Two challenges of Şimşek: tax reform and public sector savings

The local elections are over. Not as the Turkish President Tayyip Erdoğan intended, but as opposition CHP leader Özgür Özel wanted. Yet Erdoğan still has an economic crisis ahead of him. The way out of this crisis is the Medium Term Program (MTP) he entrusted to the Minister of Treasury and Finance Mehmet Şimşek. The election is over, but the MTP must continue. In addition to attracting outside investors, Simsek faces two challenges. One is tax reform and the other is public sector austerity.
At the Uludağ Economy Summit, Şimşek also revealed an approximate date for public sector savings. It coincides with the date he suggested for the decrease in inflation, i.e. from June.

Talking about public sector savings

Şimşek was in the US between April 17-22. He attended meetings with World Bank and IMF, and G20 meetings and met with many foreign investors. Upon his return, he briefed President Erdoğan in detail. Immediately afterward, news emerged that the circular on austerity or savings in the public sector would be strictly implemented, starting with office vehicles. The public sector has 115,904 vehicles in use. There are vehicles for the public benefit like the ones in the fields of health, forestry, police force, etc. We see 13,071 of these seen by the public as unnecessary spending, pageantry, and arrogance; the Ample number of vehicles provided by the government for ministers, advisors, and other government employees.
I wonder if -at least some of those official jets at the disposal of the Presidency will also be saved?
Or public buildings? In the last 10-15 years, Ankara has been filled with mini skyscrapers and luxury buildings, most of which were built by crony contractors and rented to the state for the use of government agencies. For example, will the palatial district municipal buildings and wasteful debts exposed by municipalities that switched to the CHP be held to account?
Şimşek’s job is difficult because there is fierce resistance from political and bureaucratic officeholders who do not want to give up their privileges. But if Şimşek can pass this test, at least citizens will realize that the bitter medicine is not only for them.

“No tax amnesty”

The other challenge for Şimşek is tax reform.
Taxes are the most legitimate way to increase public revenues. However, it is known that about 60 percent of the taxes collected are indirect taxes such as Value Added Tax (VAT) and Special Consumer Tax (SCT), which are based on consumption.
The natural consequence of the disinflation policy is already expected as a decline in domestic demand, growth, and profit margins, an increase in company sales and closures, and a “cooling” of the economy. How will the bitter medicine be distributed fairly in an already troubled 2024?
“Reducing inflation will already ensure fairness,” says a senior official I spoke to. True, those measures are a cure for tomorrow, but not for today. He reminds us that VAT will be kept at 1 percent on food consumption, which affects the low-income group the most. Şimşek had previously said that income tax would not be increased either.
So, what is meant by the tax reform and how will income be increased?
“There is no tax amnesty,” says the same official as soon as I bring up the subject; “It is not on our agenda either on a company or corporate basis.”Restructuring tax debts will only be possible if the taxpayer fails to pay the tax. Şimşek should take precautions against those in the business world, as well as in the upper levels of politics and bureaucracy, who will try to get around this “exception”.

Şimsek has to convince the AKP

It is understood that tax regulations will proceed in two directions.
1- Fight against tax evasion and dodging. This requires stricter tax audits. My sources describe this as “measures to strengthen the hand of the administration”. This includes the practices of tax auditors, some of which have been challenged in court. Both the auditors and the institutions supervising the audits need to be strengthened.
2- Revision of tax exemptions. The exemptions introduced to the tax system over the years will be reviewed in line with the MTP targets. Are the exemptions granted to a certain area for economic and social benefit still valid? Or have they started to impose an extra burden on the budget? “Exceptions, exemptions, and discount rates” will be redefined.
There are some of these actions that require legal regulation. After the Ministry of Treasury and Finance, under Şimşek’s leadership, prepares what needs to be done, it will be submitted to the AK Party Parliamentary Group for approval – before being submitted to President Erdoğan for approval.

Promise for 4 election-free years?

Şimşek’s main challenge, both in terms of tax audits and the revision of exemptions and exemptions, may be within the AKP Group. It is already foreseeable that the lobbies will focus on the AKP MPs in line with their interests. It is already known that the group is already trying to blame the election defeat on Şimşek’s resistance to the issue of pensions rather than themselves as if all decisions do not originate from Erdoğan.
Şimşek is not responsible for the economic crisis; Erdoğan always says “I am in charge of the economy”. But Şimşek has undertaken the most unpleasant and difficult job of finding an exit from the crisis.
On the other hand, while both Erdoğan and Şimşek say that there will be no elections until 2028, Erdoğan seems to be trying to get the CHP’s support by putting the constitutional amendment on the agenda. If the constitutional amendment reaches the stage requiring a referendum, it will also be considered an election; everyone knows this.
However, the people are not demanding a constitutional amendment, they are demanding a way out of the economic crisis.
Perhaps Erdoğan wants to use the constitutional debate as a smokescreen for tough economic measures in the wake of the March 31st election defeat. Don’t you think so?