Turkey's Economy: Fiscal Policy

During the 1990s, the government of Turkey set a very lax fiscal policy on its economy to allow the latter to grow. They adopted an expansionary fiscal policy to stimulate the consumer spending and the investments by decreasing taxation.

By the early 2000, the government realized that a more stringent fiscal policy was needed. Thus, they agreed on establishing a monetary policy that would stabilize the prices, which had been fluctuating severely for the previous years. In other words, the inflation rates increased to a level where the government had to intervene and shift the AD curve to the left. Moreover, they also used a more rigid fiscal policy to provide sustainable public finance. However, this resulted in an economic recession: the real GDP growth rate reached its minimum levels at -5.7% in 2001.

The government therefore decided to achieve fiscal consolidation, which is a set of policies that reduce government deficit and accumulation of debt. To do this, the nation applied implicit fiscal rules to its economy: this way, the government spending decreased and the taxation increased; therefore, the government budget was restored.