Fiscal Rule concept

Discussion in 'Economy' started by ekrem, May 11, 2010.

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ekremVIP Member

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I will showcase on Turkish example.
The Court of Accounts (very powerfull in Turkey) will get in June excessive auditing authority over fiscal policy of every government that rules in Turkey. The law will be passed in June through Parliament.

There is 2 constants in the law:

Primary constant = Maximum budget deficit of 1% GDP
Secondary constant = 5 % economic growth

Fictional example at 5% economic growth:
GDP = 1 Trillion\$
Maximum budget deficit = 10 Billion \$

Now, if economic growth is 8 % (3% more then the secondary constant), the maximum budget deficit for next fiscal year reduces from 1% of GDP by 1/3. So it would be 0,66 % Maximum rather then 1% budget deficit.

If economic growth is 2% (3% less then secondary constant) government is allowed to increase budget deficit in next fiscal year to 2% of GDP.

Another fictional example:
Year 1: GDP = 1 Trillion\$
Year 1: Maximum budget deficit = 10 Billion \$

Year 2: GDP = 1 Trillion and | 50 | Billion \$ ( | X | = 5 % growth)
Year 2: Debt = Cumulative + 10 Billion \$
There is a difference of 40 Billion \$, that in effect betters Debt to GDP ratio, which is obne of factors for reducing costs for refinancing debts.

The secondary constant of 5% is purposedly less then the projected economic growth of Turkey. OECD predicts 7,1 % average till 2017.

http://www.hurriyetdailynews.com/n....ms-for-public-deficit-of-1-percent-2010-05-11

Last edited: May 11, 2010
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ekremVIP Member

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Maastricht criterias of EU, which barely a EU-country is fullfilling is 3% budget deficit of GDP in fiscal year.
Euro convergence criteria - Wikipedia, the free encyclopedia

But EU has no institution for auditing. Otherwise PIGS (Portugal, Ireland etcs) would follow Maastricht Criteria.

In Turkey, Court of Accounty (Sayistay) will have auditing authority.
Sayistay is constitutional institution and will nullify government budgets passed through parliament which violate the new law, which itself will be passed in June through parliament. In the link of first post you can read, that economic minister says that 2011 fiscal budget will apply to the new law.

Last edited: May 11, 2010
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