Turkey raises taxes up to 20% on basic goods as deficit, inflation linger

The Turkish government raised taxes on different sectors and industries on Friday amid Turkey’s worsening budget deficit and President Recep Tayyip Erdogan’s efforts to save the economy following his reelection victory.

The value-added tax (VAT) on some goods such as cleaning products was raised from 8% to 10%. The tax on others such as home appliances was raised from 18% to 20%. Fees for various administrative services were raised by 50%. Turks who buy smartphones abroad will now have to pay approximately 20,000 Turkish liras ($766) for the registration of their phones, a more than 200% increase, according to Turkey's Official Gazette. 

Some of the taxes came into effect immediately, while others will take effect in the coming days. The hikes prompted large lines at Turkey's border with Georgia, with people scrambling to buy phones and register them before that fee comes into effect on Monday, according to Turkish media reports. 

Background: The tax increases come amid Turkey’s widening budget deficit. It ballooned to 263.6 billion Turkish lira ($10.21 billion) during the first five months of 2023, up from 124.6 billion ($4.78 billion) the previous year. The increase was due to spending ahead of Turkey’s elections in May as well as the impact of the deadly February earthquake in the country's southeast, according to Reuters

A Turkish official told the outlet that the purpose of the tax hikes is to reduce the deficit.

Why it matters: Erdogan was reelected for a third term in May despite Turkey’s litany of economic problems. An Al-Monitor/Premise poll from May showed Erdogan was more trusted on the economic issue despite lingering problems. The country is grappling with high inflation, a foreign currency shortage and a depreciating lira, among other issues.

Turkey's new government could be an indication that Erdogan is willing to change Turkey’s economic path. For example, the president brought back Mehmet Simsek as finance minister in June. Simsek previously served as finance minister and deputy prime minister between 2009 and 2018. He was fired for pushing back on some of Erdogan's policies, including the president's insistence on low interest rates, Al-Monitor's Amberin Zaman noted in a report last month. 

Erdogan has been criticized for his stubbornness on fiscal policy. The president has long insisted on low interest rates even in the face of skyrocketing inflation, in defiance of economic wisdom. The Turkish Central Bank actually cut interest rates last year despite the high inflation. 

However, Turkey’s Central Bank raised the rates last month in a dramatic U-turn. The fiscal institution is also under new leadership. Former Goldman Sachs executive Gaye Erkan was named governor of the bank in June, becoming the first woman to hold the position.