President Hassan Rouhani submitted a budget bill for the next Iranian year (which begins in March) to the Iranian parliament this last December. This budget should be of particular interest to Iran watchers at a time when sanctions are biting, oil prices have fallen and the country is in the midst of nuclear negotiations.
Tehran may blame a foreign plot by Saudi Arabia and the United States for many of its troubles, but such complaints are of no use for a besieged economy that needs a far deeper understanding of global economic trends, a better appreciation of successful development models, and smarter economic management. We don’t find any of that in the new budget.
Rouhani’s proposal manages to be both incoherent and misguided, offering the pain of neoliberalism without its benefits. It is an illiberal security-austerity budget that will not take Iran out of its present doldrums, and which ultimately risks a return to the economic chaos of the Ahmadinejad years. The Iranian people deserve better.
Conceptual Basis of the Budget
The budget bill, which has been produced by the newly‑revived Organization of Management and Planning, offers no explicit conceptual framework within which the budget is formulated, nor is it based on any “planning” for the economy— budgeting is no planning. This is despite the fact that the budget bill document begins with a quote from Imam Ali (the first Shi’ite imam) saying “correct (economic) planning increases trivial wealth while incorrect planning destroys abundant wealth.” It also does not begin with a discussion of the nation’s economic development prerequisites, nor give any indication of its trajectories.
However, the budget bill is based on an implicit economic philosophy that one must glean from the relative distribution of budgeted revenues and expenditures as well as priorities bestowed on various socio-economic sectors. The key concept behind the budget is a twisted version of the “neoliberal” model, the laissez-faire economic policy that became popular in the 1970s and 1980s. The proponents of the neoliberal economic policy support extensive economic liberalization, free trade, and reductions in government spending in order to enhance the role of the free market, the individual and the private sector in the economy. But economic liberalism assumes political liberalism, which is absent in the Islamic Republic.
Accordingly, austerity measures in the form of significant cuts to social and subsidy programs, devaluation of the national currency, “privatization” of public enterprises, and regressive taxation are left as the main policy tools. Together, such measures form the cornerstone of the “stabilization” and “structural adjustment” policies of the IMF and the World Bank. However, in a conflicting twist, the budget also gives the highest priority to defense and security spending, which defeats the neoliberal purpose of reducing the size of the public sector and promoting individual liberty.
The budget also incorporates the idea of the “resistance economy,” decreed by Supreme Leader Ali Khamenei, which again runs counter to the laissez-faire (free market) and laissez-passer (free trade) perspectives of neoliberalism. In a speech earlier this month, as if Rouhani had forgotten that his budget was in part based on the dictated self-sufficiency idea, said that Iran’s economic development cannot happen in the context of “isolationism.” Thus, an intelligent reader will become bewildered by the fact that several conflicting economic policy ideas are juxtaposed to provide a seemingly harmonious budget philosophy.
A No‑Growth Budget
This budget is capped at $294 billion (at the official exchange rate of 28,500 rials to 1 U.S. dollar) and is 4 percent larger than the 2013 budget. Given the fall in oil prices, even if an unlikely nuclear deal was to be struck, the predicted figure can hardly be realized. The modest increase in the budget relative to its predecessor also suggests a no-growth scenario for the economy. This is despite the fact that a no-growth budget is terrible news for a population that is growing at 1.8 percent per year, is seeing its income decline while prices rise, and is facing a youth unemployment rate in the high double digits.
The preference for muddling through and preserving the status quo of zero growth is evident in the uses of the budget. While the supply side of the economy is neglected, the demand side is depressed through the use of contractionary fiscal and monetary policies. The budget also disregards growth-friendly educational, industrial and trade policies, and it only gives lip service to construction and infrastructure. Most significantly, the sanctions-crippled Iranian economy needs serious popular mobilization and attention to social justice, but the elite-centered budget is equally oblivious to these requirements.
