Rouhani’s budget complaint
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.