevent excessive cost pressures on households while still preserving public revenues.

The minister also clarified that for 2026, taxes and fees will generally be updated based on targeted inflation rather than the revaluation rate, reinforcing the government’s disinflation strategy. This dual-track system signals a deliberate attempt to balance social protection with fiscal responsibility.

Inflation Trends and Structural Challenges

Şimşek provided an overview of inflation dynamics, highlighting notable progress since recent peaks. Inflation, which stabilized around 64–65% in late 2022 and 2023, declined to 44.4% last year and reached 31.1% by November this year. While still above official targets, the downward trend reflects the impact of tight monetary and fiscal policies.

Breaking down inflation components, the minister noted that core goods inflation, including durable goods and clothing, has fallen to 18.6%, while food inflation declined to 27%. However, overall inflation remains elevated due to persistent service sector inflation, a phenomenon observed globally but intensified in Turkey by structural rigidities and backward-looking indexation.

Policy interventions in housing and education also played a role. Temporary rent caps and education fee limits, though socially motivated, led to inflation in rents and education fees rising at nearly twice the headline rate over the past two years. Looking ahead, Şimşek argued that expanded social housing projects and the completion of earthquake reconstruction homes will boost supply and help curb rent increases. In education, a newly adopted rule-based pricing model is expected to restore balance.

Current Account and Energy Independence

Another central theme of the speech was Turkey’s improved external position. According to Şimşek, the current account deficit, which had exceeded 5% of GDP, narrowed dramatically to 0.8% in 2024. Excluding gold imports driven by portfolio preferences, Turkey even recorded a $3.2 billion surplus last year.

Energy transformation has been critical to this improvement. Turkey now meets 15% of its oil needs and 16% of its natural gas demand from domestic production. Renewable energy accounts for 62% of installed capacity, though drought conditions reduced its share in actual generation to 45% this year. As energy import dependence declines, the current account balance is expected to improve structurally.

This progress has also reduced Turkey’s gross external financing requirement, which fell from 23% of GDP to below 17%, with projections of 13–14% by the end of the program period.

Stronger Reserves and Falling Risk Premium

Şimşek highlighted significant gains in financial resilience. Since May 2023, gross reserves increased by $88 billion, while net reserves excluding swaps rose by approximately $123 billion. Combined with the successful exit from currency-protected deposits, Turkey’s balance sheet improved by an estimated $260–265 billion.

Confidence in the Turkish lira has strengthened accordingly, with lira deposits now exceeding 60% of total deposits. This shift has contributed to a sharp decline in Turkey’s risk premium, which dropped from 700 basis points to 216, the lowest level since May 2018.

The benefits are tangible. Borrowing costs have fallen sharply, with the yield on Turkey’s five-year dollar-denominated bonds declining from 11.3% in May 2023 to around 5.5% today. External debt rollover ratios have also surged, reaching 151% for the real sector and 186% for banks on a 2.5-year average.

Growth, Employment, and Policy Outlook

To address speculative capital flows, the Central Bank has tightened reserve requirements on carry trade activities, increased ratios on foreign funding sources, and imposed a 17.5% withholding tax on gross returns. These measures aim to protect financial stability without undermining legitimate investment.

Despite a period of moderate growth, Turkey outperformed its trading partners, expanding by around 3.5% while average growth among key partners, especially the EU, stood at 2.2%. Looking ahead, Şimşek expressed confidence that disinflation will pave the way for stronger, sustainable growth.

During the Medium-Term Program (OVP) period, the government expects to create 2.5 million new jobs, underpinned by firm fiscal discipline and structural reforms.