Fiscal Measures

To help achieve our public sector primary surplus target of 6.5 percent of GNP in 2002, improve the cost-effectiveness of public administration, and reduce the weight of public expenditures on the real economy, we have specified TL 5.7 quadrillion (2 percent of GNP) in additional measures to be taken. The impact of the measures on the central government budget amounts to TL 3.1 quadrillion (about 55 percent) of the total; the remaining measures affect state economic enterprises (SEEs). For other parts of the public sector, we have specified our targets without recourse to new measures.

Central government budget (measures equivalent to 1.3 percent of GNP)

To enhance revenues, we have raised the petroleum consumption tax (PCT) by substantially more than the WPI in November. Looking forward, we will continue to index the PCT monthly for WPI inflation. We will also impose the PCT on natural gas at a specific rate of TL 12,500 per cubic meter (and index this rate to WPI subsequently); raise the special transactions tax by 50 percent and the motor vehicle tax by 75 percent (50 percent above the revaluation rate) in December 2001; and take measures to raise property tax revenues in large cities (while reducing the municipal tax share to 4.1 percent, to direct the additional resources to the budget). Together, we expect these measures to yield us TL 1.1 quadrillion (0.4 percent of GNP) in additional revenues. SEE price increases will yield an additional TL 0.5 quadrillion to the budget (0.2 percent of GNP), through Treasury shares, fund revenues and VAT.

To rationalize personnel expenditures, we will (i) reduce the replacement hiring ratio from 80 percent to 50 percent in the entire government budget except security, education, and health (total hiring, excluding transferred state bank workers, would be limited to total attrition); (ii) avoid new hiring of public sector workers (except in the military) and prevent any transfer of public workers from privatized institutions to consolidated budget agencies; (iii) restrict the applicability of the circular which states that retirement cannot be required to workers below 50, with expected wage savings in 2002 of TL 60 trillion; (iv) reduce labor costs for public sector workers in weakly performing enterprises by 10 percent; (v) require state banks to remit monthly to us funds sufficient to cover the cost of their redundant former civil servant employees, now paid by the budget (this payment would cease no later than the end of 2002); and (vi) increase rents for civil servants living in government housing. As regards civil service wage increases, our indexation methodology will remain the same as in 2001, and the upfront payment in January and July will be 10 and 5 percent respectively. Together, we expect these measures to yield us TL 0.5 quadrillion (0.2 percent of GNP) in cost savings.

To rationalize benefit expenditures and transfers to our pension funds, we will reduce regulated profit margins for medicine; tighten quality controls; limit prescriptions to amounts necessary and withhold a 10 percent co-payment; and pass by end-November the Bag-Kur reform bill, which will reorganize this institution and increase health premia for its members by 5 percent. Together, we expect these measures to yield us TL 0.5 quadrillion (0.2 percent of GNP) in cost savings. Given the impact of our retirement policy on the social security institution, the net impact of our public sector measures on benefits and pension transfers will be to achieve cost savings of TL 0.4 quadrillion (0.1 percent of GNP).

To improve the cost-effectiveness of operations and maintenance expenditures, we will immediately start the process of transferring obligations and resources from the central to the local level wherever appropriate. This process will continue and accelerate throughout 2002. We will eliminate the regions level administration; and gradually shift the workers, equipment and responsibilities of the Rural Affairs department, and of other central government departments and agencies, to the provincial administrations. Transfers to these ministries and agencies will be reduced by TL 0.3 quadrillion (efficiency gains, and additional revenues associated with revaluing properties for tax purposes by a factor of 9.5 should enable lower levels of government to cope with this burden). Together, we expect these measures to yield us TL 0.4 quadrillion (0.1 percent of GNP) in cost savings.

Finally, to help rationalize our system of agricultural and other subsidies we will eliminate all premia except those budgeted for soybean and canola (which together amount to TL 10 trillion). Also, reflecting price increases for sugar (see below), budgetary transfers to TSFAS will be reduced by TL 100 trillion. Consistent with earlier program commitments, we have eliminated all bank credit subsidies. Eliminating the premia payments and lowering transfers to TSFAS will yield us TL 0.3 quadrillion (0.1 percent of GNP) in cost savings.

State economic enterprises (SEEs) (measures equivalent to 1.1 percent of GNP)

To enhance SEE revenues, in November we raised the price of alcohol and tobacco products by 25 percent; prices at Telekom by 12 percent; and prices for sugar by 25 percent. We will undertake price increases netting us another TL 100 trillion by end-2001. During 2002, SEE prices will move in line with the WPI, or world market prices (where applicable). We will also eliminate discounts and exemptions granted by the coastal surveillance corporation, the airports, the railway, the airline, TEDAS (for induction furnaces and treatment plants), TIGEM and others. Finally, we have undertaken to reduce distribution losses in the energy sector by (i) installing and activating meters for those customers of TEDAS who currently receive electricity free of charge (this will require an amendment in the Construction Law, which we expect to be approved by end-December); and (ii) an enhanced program of on-site inspection, for which TL 27 trillion in funds have been allocated in TEDAS’ budget. We expect these measures to yield us TL 1.6 quadrillion (0.6 percent of GNP) in additional SEE revenues.

To rationalize personnel and benefit expenditures, (i) we have imposed a hiring freeze for all budget funded SEEs and limited replacement hiring to 10 percent for all others (workers transferred from the PA portfolio will be counted in this 10 percent limit); (ii) we will reduce labor costs by 10 percent by methods appropriate to each enterprise at hand; (iii) following the restriction of scope of the circular preventing retirements (see above), we will pursue wage savings of TL 300 trillion in SEEs; (iv) we have eliminated overproduction premia for workers in idle units of SEEs; and (v) we will strictly limit overtime payments by reducing hours of overtime by 20 percent for public workers (compared to 2001), and 50 percent for others. Together, we expect these measures to net us TL 0.7 quadrillion (0.2 percent of GNP) in cost savings.

To reduce non-wage operating expenses, we will instruct SEEs to (i) lower their planned general administration expenses (including reduced advertising, promotion, and association memberships) by TL 100 trillion; and (ii) reduce their stock of inventories by TL 175 trillion, by selling metal items for scrap, and by tighter controls on raw material procurement. We will also eliminate 10 loss-making railroad routes; we will reduce airline branch offices abroad, eliminate unprofitable routes, and increased THY’s reliance on travel agents; and we will close idle airports. Together, we expect these measures to yield us TL 0.3 quadrillion (0.1 percent of GNP) in cost savings.