How vulnerable is the fiscal posture in Turkey?

Cansın Kemal CAN; Cansın Kemal CAN

doi:10.3934/GF.2021016

Green Finance

2021, Volume 3, Issue 3: 319-336. doi: 10.3934/GF.2021016

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Research article

How vulnerable is the fiscal posture in Turkey?

Cansın Kemal CAN ^,

Department of Public Finance, Istanbul Medeniyet University, Göztepe, Kadıköy, Turkey

Received: 24 June 2021 Accepted: 26 August 2021 Published: 31 August 2021
JEL Codes: E62, G01, H12, H3, H6

This study gauges the degree of fiscal vulnerability in Turkey by calculating the debt stabilising primary balance level and evaluates how this variable measures up against the actual primary balance levels for the 1978–2019 period. Based on this comparison, we build up a fiscal fragility index using the methodology described in Stoian (2012). In addition, the Toda-Yamamoto causality test is carried out to detect the direction of causality among these two variables. The index-based analysis reveals that the fiscal performance of Turkey was chiefly satisfactory for the estimation period. Also, the Toda-Yamamoto causality test results imply a unidirectional causality from the required primary balance to real primary balance, suggesting that the government uses the primary balance to stabilise fiscal imbalances, which is an affirmative effort by the government to restore fiscal sustainability. Nevertheless, notwithstanding the implementation of corrective fiscal actions to preserve stability, the index value is steadily moving up in recent years, indicating a mounting fiscal vulnerability risk. Back-loading fiscal adjustments involving spending cuts, full-fledged tax reform, proper scrutiny of public expenses, etc., are among the prominent policy options available to the government to alter the ongoing unfavourable trend in the fiscal vulnerability index.
- fiscal sustainability,
- fiscal fragility index,
- Toda-Yamamoto Test
Citation: Cansın Kemal CAN. How vulnerable is the fiscal posture in Turkey?[J]. Green Finance, 2021, 3(3): 319-336. doi: 10.3934/GF.2021016

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Abstract

This study gauges the degree of fiscal vulnerability in Turkey by calculating the debt stabilising primary balance level and evaluates how this variable measures up against the actual primary balance levels for the 1978–2019 period. Based on this comparison, we build up a fiscal fragility index using the methodology described in Stoian (2012). In addition, the Toda-Yamamoto causality test is carried out to detect the direction of causality among these two variables. The index-based analysis reveals that the fiscal performance of Turkey was chiefly satisfactory for the estimation period. Also, the Toda-Yamamoto causality test results imply a unidirectional causality from the required primary balance to real primary balance, suggesting that the government uses the primary balance to stabilise fiscal imbalances, which is an affirmative effort by the government to restore fiscal sustainability. Nevertheless, notwithstanding the implementation of corrective fiscal actions to preserve stability, the index value is steadily moving up in recent years, indicating a mounting fiscal vulnerability risk. Back-loading fiscal adjustments involving spending cuts, full-fledged tax reform, proper scrutiny of public expenses, etc., are among the prominent policy options available to the government to alter the ongoing unfavourable trend in the fiscal vulnerability index.

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