By Judith Ugwumadu | 2 June 2014

Turkey’s success in creating space for rapid economic progress and improved social outcomes has prompted the World Bank to urge the nation to shift to a more sustainable growth model.

A report launched in the Turkish capital Ankara today documents how fiscal policy shaped the way Turkey’s economy operated as a whole. But it argues that fiscal policy now needs to adjust to support the increase in national savings, reduce the reliance on consumption-based taxes, and lay the foundation for sustained growth in the coming period.

The consolidation of Turkey’s public finances helped the country attract greater international capital flows, reinforcing the decline in interest rates and fuelling private sector growth, the World Bank’s Turkey in transition: time for a fiscal policy pivot? report said.

In addition, rising government revenues and the ‘dramatic’ reduction in interest payments created room to increase social expenditure by about 5 percentage points of gross domestic product, with health and pensions benefiting the most, the bank noted.

Its report concludes that Turkey now faces a series of fiscal policy trade offs, suggesting that the Turkish government shift spending towards public investment and restrain increases in current spending to establish a growth model less dependent on debt-financed consumption.

The bank also noted that shifting from consumption-based taxes to capital taxation would enable Turkey to grow faster with higher domestic savings and continued fiscal prudence.

Turkey also needs to identify alternative sources of revenues and should consider broadening its tax base and implementing structural measures to boost job creation, the bank said.