Review of Social, Economic & Business Studies, Vol.5/6, 189 - 208 189 Fiscal Deficit Sustainability with a Structural Break: An Application to Turkey Yeşim KUŞTEPELİ Asst. Prof. Dr., Department of Economics, Faculty of Business, Dokuz Eylül University Gülcan ÖNEL M. A., Department of Economics, Faculty of Business, Dokuz Eylül University Abstract The vast literature on budget deficits shows that the ability of a government to have sustainable fiscal deficits is important in terms of its effect on macroeconomic stability of the economy. This study tests the sustainability of government deficits in Turkey with the intertemporal budget constraint (IBC) approach initiated by Hamilton and Flavin (1986). The paper analyzes the sustainability of budget deficits in the 1970-2003 period in which Turkish budget balance has been in deficits with an exception in 1970. The empirical analysis without structural breaks show that Turkish fiscal deficits are weakly sustainable. The results do not change when structural breaks are taken into account. According to Gregory and Hansen (1996) test, with the mean and regime shifts in 2000 and the slope shift in 1982, again the Turkish budget deficits are found to be weakly sustainable. Keywords: Fiscal Deficit, Structural Break, Turkey.