Fiscal space: An empirical study on Turkey

In this study, Turkey's fiscal space is estimated by using Ostry et al. (2010) approach. It is aimed to contribute to literature by estimating fiscal space of a developing country for the first time with this approach. At first, it is estimated Turkey's primary balance reaction function by using annual data between 1986-2017. Our findings show that the response of the primary balance to lagged debt is gradually slowing down as the debt stock increases correspondingly fiscal fatigue behavior. Secondly, interest rate – growth rate differential is estimated by using long term government bond interest rates and growth rates in the last decade. Differential is negative according to the findings. Debt limit is determined by combining the primary balance reaction function and the interest rate – growth rate differential. Thereafter, it is reached to Turkey's fiscal space subtracting current debt (in percent of GDP) from the debt limit. Accordingly, when all risks are ignored, Turkey's fiscal space is approximately 72% of GDP. The main reason of this relatively high ratio are realizing primary surpluses in reaction to fiscal discipline and providing high growth rates which reduce debt/GDP ratio for many years. But, governments in Turkey should pay attention to contingent liabilities about treasury guarantees given in the direction of the PPP investment model and social security deficits. Because these factors negatively affect the fiscal space. In this respect, reducing the risk of exploitation of the fiscal space requires preserving continuity of high primary balance and some structural reforms, mainly related to the current account deficit.