VZCZCXRO7481
PP RUEHDA
DE RUEHAK #6494/01 3280625
ZNR UUUUU ZZH
P 240625Z NOV 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 0050
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 1677
RUEHDA/AMCONSUL ADANA 1366
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 006494 
 
SIPDIS 
 
TREASURY FOR JROSE AND CPLANTIER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV TU
SUBJECT:  Fiscal Discipline in an Election Year 
 
¶1. (SBU) Summary: Turkey's 2007 budget calls for total expenditures 
of $137 billion; 32% of projected 2007 GDP and 18% higher than in 
¶2006. Despite the sharp election-year  spending increase, the 
Government will maintain Turkey's austere 6.5% of GDP primary 
surplus target, if necessary by means of increased taxes. The 
above-inflation increase in spending makes it that much harder to 
achieve the inflation target, putting additional pressure on the 
Central Bank to keep monetary policy tight.  Questions remain about 
how the GOT will achieve a 20% increase in tax revenues and about 
social security and state enterprise losses.  The big picture, 
however, is that the Government has opted to stick with a tight 
primary surplus target in an election year.  End Summary. 
 
--------------------------------------------- --------- 
Primary Surplus Target Retained Despite Spending Surge 
--------------------------------------------- --------- 
 
¶2. (SBU) The Government announced the broad lines of the budget late 
on October 17.  At YTL 204.9 billion ($136.6 billion), total 
expenditure came out at 32% of the 2007 GNP target of $404 billion, 
a nominal increase of 18% over 2006 spending.  The budget projects 
revenues at YTL 188.2 billion ($125.5 billion) and a budget deficit 
of YTL 16.7 billion ($11.1 billion); 2.7% of the 2007 GNP target of 
$404.0 billion. As they did last year, Government ministers make 
much of the fact that this budget deficit is within the Eurozone's 
Mastricht criteria limit of 3%.  Given that Turkey's budget deficit 
used to be well over 10%, the modest size of the deficit is a 
significant achievement.  Tax revenues are set at YTL 158.2 billion 
and non-tax revenues, which also include privatization revenues, are 
set at YTL 29 billion. The primary surplus is targeted at YTL 36.2 
billion.  Despite the higher spending, the budget retains Turkey's 
world-beating 6.5% primary surplus target, continuing the 
centerpiece of its macroeconomic strategy. 
 
------------ 
IMF Concerns 
------------ 
 
¶3. (SBU) Earlier reports suggested that the total budget expenditure 
would be YTL 207 billion ($138 billion) but the IMF mission 
apparently pressed the Government to reduce the deficit by an extra 
6 billion YTL: roughly YTL 2 billion from the expenditure side and 4 
billion YTL from the revenue side. The IMF reacted to the 
Government's plan to increase spending by 20% from YTL 174.3 billion 
($120 billion) in the 2006 budget. The IMF's push for a tighter 
budget stemmed from concerns about increasing health spending, 
above-inflation civil servant wage hikes, and the likelihood that 
2007 interest rates will be higher than previously thought.  Despite 
the squeezing from the IMF, non-interest expenditures increased 19%, 
far above the rate of increase projected for nominal GDP. 
 
------------------------ 
Ambitious Revenue Target 
------------------------ 
 
¶4. (SBU) Hitting the primary surplus target in 2007 might be 
difficult given the ambitious projection for tax collections - a 20% 
increase over 2006. A portion of the increase is expected to come 
from more effective tax collections following the restructuring of 
the Tax Administration.   For the first time, the IMF tax experts 
had enough confidence in the changes at the Tax Administration to 
build increased tax collection rates into the budget projections. 
Improved collections are unlikely to be sufficient, however, and 
many analysts and tax experts believe higher taxes will be required. 
 Speculation centers on an increase in tobacco excise taxes, despite 
Finance Minister Unakitan's earlier denials that there would be 
further tax hikes. 
 
--------------------------------------------- --- 
Questions about Social Security, Health and SEEs 
--------------------------------------------- --- 
 
¶5. (SBU) Other unresolved questions relate to the social security 
system and state enterprises.  The reason social security transfers 
did not surpass the 2006 Budget limit was because of a one-time 
social security (SS) debt restructuring made in 2006, which brought 
in revenues from one-off, up-front payments. In 2007, the GOT will 
have to increase the SS transfers to YTL 32 billion, and may need to 
compensate for slippage from 2006 in public health expenditures. 
Additionally, there are likely to be budgetary costs from State 
Economic Enterprises (SEE), particularly in the electricity and gas 
sectors. The GOT will eventually have to pass on incurred losses 
through price hikes to consumers, though it may try to postpone as 
many of these increases as possible until after the elections. 
 
 
 
ANKARA 00006494  002 OF 002 
 
 
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Wage Hikes Undermine Disinflation Efforts 
----------------------------------------- 
 
¶6. (SBU) Taking into account the Government's above-inflation wage 
settlement with the civil service unions, personnel costs are 
projected to jump 21% in nominal terms.  The generous wage 
settlement will make it that much harder to achieve the inflation 
target, putting more of the burden on monetary policy than in 
previous years.  Analysts have concluded that because of the wage 
increases, the Central Bank will adopt a more cautious stance, 
waiting longer before resuming interest rate cuts. 
 
¶7. (SBU) Interest expenditures constitute 25% of the total 
expenditures of YTL 204.9 billion, i.e. YTL 52.9 billion or a 14% 
increase in nominal terms.  Transfers, especially to the social 
security system and farmers, are also up sharply.  Along with its 
budget presentation, the GOT also announced that per capita GDP 
would reach $5,472, the GDP growth rate target is 5% and the 
inflation target is 4% for next year. Export and Imports are 
foreseen to reach $90 billion and $145 billion respectively. 
 
---------------------------- 
Cutback in Public Investment 
---------------------------- 
 
¶8. (SBU) In order to achieve the primary surplus target while 
accommodating higher wage and social security costs, the Government 
had to tighten its belt on investment spending, despite the election 
year and despite the draconian investment budgets of the immediate 
post-crisis period in 2002 and 2003.  At YTL 12 billion, the 2007 
investment budget is slightly lower than the 2006 investment budget, 
even in nominal terms.  Press reports suggest the transportation 
component will be hard hit, with reports of a 27% decline in real 
terms in transportation spending.  The Government will have to slow 
down progress on some of its signature, high-profile transportation 
infrastructure projects, such as the Istanbul-Ankara high speed 
train project, or the large number of highway projects.  Press 
reports suggest the transportation component will be hardest hit, 
with reports of a 27% decline in real terms in transportation 
spending. 
 
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Comment 
------- 
 
¶9. (SBU) In a recent meeting, Treasury Under Secretary Ibrahim 
Canakci had warned us to expect a tight budget year.  The budget 
numbers, as well as the last-minute IMF-induced tightening show the 
tension between the Government's desire to deliver benefits to 
voters in an election year and its desire to show investors it is 
sticking with its fiscally-austere economic program.  In the end, 
however, the Government opted to retain the 6.5% target, even if it 
meant cutting investment spending and possibly raising electricity 
and gas prices in an election year.  When forced to choose between 
populist electioneering and retaining the confidence of the IMF and 
investors, the Government chose the latter. 
 
WILSON