Ali Çufadar speaks to 12punto: He points to the danger of stagflation and warns: Unemployment is just beginning

Hikmet Eren ÇELENK- 12punto.com.tr /EXCLUSIVE

It had come to the agenda that a new tax law would be enacted following a draft prepared by the Ministry of Treasury and Finance that was leaked to the press. According to the draft, it was revealed that work was being done on a system that would introduce fair taxation based on income levels. Claims that the government had taken a step back regarding the tax law draft, which lost much of its impact on the agenda in the following process, began to be voiced frequently. Economist Ali Çufadar answered our questions regarding the dangers awaiting the economy, fiscal discipline, and taxation. 

'THE BURDEN OF MONETARY POLICY MUST BE SHARED WITH BUDGET DISCIPLINE'

Sharing his comments on the fiscal discipline that has come to the agenda within the scope of economic contraction, Ali Çufadar said, "Let's talk about the background. Before the presidential elections, a very large income transfer was made to a limited segment of society. After the presidential elections, we needed to fix the economy. We raised interest rates and tightened monetary policy, but this cannot continue for a long time. If we keep interest rates high for a long time in the same way, and if we rely only on economic policy, we will severely damage the economy and it will slow down significantly. Economic growth will fall below 1 percent. We must share the burden of monetary policy with budget discipline. Loose budget discipline means higher interest rates. This situation puts the economy in a very difficult position," he said.

'TAXES SHOULD BE SPREAD TO THE TOP, NOT THE BASE'

Ali Çufadar answered our questions regarding the new tax law draft reflected in the press and the economic contraction as follows:

"The government is aware of the situation; in the coming days, we will see that the economy is slowing down much faster. We will see that the real sector will shrink due to high interest rates. The government is aware of this and says, 'Let's proceed with budget discipline and pave the way for monetary policy.' The way for budget discipline is opened in two ways; first, expenditures are cut, and in the second method, income is restricted. Cutting expenditures means paying lower salaries to retirees and civil servants. In the second method, you restrict public expenditures and prevent high-budget investments. The government started out with public expenditures because society was reacting strongly to these expenditures. However, on this path, not much of a step could be taken in terms of cutting expenditures, and there were no significant savings. That area continues with a system close to the old one. This time, the second path we mentioned was preferred, but this also caused social reaction. At this point, they need to turn to income. The first way to do this is to increase taxes. They say 'let's spread it to the base,' but it needs to be spread to the top. You tax those with high incomes and the segment that has made large profits from wealth income transfers. In the second method, you impose high price hikes on public goods. The government set out with the first method and issued a budget bill, but it largely backed down from it. As such, the government began to reflect taxation onto the base with the second method." 

'WHAT THEY ARE AWARE OF IS THEIR OBLIGATIONS'

Speaking about the economic program and targets implemented by the government, Ali Çufadar said, "The government seems serious about budget discipline. I disagree with the method; it is not very healthy. What they are aware of is their obligations. They know that if they cannot lower interest rates, they cannot ensure budget discipline. If interest rates continue to remain high in this way, the economy will slow down and unemployment will continue to rise. They aim to bring the budget deficit below 5 percent of GDP this year, and it looks like they will be successful. They will try to keep it below 5 percent next year as well. Can they do it? They have to. Budget discipline is being ensured, but there are problems in its content. The taxation methods used cause social reactions and naturally create an obstacle to ensuring stability," he stated.

'CONTRACTION AND THE RISE IN UNEMPLOYMENT ARE JUST BEGINNING'

Stating that justice in taxation has not been achieved and that more difficult days await us, Ali Çufadar said, "It is not that easy to collect taxes from those who have money. Those who have money have close relations with the government and lobbies. For example, an attempt was made to tax the stock market, and a lot of noise was made. Politics can implement these taxes, but it must withstand the reactions. Conditions seem to be forming in October. It should also start to come down in November because they have to. These interest rates need to come down. Much more difficult days will be waiting for us ahead. Contraction in industry and the rise in unemployment are just beginning. It is likely that there will be a negative decline in these indicators until the first quarter of 2025. We will go a little lower every passing month," he said.

'THEY SHOULD HAVE SHOWN THAT EVERYONE IS DOING THEIR PART'

Stating that society must bear the burden of increasingly tightening policies and that the process must be explained with all clarity, Ali Çufadar said, "I constantly keep legitimacy on the agenda. You need to explain your scenario of how we will get out of this from now on to society in a fair way and show the declaration that we are carrying out all our practices fairly. The way to do this is to say and show that we are also collecting significant taxes from the rich and the wealthy. If they had strongly enacted the first bill they drafted, they could have convinced society. They should have shown that everyone is doing their part. I think the biggest problem in society right now is the lack of trust in the fiscal stability system. The question of whether the government will follow a method such as hitting the brakes and returning to old monetary policies at a point where social pressures increase creates unrest in the markets. Politics has to carry out these difficult processes," he said.

'THERE IS NO SUCH THING AS IT CANNOT HAPPEN IN TURKEY'

Stating that the political cost of returning from current economic policies will be high, Ali Çufadar concluded his words as follows:

"If these tight policies are continued, Turkey will enter a recession. Unemployment will increase, and tradesmen and SME circles will struggle significantly. This is the good scenario we are talking about. In the bad scenario, if they give up early and say 'let's return to the old system, print money, and distribute plenty of credit again,' stagflation will begin. Growth shrinks while inflation does not fall. The market's reaction will be harsh. This path that has been entered needs to be continued one way or another. If they continue on the path by taking society along with them and convincing them in the ways we mentioned, there will be a normal recession. There will be a recession in any case. The worst-case scenario is stagflation. Local elections have adjusted politics. Society has shown that it does not want inflation and has seen that its wealth is being transferred to certain segments through inflation. Society will not accept inflation again. Politics must be seeing this. I do not see a return in a normal process. The political cost would be high. Of course, there is no such thing as 'it cannot happen in Turkey,' we are hoping that it does not happen."