Interest eats a sixth of Türkiye's revenue, binding the Treasury to rates

The noise is in defence, the signal in the interest line

Treasury and Finance Minister Mehmet Şimşek told the Istanbul Economic Forum on 8 October that defence spending would rise by 229% in the 2027 budget. According to Bianet, it is unclear whether the increase covers only the defence ministry's budget or a wider set of defence items; the ministry received 822.93 billion lira in 2026. The Medium-Term Programme (MTP) ceilings reported by Yeni Şafak put the ministry's 2027 allocation at 1.533 trillion lira, an increase of 86%. The gap between the headline 229% and the ceiling means either that defence spending is spread across other institutions or that the ceiling will be breached. Which of the two applies could not be verified.

The line the headline overshadows is interest. The budget allocates 3.975 trillion lira to interest: 17% of 23.408 trillion lira in revenue and 14.6% of 27.273 trillion lira in spending. Interest alone is 2.6 times the defence ministry's ceiling. Because non-interest spending is 23.298 trillion lira, the budget shows a primary surplus of 110 billion lira. Put differently, the whole 3.865 trillion lira deficit stems from interest payments.

Viewed from the tax side, the picture is harsher still. General budget tax revenue is projected at 19.906 trillion lira, and interest absorbs 20% of it: one lira in every five collected in tax goes on debt service. By Saygılıoğlu's calculation, tax revenue must rise 44% on the 2026 budget. The MTP projects spending at 24.5% of national income and revenue at 21%. The 3.5-point gap matches the MTP's 2027 deficit target.

Constraint 1 · The interest bill is an extension of monetary policy

The policy rate has stood at 37% since 10 September. Trading Economics data put the 10-year bond yield at 32.81% on 15 October, 4.19 points below the policy rate. The yield curve, the line plotting yields against maturity, is pricing in cuts. In a Matriks survey concluded on 13 October, 32 of 37 economists expect a 100 basis point cut on 22 October, taking the rate to 36%.

The same survey carries a detail pointing the other way. The end-2027 policy rate expectation rose from 27% to 28.5%, and the end-2027 inflation expectation from 23% to 23.5%. The government has not disclosed which rate path underpins the budget's interest line. But with expectations shifting 150 basis points higher, any delay along that path feeds directly into a larger 2027 interest bill. September CPI fell to 29.73%, below 30% for the first time in four years and ten months. Even if disinflation continues, the interest burden may erode more slowly than expected.

Constraint 2 · The money carrying reserves is near-term money

The CBRT's gross reserves rose by $4.187bn in the week to 9 October to $171.575bn, ending a six-week decline. According to Dünya, net reserves excluding swaps climbed $6.4bn to $44.2bn. In the same week foreign investors put $451.1 million into government bonds and took $248.2 million out of equities. Adjusted for price and currency effects, the total shows a net outflow of $865.1 million. The foreign money feeding reserves is chasing the rate differential, not growth prospects.

This is where the knot is tied. A cut would let the CBRT ease the Treasury's domestic borrowing costs. The same move narrows the carry return: the gain from borrowing in a low-yielding currency and holding high-yielding lira. USD/TRY stood at 49.5276 on 15 October, up 18.42% over a year. If carry money leaves, reserves absorb the pressure on the lira. Exchange-rate pass-through then unsettles inflation expectations, and the 2027 interest line swells again. Türkiye's five-year CDS stood at 245.27 basis points on 14 October, a level that does not make external borrowing a cheap way out.

The sharpest part of the constraint is that two institutions are pulling the same variable in opposite directions. For the Treasury, every 100 basis point cut cheapens the repriced share of a 3.975 trillion lira interest bill. For the CBRT, the same cut tests the foreign flows that feed $44.2bn of net reserves excluding swaps. Foreign holdings of government bonds stood at $17.04bn on 9 October. The $484.7 million that foreigners sold in the previous week, to 2 October, showed how quickly the flow can turn.

What comes next

According to the timetable reported by Memurlar.net, the bill goes to parliament on 16 October. The Plan and Budget Committee starts work on 21 October, and ministry hearings end on 27 November. The defence ministry's budget is scheduled for 18 November. The timetable is squeezed between the MPC meetings of 22 October and 10 December, so the CBRT will set the input to the interest line while parliament debates it. The committee's general debate opens on 27 October, five days after the MPC decision, and MPs will discuss the interest line against a new policy rate.

Our reading is this: the real variable in the 2027 budget is interest, not defence. Until the committee clarifies the revenue assumptions and the rate path, the 3.5% deficit target should be read less as a target than as an interest-rate scenario.