The role of fiscal rules in ensuring fiscal dicipline: The case of Turkey, 2000-2008

In the last decade, many OECD countries have experienced with fiscal rules in order to help restore or safeguard fiscal sustainability. After experiencing a very severe economic and political crisis in 2000, Turkey also embraced far-reaching institutional-structural reforms and multi-yearly spending ceilings combined with a primary surplus target, aimed at continuing to reduce the public debt ratio. Since 2002, fiscal policy -hitherto a key source of macroeconomic volatility- has become the cornerstone of Turkey?s macroeconomic program. High primary surplus target have led to sharply lower debt and real interest rates and strong private-sector driven growth. After the mortgage crisis, however, tensions arose and growth slowed down as a result of loss of competitiveness in large areas of economy, the deterioration of international conditions, and a weakening of confidence domestically. More recently, Turkey, faces several vulnerabilities that need to be carefully managed to avoid the boom-bust cycles of the past. In Turkey, public debt ratios are stil relatively high, constraining implementation of countercylical policy and bidding up interest rate. Long- term trends in the current account hinge, in turn, on growth prospects. Another macroeconomic challenge is the recent setback in the disinflation process. In this context, tight fiscal policy has been the cornerstone of the macroeconomic strategy and a well-designed fiscal rule could serve as an anchor amidst competing mediumterm fiscal objectives. Either an expenditure rule or a (balanced) budget rule would support debt reduction. An expenditure rule combined with a debt target would, hovewer, be more conducive to expenditure restraint and, thus, to creating fiscal space for tax reforms.This study is divided into three chapters. Chapter I looks into the definition, main features and theoretical basis of fiscal discipline in Turkey. Chapter II examines the theoretical basis of the role of fiscal rules in ensuring fiscal disciplines. After a brief literature review, it also provides a review of the results of fiscal policy rules implementation in EU and OECD. The last chapter reviews the fiscal policy and fiscal rules in Turkey and concludes with policy prescriptions.