Turkey: Budget deficit spikes by 3.7 times y/y to TRY 150.7bn in January
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The central government budget posted a deficit of TRY 150.7bn in January, the Finance Ministry reported. The budget deficit spiked by 3.7 times y/y, compared to TRY 32.2bn in the same month of 2023. Interest payments boosted the annual increase in the budget deficit. Otherwise, the expansion of the primary budget deficit was less pronounced to TRY 29.6bn in January from TRY 10.9bn a year earlier. Interest expenditures jumped by 4.7 times y/y, reflecting high increases in both domestic and external payments. Overall budget expenditures rose by 139.0% y/y also with the contribution of a 115.7% y/y hike in primary spending.
Non-discretionary spending appeared to be the main factor behind the primary spending jump, given strong pay hikes to civil servants and pensioners. The government's personnel spending rose by 152.1% y/y and social security contributions over public employment - by 96.9% y/y. Retirement pension hikes filtered in current transfers, which rose by 94.5% y/y. The other important factors behind the rise in current transfers included a dramatic rise in agricultural subsidies, and less pronounced increases in revenue share payments to local governments and transfers to households. Government lending jumped y/y mostly on TRY 20bn lent to the Turkish Grain Board (TMO). Capital expenditures rose by 82.7% y/y, while capital transfers recorded a dramatic increase. Capital transfers, however, had a very limited share in the monthly total of budget expenditures. We also note that the primary spending growth in January was notably lower than the December print, but this does not necessarily mean increased caution in fiscal policy because the government's spending pattern is skewed towards the end of the year.
Budget revenues expanded by 113.5% y/y in January on the back of a 104.6% y/y increase in tax revenues. The tax revenue growth slowed down from 108.3% y/y in December despite several tax hikes at the beginning of the year, including inflation-indexed hikes in the special consumption tax (OTV) on fuels and alcoholic beverages, OTV hikes for tobacco products, as well as the annual revaluation of some other lump-sum taxes, administrative fees and fines. The slowdown in tax revenue growth in January may signal weaker economic activity, in our view, especially with respect to private consumption. Revenues from major indirect taxes such as the domestic VAT, the VAT on imports and the OTV increased respectively by 164.6% y/y, 118.2% y/y and 73.8% y/y. Revenue growth moderated from the previous month for all these taxes. Income tax revenues, however, accelerated to 107.4% y/y growth.
Non-tax revenue items contributed to the annual increase in total budget revenues. Income from interest, shares and fines made the highest contribution as they almost tripled y/y mainly because jumping interest revenues. Budgetary income under the item of grants, aids and special revenues recorded an extraordinarily high increase y/y due to unspecified special revenues. Property income rose by 112.1% y/y with the help of revenues from state banks and other SOEs.
The budget plan targeted a central government deficit of TRY 2,651.9bn in 2024, accounting for 6.4% of the government's forecast GDP. The plan allocated TRY 1,028.3bn of budget spending to recovery and reconstruction works in the Feb 2023 earthquake region. We note that some of the pay hikes have yet to filter in the budget in January because the parliament's decision on additional hikes in pensions to some retiree groups went into effect in early February. Meanwhile, Labour Minister Vedat Isikhan signalled recently improvement in bi-annual bonuses to pensioners with potential extra burden on the budget. In a broader sense, we expect the budget execution to remain unfavourable on the way to the municipal elections on Mar 31. A tighter fiscal stance is likely afterwards, in our view, through spending caution, tax and administrative price hikes.