GOVERNMENT BUDGET DEFICITS, DEFENCE EXPENDITURE AND INCOME DISTRIBUTION: THE CASE OF TURKEY*

Abstract

This paper analyzes the relationship between government budget deficits, defence expenditure and income redistribution among different social‐income groups in Turkey for the period 1965–2003. The analysis was based on a five‐equation vector auto regressive (VAR) model and impulse response functions (IRFs) derived from the VAR model. The study finds that the deficit as a percentage of GNP has a negative and significant impact on transfer payments as a percentage of GNP. The IRFs indicate that shocks to deficit expenditures as a percentage of GNP (DEFGNP) have statistically significant impacts on defence spending as a percentage of GNP (DSGNP), educational expenditures as a percentage of GNP (EDGNP), health expenditures as a percentage of GNP (HEGNP), and transfer payments as a percentage of GNP (TPGNP). The results derived from this study also indicate that there is a positive and significant relationship between defence spending as a percentage of GNP and deficits as a percentage of GNP. Therefore, defence spending is viewed as a tool for transferring income among different social‐income groups and across generations in Turkey for the period 1965–2004. As a result of this, the government can use deficit and defence spending as one of the major instruments to transfer income among different social‐income groups and across generations in Turkey. *An earlier version of this paper was presented at the First International Conference on Business, Management and Economics, organized by Yaşar University in Çeşme‐İzmir, on June 2005. I appreciated the comments of participants of the conference. Thanks also to two anonymous referees and to Keith Hartley for their comments and suggestions. Any remaining errors are mine.