Güldem Atabay: Simsek’s disappointing Austerity Package and the problem of public policy building capacity

Nearly a year has elapsed since Mehmet Şimşek assumed office as Finance Minister. Throughout this period, hopes for fiscal discipline were consistently deferred, often attributed to the March 2024 local elections. Now, with the completion of the crucial pillars of monetary tightening and the conclusion of local elections, attention turns to the pressing need for concrete fiscal discipline measures.

Yet, the available January-April cash budget data offers no evidence of fiscal restraint. While inflation is expected to dip to around 50 percent from 75 percent in May by the end of summer, primarily due to base effects, sustaining disinflation beyond this hinges on the specifics of fiscal discipline steps. The focus now shifts to the direction, magnitude, and timeline of fiscal policy in supporting the fight against inflation alongside monetary policy.

However, the efforts of the Şimşek-Yılmaz duo over the past 10 months reveal that the austerity plan they’ve been crafting falls short of expectations. The Austerity Package, framed as a gesture of goodwill, lacks substance, merely touching upon symbolically significant issues such as reducing excessive public vehicle purchases and addressing multiple top level public worker salaries. In its current iteration, it seems unlikely to meaningfully alleviate inflationary pressures.

Beyond being labeled as “better than nothing,” the package appears insufficient to address the profound damage, particularly the rampant inflation, inflicted by economic policies pursued between 2021-2023. The absence of size targets for austerity measures, such as investment restrictions and hiring freezes, leaves crucial questions unanswered. Key metrics, including the portion of GDP affected by expenditure measures and the impact on the budget deficit, remain undisclosed, hindering public assessment of performance.

While no further tax hikes are on the agenda, the absence of revenue-enhancing measures through tax system reforms is glaring. Austerity measures lacking numerical targets fail to promise periodic public reporting, suggesting minimal, if any, savings from targeted actions. It appears geared more towards assuaging voter discontent than combatting high inflation.

The plan lacks a comprehensive approach, lacking a focused reform program with a clear timetable, savings strategies for Public-Private Partnerships (PPPs), the reevaluation or cancellation of tax exemptions, and more effective measures like tax reform—all without specified numerical targets.

The government’s Medium-Term Plan (MTP) lacks the depth of a reform or economic program, much like the Austerity Package announcement fails to offer a comprehensive and credible fiscal discipline strategy.

Presented as a mere gesture of goodwill, at best, the announced plan represents only an initial stride. Without prompt and efficient attainment of fiscal discipline within the budget, and should the process unfold gradually with these feeble measures, prospects for successfully curbing inflation and shrinking the escalating budget deficit appear bleak.

To instill confidence in the effectiveness of spending cuts, austerity measures must encompass meticulous revisions in at least four essential areas:

  1. Enhancing transparency entails fundamental revisions to public procurement laws, minimizing exceptions and exemptions utilized for partisan interests.
  2. Revamping the public investment program involves prioritizing efficiency-driven projects over idle ventures, ensuring transparent planning to secure future gains.
  3. Reassessing Public-Private Partnership (PPP) initiatives, particularly those with guaranteed foreign currency payments, should lead to substantial savings, drawing parallels with the extra-budgetary fund efforts seen in the 2001 post-crisis stabilization program.
  4. Moreover, public performance evaluations, including numerical and proportional targets, should be readily accessible.

However, the austerity package, a collaborative effort between the Ministry of Finance and the Presidential Office, falls short in dismantling the systemic factors often triggering economic crises in Turkey.

The significant deficiencies within the Austerity Package are also crucial indicators of the escalating decline of public institutions under the presidential system. The dismantling of institutions like the State Planning Organization and the neutralization of the Court of Accounts have resulted in a depletion of expertise. This situation elucidates why measures beyond monetary policy cannot be implemented to alleviate Turkey’s current economic instability, despite its considerable resources.

If Şimşek cannot enhance the current minimal austerity plan into a comprehensive restructuring of the state’s economic operations, the anticipated impacts of implementing tighter monetary policies will be squandered. The battle against the substantial inflation deliberately induced by the AKP between 2021 and 2023 will result in a prolonged and intensified burden on significant portions of the populace, particularly those reliant on fixed incomes, thereby exacerbating its political ramifications.