(Adds budget details, outside comments)By Orhan CoskunANKARA, June 27 (Reuters) - Turkey's government is revivingplans to transfer the central bank's 46 billion lira ($8billion) in legal reserves to its deteriorating budget to shoreit up and is also considering adjusting some tax measures as itbattles recession, sources said.A Treasury official and three other sources familiar withthe plans confirmed that the funds - which are separate from thecentral bank's foreign exchange reserves - were being eyed tohelp narrow a budget deficit that has widened by 225% in thefirst five months of the year.The Treasury ministry's proposals were expected to bepresented to parliament in a few weeks, after which they couldbe passed into law, the sources said.Such a transfer from the central bank would mark the latestunorthodox attempt by President Tayyip Erdogan's government topull Turkey out of recession and steady the lira following acurrency crisis last year. Reuters reported in May that the Treasury was working on aplan to transfer some 40 billion lira of the legal reserves, butit was later shelved amid a market backlash including worriesabout weakening the bank's ability to respond to another crisis.The "legal reserves" are what the central bank sets asidefrom profits by law to be used in extraordinary circumstances."The planned regulation amendment for legal reserves was notcompletely dropped. It was on hold during that time," said oneof the officials with knowledge of the matter. "There is a willthat it would be included into a proposed legislation."Turkey's budget recorded a 66.5 billon-lira deficit in thefirst five months of this year, even after the central banktransferred in some 37 billion lira in profits in January,Treasury and Finance Ministry data showed.The government predicts an 80.6 billion lira deficit thisyear, or a 1.8% ratio versus Turkey's GDP. Economists generallyexpect the ratio to be more than 3%, though the addition of thelegal reserves would lower that by about one percentage point.
MONEY OF LAST RESORTLast month, economists warned that the planned transferrisked depleting the central bank's last-ditch defences whilealso making the budget more reliant on one-off income boosts."This is the money for difficult times. It should not beused to continue faulty policies...This is clearly wrong. Turnback from this mistake," said Ozgur Demirtas, the finance deskchairman at Sabanci University.The Reuters story sparked a selloff on May 13. But the lirahas strengthened some 5% since then. It stood at 5.7705 per U.S.dollar at 1108 GMT, roughly unchanged from Wednesday's close.Erkin Isik, the chief economist at QNB Finansbank, said sucha move could set the stage for similar steps in the years aheadas Turkey's fiscal position becomes less stable.
TAXATION CHANGESThe tax measures under consideration included introducing anew income tax band of around 50% for those earning annualincome of more than 1 million lira, three of the sources said.They also included reducing the corporate tax rate to 20% from22%, they said.
Turkey currently applies up to 35% income tax at the highestincome band.
"A possible change in tax levels is still being evaluated,but increasing income tax to around 50% for people with over 1million lira income is on the table," a second official said.The lira lost 30% against the dollar last year and another10% so far this year in part due to worries about a run-down inthe central bank's net reserves, which are different from legalreserves. At end-2018, the legal reserves stood at 27.6 billionlira, according to the bank's balance sheet data."It is a reality that the budget needs to be supported," athird official told Reuters.
"The expected transfer of 46 billion lira in legal reserveswould in part fix the outlook of the budget. We will see thisamount in the budget after the final approval" by Erdogan. (Reporting by Orhan Coskun; Additional reporting by NevzatDevranoglu and Behiye Selin Taner; Writing by Jonathan Spicer;Editing by Dominic Evans and Toby Chopra)
jonathan.spicer.thomsonreuters.com@reuters.net