A fragile budget

December 18, 2020 - 16:34

TEHRAN- President Rouhani Submitted the latest government Budget Bill to the Iranian parliament. Iran’s 2021 budget with 53% growth compared to the previous year, has broken the record of budget growth in recent decades.

Among other factors 50 percent jump in staff and retirees' wages is a major contributor to Iran’s 2020 Budget law, accounting for more than half of government spending (most pension funds in Iran have to cover their budget deficits). The share of government bond repayment and investment expenditures is 15% and 12%, respectively. On the government revenues side, above all, we should mention the 110% growth of government bonds and the 280% growth of oil exports. This is while the growth of tax revenues is estimated at about 30%.

Based on the following points, Iran’s 2021 Budget Bill can be considered a disappointing budget with dangerous economic consequences:

1. However, 35% inflation in Iran this year (affected by sanctions and the corona) could be a justification for increasing the 2021 budget and be an expansionary policy to exit the recession. Next year's budget is apparently an expansionary policy that could be considered favorable in a recession, but it has been accompanied by an unprecedented jump in the budget deficit. The share of tax revenues has reached its lowest level in decades, with only 29 percent of government spending covered by taxes. Despite 35% inflation, a 21% increase in tax revenues indicates that the tax effort index is small and the gap between actual and potential taxes is large. Official reports indicate a high level of tax evasion in Iran, however, the capacity of the fair tax office seems to be much higher than it is now. Under such circumstances, a jump in government spending and a budget deficit could lead to continued inflation in the coming year.

2. Declining demand and purchasing power of households is a fact of the Iranian economy, and increasing government current spending (including government employees' salaries, assistance to pension funds, and subsidies) can be attractive to the public in the short term, but when it increases inflation in the long run, it will ultimately be to the detriment of household purchasing power. The government's position in its final months is a factor in increasing government short-sightedness.

3. The only possible anti-inflation factor for the Iranian economy next year is the increase in interest rates, which is due to the high sales of Iranian government bonds next year. Iran's budget has never been as dependent on bond sales as in 2021. When we put these bonds together at interest rates above 20 percent, the outlook for the Iranian government's debt growth is worrying. Very worrying.

4. The unprecedented jump in oil revenues in the 2021 Budget Bill is another important point to consider. The 2020 budget law assumed a daily export of 1.5 million barrels per day. When we criticized this overestimation last year in the context of the Iranian oil embargo, we predicted that its actual realization would be much less. This happened and even half of the government's oil revenues did not materialize this year. Although President Rouhani is very optimistic about easing sanctions and increasing oil sales since Joe Biden took office in the United States, budgeting rules dictate that we draft the bill carefully. Exports of 2.3 million barrels of oil next year (or domestic oil sales) are beyond all realistic forecasts. It is a risky policy to make more than 40% of the Iranian government's spending next year dependent on the jump in oil exports. The government's willingness to increase spending in the final months of government seems to be a major factor in overestimating oil revenues.

All of this means that the budget will be more vulnerable next year and is against the policies of strengthening the national economy. But despite the above axes, what can be done for the 2021 budget?

The first step is the need to control current government spending. Limiting the increase in government employees' salaries to inflation or even lower, although a painful policy in the short term, is like the bitterness of syrup for a patient whose budget deficit will add to his current 35% inflation. Note that there are only a handful of countries experiencing inflation at this level.

The second step is to realize oil spending and rely more on tax revenues. Given that Iran's economy is experiencing widespread tax evasion and some of the common tax bases in developed countries (such as CGT or wealth tax) are almost non-existent in Iran or its figures are close to zero, this measure can be done without further pressure on the mobile manufacturing sector. Be. This policy is very much in line with the slogan of justice, a slogan that is often heard in the new Iranian parliament.

By: Seyed Ehsan Khandouzi & Mahdi Toghyani (Iranian MPs and economic professors)

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