Trillion-lira budget returns to Turkey after decades, signalling possible war tax

When the Justice and Development Party (AKP) won the general election in 2002, it took over a country that had suffered from decades of economic instability, including periods of hyperinflation. Much of its credibility and election success since then can be put down to tackling that economic malaise and restoring stability.

But after nearly 20 years in power, there are signs of Turkey’s economic issues returning.

Turkey’s economy suffered a bad year in 2018, when a currency crisis knocked nearly 30 percent off the lira’s value and led to a recession. The country is yet to fully recover, and the latest budget has brought a significant sign that worse is to come.

Turkey began using million-lira banknotes after an economic crisis in 1994. Hyperinflation pushed the budget to a quadrillion liras.

The crisis that year, and another in 2001 fuelled by political instability and failing banks, twice forced Turkey to turn to the International Monetary Fund for help. AKP leader Recep Tayyip Erdoğan vowed to end Turkey’s reliance on the IMF when he took power and has repeatedly said he would not go back to the fund.

But now, 14 years after the AKP removed six zeros from the lira, Turkey is swiftly heading towards a new trillion-lira budget.

After announcing a new economic programme in September, the AKP has prepared a mid-term financial plan for the years 2020-2022 projecting that next year’s budget expenditure will reach 1.1 trillion liras.

The 434 billion liras assigned to the Treasury and Finance Ministry each year between 2020 and 2022 accounts for nearly half the budget.

The plan foresees a budgetary spending cap of 1.2 trillion liras ($200 billion) in 2021, increasing that to 1.3 trillions liras the next year.

The budget deficit will increase to an extraordinary degree with the programme, rising to 138 billion liras ($23.7 billion) in 2020, before leaping to 157 billion liras ($27 billion) in 2021, and to 160 billion liras the year after.

The projected cost of interest payments alone is nearly 139 billion liras in 2020, 160 billion liras in 2021, and 176 billion liras in 2022.

This means Turkey is heading for a period where it will need to take out more domestic and foreign credit to fund huge budget deficits.

In the next three years, nearly half of budget expenditure is going to staff salaries, interest payments and to plug gaps in social security budgets. There will be few funds left for investment and to stimulate employment.

The military operation Turkey launched in northeast Syria this month will pump up defence spending and further increase the deficit – another factor that will likely lead the government to seek out more credit.

To address the shortfall, Treasury and Finance Minister Berat Albayrak, Erdoğan’s son-in-law, has vowed to implement tax reforms and a progressive tax system.

The budget was presented to parliament on Oct. 17, and measures that will bring in the new taxation system are expected by Jan. 1.

Rises in indirect taxes, including VAT, consumption and fuel taxes are planned besides the hikes in income and corporation tax.

Higher taxes on tobacco will provide another source of revenue, Erdoğan revealed during a speech to his party this month. These will not be limited to cigarettes – large increases can be expected to rolling tobacco, hookah tobacco and cigars.

Plans are also in place to increase administrative fees for passports and other official documents. While the new economic programme foresees inflation of 8.5 percent in 2020, the increase in fees and taxes will be more than 20 percent.

Economic circles in Ankara have said the government could be planning to impose a one-off tax on citizens to pay for the Syria operation – a measure that the government used after crisis hit in 1994.

The government of the time issued short-term high interest Treasury stocks to replenish the coffers, but also imposed one-off supplementary income and corporation tax payments.

Erdoğan’s government is said to be planning a similar move to take effect in the new year.