The importance of primary surplus in Turkey and the effect on economic growth

Primary surplus is an important tool for budgetary discipline in developing countries such as Turkey which has high borrowing rates. Government can meet interest payments by primary surplus. As primary surplus increases, the rate of interest expenses in government expenditures decrease. This will lead to decline in interest rates. Lower interest rates will promote economic stability and will contribute to economic growth. Therefore in Turkey, providing primary surplus in the budget and reduction of public debt cost and stock has been asked to ensure debt sustainability. It is called in the literature that the implementation of tight fiscal policies for primary surplus may adversely affect economic growth. However, in Turkish economy, possibility of low cost of borrowing by primary surplus promoted high economic growth especially after year 2001. In this study, the effect of primary surplus on economic growth in Turkey investigated by using co-integration analysis. For econometric analysis Turkey's quarterly data between the years 1998-2003 were used. According to the empirical findings, there is a positive correlation between primary surplus and economic growth in the long term. As a result primary surplus promote economic growth in Turkey. KEYWORDS: Primary Surplus, Economic Growth, Co-integration Analysis, Budget Balance