Sustainable fiscal adjustment in the medium and long-term will depend on the enactment of structural reforms in the public sector rather than on provisional measures. Besides jeopardizing the attainability of budget targets, a delay in structural reforms will also cause the supposedly provisional measures to become permanent. Such implementation might affect the quality of expenditures and revenues unfavorably and cause inflationary impacts due to revenue-boosting methods. Therefore, increased control and effectiveness in public expenditures are critical factors for the quality of fiscal adjustment. A study comparing the fiscal adjustment policies implemented at different times in OECD countries2 revealed that a long-term improvement in public balance can be achieved through expenditure-curbing policies rather than revenue-boosting policies. Besides controlling public expenditures, incomes policy also plays an important role in increasing the quality of fiscal adjustment. For this reason, the implementation of incomes policy must be coherent with the inflation target. As I have mentioned before, important policies are pending in the upcoming period in the framework of the European Employment Strategy. These policies are aimed at ensuring that high growth performance affects employment in such a way to assure a sustainable increase in employment, to increase the additions to the labor force and to establish a more flexible labor market. Developing coordination in economic policies and a harmonization of the decision-making process is another outstanding factor. All these factors will not only establish macroeconomic stability and increase social welfare in Turkey, but also play a key role in the European Union integration process.

It is very well known that it is really hard to implement price stability-oriented monetary policies in an environment of fiscal dominance environment stemming from budget deficits and excessive domestic borrowing. In order to solve this problem, under the current economic program, giant leaps have been taken towards decreasing interest rates and achieving sustainable borrowing by employing tight fiscal policies. In addition, steps have been taken towards eliminating the public debt sustainability problem in the medium and long run by achieving primary surplus. At this point, I would like to underline that the stability, confidence and positive expectations, which have emerged in the markets as a result of the tight fiscal policies, have significantly contributed to the downward trend in inflation. Furthermore, continuous increases in productivity, the strong position of the Turkish lira and an income policy in line with inflation have to a large extent contributed to the favorable course of inflation in the recent period. Domestic demand has been kept under control as a result of the tight and prudent fiscal and monetary policies. The postponed consumption and investments, accompanied by advanced consumption, which was driven by worries stemming from old habits, have been instrumental in the rapid increase in domestic demand in the first two quarters of 2004. However, the increase in domestic demand slowed down evidently as of the second half of 2004, as expected. . Accordingly, the level of domestic demand did not exceed the production capacity, and thus no demand-side pressure was created on inflation.