Sources of the Budget
The primary revenue sources for this budget include oil and nonoil exports, taxes, devaluation of the national currency, and proceeds from privatization. The projected oil price for the budget is $72 per barrel. However, oil prices have already dropped to below $50 per barrel. According to the IMF, Iran’s budget predicament is even more serious. It predicts that, given sanctions, the country must sell its oil at the impossible price of $131 per barrel for the next two years just to cover its budget shortfalls. To make up for part of this shortfall, the government will not be required to deposit 3 percent of oil revenue in the National Development Fund (oil reserve fund) that the law had mandated til now.
Iran’s economy is heavily dependent on oil revenue; indeed some 70 percent of Iran’s foreign exchange earnings come from the sale of oil, gas, petrochemicals and related products. Sanctions have cut Iran’s oil exports by 40 percent, down to around 1.3 million barrels per day. This figure includes official sales (to countries exempt from U.S. sanctions) and black market sales, which earn Iran around half the official market price, due to many middlemen and corruption. Because of banking sanctions, a significant share of Iran’s oil revenue gets frozen in buyer countries. The interim nuclear deals have so far given Iran access to about 5 percent of its frozen oil earnings.
The nonoil exports are the next best hope for the government to compensate for the shortfalls in oil income. In the immediate past years, this revenue source brought about $20 billion; it is projected to increase by 20 percent in 2015. Iran’s principal nonoil exports include cheap automobiles sold in Iraq, Syria and Afghanistan; gas-based petrochemicals sold to China; and carpets, packaged foods, vegetables, fruits and dry fruits shipped to various countries. The projected increase in non-oil exports is based on the assumption that either a comprehensive nuclear deal will be struck or the status quo in the region will remain largely unchanged. While a nuclear deal remains uncertain, the situation in the region is definitely deteriorating.
In the next year, Iran will most likely not earn more than $55 billion from oil and related exports. Of this amount, about $15 billion will be needed by the Ministry of Petroleum just to maintain current production of about 3 million barrels a day. Nonoil exports could earn another $22 billion, which will net about $17 billion when production and other costs and deductions are accounted for. Thus, the net foreign exchange available for the government to spend will be about $57 billion. The decline in oil prices has already cost Iran around $7 billion. The nation’s annual import bill is about $57 billion, with an additional several billion for its foreign operations. Thus, the chronic budget deficit will continue to increase.
Despite an expected decline in oil and nonoil income (by about 28 percent relative to 2014), the new budget assumes a 19 percent increase in government revenues. This additional revenue is expected to come from a few sources. The easiest trick to cover the shortfall was an official 9 percent devaluation of the national currency, from 26,000 to 28,500 Rials to 1 US dollar. This accounting trick reduces the 28 percent shortfall to only 8 percent. The same trick also reduces the dollar value of the budget by about 3 percent from $303 in the preceding budget. Surprisingly, this is the budget that is also designed to reduce inflation, even with the devaluation, to an impossible 20 percent in 2015.
Income and value-added taxes are two other important sources of revenue, which are hoped to contribute 22 percent to the projected revenues. Ironically, taxes are projected to contribute 22 percent more to this budget than to the preceding budget, even if the economy is expected to grow at zero percent. There are a few sources from which this hoped-for tax increase can be potentially raised. They include the Revolutionary Foundations, businesses, the wealthy, and the middle to lower income groups. Yet, in reality, none of these sources will pay the amount of taxes that the government hopes to collect. Moreover, tax collection is intensely political and has the most inefficient bureaucracy in the country.
While Iran’s parliament has passed a law that subjects the Revolutionary Foundations to taxation, only Supreme Leader Khamenei can make the ultimate decision. Until now these institutions, which directly operate under the Supreme Leader, have been tax-exempt. Even if they were ordered to pay taxes, the amount collected would be symbolic at best, as most claim annual losses. Collecting taxes from the bazaar and wealthy will also be tough, given their past reluctance to pay taxes. Much of the wealth in Iran is held in trade and cash forms, and these are almost impossible to tax. This leaves the manufacturing units and the middle to lower income groups, who already live in a precarious economic condition, to shoulder the tax burden.