Turkey: Budget posts TRY 842.5bn deficit in December, annual deficit at TRY 1,375bn

• Primary spending jumps y/y in Dec seemingly as govt wires delayed capital transfers
• Tax revenues rise by 108.3% y/y, growth slows down on direct tax components
• 2023 budget deficit comes at double of original target, but undershoots updated forecast
• General election period, Feb quakes burden budget last year against strong private consumption, mid-year tax hikes

The central government budget posted a deficit of TRY 842.5bn in December, the Ministry of Treasury and Finance reported. The deficit jumped by almost six times from TRY 122.2bn in the same month of the previous year as expenditures nearly quadrupled y/y. Primary spending jumped by 2.8 times y/y and its growth accelerated sharply from November and the Jan-Nov average, mainly on account of a dramatic increase in capital transfers. The government wired TRY 639.4bn as capital transfers in December, accounting for 75% of the annual spending under the item. Detailed data by the ministry grouped TRY 622.7bn of capital transfers in the month as unspecified. We think some part of the substantial amount of transfers may be related with recovery and reconstruction efforts in the February quake zone. It is also possible that the government delayed some of the budgeted capital transfers to December in a wait-and-see stance for the annual budget performance.

The high primary spending growth in December was also boosted by current transfers, which increased by 167.4% y/y. Under the current transfers, duty loss payments to state-owned enterprises jumped by 6.2 times y/y, while healthcare, pension and social aid expenditures by the Treasury also rose by double-digit rates, probably with the contribution of bonus payments to retirees and end-year payments to hospital, in our view. Goods and services purchases by the government rose by relatively modest 54.4% y/y. Strong pay hikes in the public sector continued to burden the budget with personnel spending almost doubling y/y in the month. Interest expenditures were up by 132.0% y/y due more to payments to the domestic market.

Budget revenues increased by 117.4% y/y in December. Tax revenues rose by 108.3% y/y, slowing down from 114.3% y/y in November. The moderation in tax revenue growth stemmed largely from direct taxes as direct tax revenues were boosted by additional receipts from the corporate and motor vehicle taxes in November. The indirect tax performance remained strong in the month, which implies that household spending maintained strength, in our view, albeit losing some pace in Q4. Specifically, revenues from the domestic VAT and the special consumption tax jumped respectively by 225.0% y/y and 122.3% y/y. The growth of income from the VAT on imports eased mildly to 79.6% y/y.

The government budget posted a deficit of TRY 1,375.0bn in 2023, compared to a TRY 142.7bn deficit in 2022. The primary budget likewise deteriorated sharply y/y to a deficit of TRY 700.4bn last year. The headline budget deficit was more than double the budget plan target of TRY 659.4bn, but it undershot the government's updated forecast of TRY 1,663bn. Total budget expenditures rose by 123.8% last year due both to interest and non-interest expenses. Post-quake spending and the pre-election spending spree ahead of the critical general elections in May contributed to a 124.6% increase in primary spending in 2023 in addition to strong pay hikes to public sector employees and pensioners. Among the pre-election fiscal expansion measures, we think the early retirement scheme had the biggest negative effect on the budget. We also note that the Treasury's transfer of responsibility to compensate FX-protected deposits for exchange losses to the central bank in July prevented a steeper increase in primary spending.

Budget revenues rose by 86.1% in 2023 with the backing of a 91.2% increase in tax revenues. We think that robust private consumption especially in H1, high inflation, and fiscal consolidation measures delivered after the May elections to finance post-quake spending needs were the main drivers of tax revenue growth last year. In this context, we note that the government raised the general VAT and corporate tax rates in mid-2023, as well as imposed one-off additional taxes on motor vehicle owners and corporate tax payers.