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Budget Deficit: TEPAV Warns Recovery Lacks Foundation

tr-economy

The Economic Policy Research Foundation of Türkiye (TEPAV) has released its first “Public Finance Evaluation Note,” offering a critical perspective on the recent improvement in the central government budget. While headline figures show a narrowing of the deficit, the report argues that the recovery is largely driven by temporary factors and that structural vulnerabilities remain.

Budget Deficit Shrinks Amid Temporary Boosts

During the first quarter of 2026, the central government budget deficit fell significantly, from 711 billion TL to 420 billion TL, compared with the same period in the previous year. Furthermore, the primary balance (non-interest balance) yielded a surplus of 208 billion TL.

However, TEPAV attributes this positive shift to two specific administrative maneuvers rather than structural reform:

  • Front-loaded Revenue: Corporate tax collections were moved forward, artificially inflating early-year revenue.

  • Reduced Investment: Capital expenditures (investment spending) declined compared to last year, narrowing the deficit by cutting back on growth-oriented spending.

Structural Risks and Debt Vulnerability

The report highlights that the composition of budget spending has not evolved toward more efficient outcomes. Personnel costs and current transfers continue to grow at rates exceeding inflation, maintaining their heavy weight in the budget.

Fiscal Indicator Status as of March 2026 Risk Level
Central Government Debt Stock 14.4 Trillion TL High
Debt Composition Only 1/3 is TL-denominated & Fixed-rate Critical
Fiscal Transparency Hidden liabilities (TVF, PPP projects, KİTs) Medium-High

TEPAV warns that the debt portfolio is highly sensitive to exchange rate fluctuations, interest rate spikes, and inflation shocks because a vast majority of the debt is not fixed-rate TL.

The Path to Fiscal Stability

The evaluation concludes that the current fiscal stance provides limited support to disinflation efforts. To achieve a genuinely sustainable fiscal path, TEPAV recommends shifting focus from merely cutting expenditures to strategically reallocating resources:

  1. Productive Allocation: Redirect resources away from inefficient consumption and toward productive, non-inflationary areas.

  2. Tax Reform: Expand the tax base and reduce heavy reliance on indirect taxes, while strengthening efforts to combat the informal economy.

  3. Transparency: Implement comprehensive reporting for off-budget liabilities, including Sovereign Wealth Fund (TVF) obligations and Public-Private Partnership (PPP) projects.

  4. Rules-Based Framework: Establish a rule-based fiscal monitoring system that works in harmony with the Central Bank’s inflation targets.

 

 

 

Source: karar

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