Tyranny of numbers

Rouhani’s budget complaint

Posted in General by Djavad on November 29, 2013

The president’s television interview on his 101st day in office raised more questions that it answered, especially about the sorry state of the government finances.  His criticisms of the previous government’s irresponsible spending commitments is well taken and well known.  Less well known and more doubtful is the charge that the previous government is also responsible for lack of revenues.  If the blame game is to continue for much longer, it should at least be extended to include two other parties: the public for its unwillingness to pay for the services it consumes and the present administration for not moving fast enough to get them to pay.  

The president illustrated his budget frustration by noting that the treasury lacked the 75,000 BR (billion rials) to pay for government wages and salaries for  the first month of his administration, August/September 2013. This state of affairs raises questions that go beyond the incompetence of the Ahmadinejad book keepers.  Why would a government that delivers the equivalent of about 5 million barrels of oil and gas daily to customers inside and outside the country not be able to pay its workers?  With a modest profit on this account ($50 per barrel) the government should earn about 150,000 BR each month, twice its payroll.

And what has happened to Iran’s system of taxation?  Even the measly 6% of the GDP that Iran collects in taxes, one of the lowest in the world (one-fourth of Venezuela!), should bring at least 50,000 br per month.  These items add up to 200,000  BR per month, which should cover the government payroll two-and-half times over.

The question that the president and the country need to ask themselves is why is this money not coming in?  We hear a lot about the 350 BR expenditures on cash transfers per month, but little about why there is not enough revenue to cover them.  The revenue shortage cannot be the result of populist promises; it is the failure of the government to collect the revenues it is owed, and of the people to pay for the serves they use: oil and gas, utilities, and other government services such as education, health, and the roads.  A country whose people demand all these services but are unwilling to pay for them has one of two choices: either to let services decline or to tolerate inflation.  Both have been taking place in recent years.

I was shocked recently to learn that the budget for K-12 education for this year (1392=2013/2014) is less that 2% of the GDP, which is abysmally low.  A growing country needs to spend at least twice as much on K-12 education.

President Rouhani has rightly set fighting inflation as his first economic priority.  And he also rightly boasted about his success in bringing the inflation rate down by a big notch since August (though he failed to mention that it had been declining for the preceding three months, before he took office, as I explained here). But winning the war on inflation by cutting expenditures is neither wise nor fair. He should balance this with revenue collection.  Increasing revenues from hydrocarbon sales inside Iran and more effective collection of taxes should be an  integral part of his anti-inflation strategy.

President Rouhani has accumulated considerable political capital in his first 100 days, mostly from his successes in foreign policy, but he needs to spend some of it now, domestically, on getting the middle and upper class Iranians to live responsibly by paying for the services they use.

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7 Responses

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  1. shams said, on January 6, 2014 at 11:30 am

    سلام
    آقای دکتر اصفهانی امروز در دنیای اقتصاد نوشته بودید در آمریکا نقدینگی خیلی افزایش یافته ولی تورم کنترل شده ممکن است برای بنده بیستر توضیح دهید با چه سازوکاری اینگونه شده.ضمنا بنده کارشناس وزارت کار در زمینه کارآفرینی هستم امیدوارم وبینار هفته اینده تان راببینم.ضمنا همکارانم هفته بعد یک تحلیل اماری در نشریه ای درباره اشتغال دانش آموختگان منشر می کنند که برایتان می فرستم عجیب است فیلتر بودن سای شما

    • Djavad said, on January 6, 2014 at 1:43 pm

      The DE article was by my brother, Hadi Salehi Esfahani, so you should ask
      him. I do work in labor markets and would like to see the studies you
      mentioned. By the way, this site is mirrored at djavadsalehi.com, which
      is not filtered.

  2. Rd. said, on December 23, 2013 at 10:33 am

    At least, they are cutting back on the NG supplies to the petro industry. Unfortunately, no mention of price correction in the NG supplies to the petro’s…

    http://en.trend.az/capital/business/2224187.html

  3. Baddu said, on December 6, 2013 at 8:13 pm

    “Why would a government that delivers the equivalent of about 5 million barrels of oil and gas daily to customers inside and outside the country not be able to pay its workers?”
    “President Rouhani has accumulated considerable political capital in his first 100 days, mostly from his successes in foreign policy, but he needs to spend some of it now, domestically, on getting the middle and upper class Iranians to live responsibly by paying for the services they use.”

    Well done! Professor Salehi.
    You have seen behind the smoke-screen where so far other academicians have failed to shed light on. Exactly! The question is why does the champion of ‘Moderation and Wisdom’, who can checkmate the Saudi-Israeli-McCain-AlQaeda alliance in a late-night zarif game, fail to save his own valuable assets from being bagged by local boys for a pittance?

    One would expect that at least the highly profitable petrochemical industry, which the Rouhani cabinet distinguished by naming in the Geneva Accord would, under the tutelage of Minister Nematzadeh, have the courtesy of paying for the natural gas it consumes at one half Iran’s export price.

    One correction! According to the other Dr. Salehi (Iran Atomic Energy chief and former foreign minister), quoted in Etela’at Sunday 10.9.1392, domestic energy consumption is 1.8 million barrels of oil and 500 million cubic meters of NG daily. The latter is equivalent to 3.08 million barrels of oil. This puts Iran’s total domestic energy consumption at equivalent to 4.88 million barrels of oil daily or 1.78 billion barrels annually.

    • Djavad said, on December 8, 2013 at 5:01 pm

      Thank you for your kind words and your updated estimate of Iran’s distribution of oil and gas inside the country, which strengthens the puzzle of the deficit in the subsidy reform program. The cheap-energy lobby is strong in Iran and will do its best to prevent the Rouhani government from raising energy prices. Interestingly, the two industries with greatest dependence on cheap energy — automobile and petrochemicals

      • Baddu said, on December 10, 2013 at 3:01 pm

        Would you care to complete your last sentence?

        The automobile industry is favored in several ways. People need to buy their shoddy, over-priced and somewhat inefficient product in order to cash-in a part of their allocation of subsidies on energy. The industry are given ever-increasing, government-backed substantial cheep loans to compensate them for their bad book keeping practices – depreciation reserves are a fraction of what they should be. Oil exports are used to keep their heavy foreign currency needs subsidised, while custom tariff walls protect the industry from international competition. Traffic jams and air-pollution are their legacy.

      • Djavad said, on December 10, 2013 at 9:38 pm

        Very well said!


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