Tyranny of numbers

Iran’s proposed budget for 2015/2016: tight fiscal policy to continue

Posted in General, Macroeconomy by Djavad on December 14, 2014

Rouhani’s budget for the current year (1393 =2014/2015) was a tight one, and for good reason because he inherited a macroeconomy in a shambles with a high rate of inflation.  Despite the contractionary budget, this year the economy appears to be squeezing a small positive growth rate (4.6% in the first quarter).  If Rouhani’s promise of a robust economic recovery is to turn from hope into reality, the just released Budget Bill for 1394 (2015/2016) has few indications.

The new Budget Bill projects a modest 1.8% growth in revenues and expenditures in real terms, so it will remain on the contractionary side at least for next year.  If the economy is to grow by 5-8% next year, as a robust recovery would require, the resources have to come from the private sector.  With a high level of unused production capacity and 20% of its educated youth unemployed, the country is certainly capable of growth at 8% per year, but not without internal reforms that increase productivity and profitability of private investment, and not in the absence of further easing of international sanctions.

In the table below I report the basic numbers of the proposed budget numbers (warning: I am not an expert in reading Iran’s budget bill, which has become a highly specialized skill!).  To be consistent, I compare the budget bills for the two years, rather than the approved bill for this year with the proposed for next year.  The new bill will likely go through some adjustment in the coming months before it is finalized and becomes law.  To calculate real changes in the last column I assume that prices will be 20% higher next year. This table excludes the budget for public enterprises which is included in the budget bill and is roughly twice as large.

Trillion rials


% increase over 2014/2015


2014/15 2015/16 Nominal Real
Revenues

2,188


2,674


22.2


1.8

Taxes 661 861 30.3 8.6
Oil 777 711 -8.6 -23.9
Sale of assets 224 312 39.2 16.0
Other 526 789 50.1 25.1
Expenditures 2,188 2,674 22.2 1.8
Current 1,430 1,660 16.1 -3.3
Development 378 478 26.4 5.4
Other


380


535


41.0


17.5


Note: Numbers taken from Tables 1-2 of the Layehe Boudjeh (Budget Bill) for the two years. “Other revenues” include those from sale of goods and services, classified as “special revenues”.  “Other expenditures” are largely tied to special revenues. Real values assume a 20% higher average price level in 2014/15 compared to this year.

On the revenues side, the most important assumption is about the future price of oil.  The budget is based on a price of $70, which is about what Iran has been getting for its oil recently, and assumes that oil market will not recover any time soon. Perhaps, contrary to Rouhani’s uncharacteristic rhetoric about a conspiracy behind the falling price of oil, the budget follows global economic predictions of oil prices in the medium term.

The shortfall of 8.6% in oil related revenues will in real terms amount to 23.0% drop (assuming a 20% increase in prices).    Even this may prove optimistic if by July 1 of 2015 there is no long term agreement and Iran is still under sanctions or if oil prices stay below $70 for next year.  But if there is an agreement, the remaining 9 months of the next Iranian year may allow Iran to pump enough oil to keep oil revenues at about the same level as this year.  In that case there may be no loss of revenue from this source and overall expenditures may increase by close 5% instead of 1.8%.  It makes me wonder if Iran’s strategy of blaming Saudi Arabia for the oil price decline is to help it deflect criticism of overproduction if Iran can (and decides to) increase production.

The reason why expenditures can increase at all (in nominal terms by 22.2%, in real terms by 1.8%) is the optimistic assumption that non-oil revenues will increase by 39%, and much of this, the government hopes, will come from higher tax collections (up by 30%).  Tax collection in Iran is highly uneven, with a large burden on sales and value added taxes, which tend to be regressive, and on workers in the formal sector whose income taxes are automatically deducted.  It remain to be seen how, without a much bigger economy, taxes can increase.

On the expenditures side, the biggest change is the reallocation in favor of development expenditures.  Ahmadinejad, who dissolved the Management and Planning Organization because it constrained him from distributing cash, reallocated in favor of current expenditures.  The MPO has been revived, so it is fitting and important that more money is going to development than to current expenditures.  Development expenditures are set to increase by 26.4%, compared to 16.1% for current expenditures.  Government salaries will take the big hit in the latter category, expected to rise by 2.3% (a fall of 14.5% in real terms). Another major cut is in various subsidies that the government pays, by 25% in nominal and 39% in real terms.  These two items are probably the largest parts of the budget that make it contractionary. How all these cuts will be distributed, I have not dug deep enough into the budget bills to know.

 

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2 Responses

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  1. […] as pressure on the government budget mounted, the administration of President Hassan Rouhani has increased taxation. The government has also announced that it will make the parastatal organizations eventually […]

  2. Expat said, on December 20, 2014 at 5:01 pm

    Hello Dr. Salehi,

    I have been following your blog for a while, and quite a few times you have alluded to the need for internal reform, yet you have never expounded on what that means. Can you elaborate? By this do you mean a need for economic rule of law?


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