Turkey Raises Tax Rates in Effort to Tackle Budget Deficit and Inflation
Turkey has announced an increase in value-added tax (VAT) rates as well as taxes on consumer loans in an effort to address its growing budget deficit and combat high inflation. The VAT rate on goods and services has been raised from 18% to 20%, while the tax on basic goods, including toilet paper and detergents, has increased from 8% to 10%. These changes, effective immediately, are expected to raise Turkey’s budget revenues by approximately 2%.
Additionally, the government has increased the Bank Insurance and Transaction Tax applied to consumer loans from 10% to 15%. This move aims to generate more revenue and reduce the budget deficit, which reached 263.6 billion lira ($10.21 billion) in the first five months of this year. The deficit was significantly impacted by increased spending ahead of May elections and the devastating earthquakes in southern Turkey in February.
To further strengthen fiscal discipline, spending cuts are also being planned alongside the tax increases. The government aims to achieve a serious budget recovery and address the economic challenges facing the country. Oyak Investment estimates that the tax hikes could raise Turkey’s budget revenues by around 2%.
However, these measures are expected to contribute to a rebound in inflation. Annual inflation dropped below 40% in June but is anticipated to increase in the coming months due to minimum wage and salary rises, as well as the fiscal measures implemented by the government. QNB Finansbank predicts that the new tax measures could raise overall inflation by 1 to 1.2 percentage points.
In an effort to control inflation, the central bank recently increased interest rates and pledged to tighten policy further. This represents a significant shift in economic strategy by President Tayyip Erdogan, who was re-elected for a five-year term in May. The increased VAT rate is expected to boost state revenues by approximately 30 billion lira, according to economists.
The tax hikes come after the introduction of a draft law in parliament aimed at raising the corporate tax from 20% to 25%. The additional revenue will be used to fund earthquake-related rebuilding efforts following the devastating earthquakes in southern Turkey earlier this year. The reconstruction is estimated to cost more than $100 billion.
In a separate move, Turkey has exempted companies listed on the Istanbul bourse from withholding tax on dividend payments for their own shares. This move aims to support these companies and encourage investment in the stock market.
Overall, these tax rate increases and other fiscal measures are part of Turkey’s efforts to address its budget deficit, reduce inflation, and support economic recovery. By implementing spending cuts and generating additional revenue, the government aims to achieve fiscal discipline and navigate the economic challenges facing the country.
