Tyranny of numbers

The 2017/18 budget

Posted in General, Macroeconomy by Djavad on April 17, 2017

If President Rouhani is re-elected to office next month, he will be presiding over his fourth frugal budget.  This is how he has gotten inflation down to single digits, and kudos to him for that, but the economic growth that he promised when he was elected has not materialized, and this frugality, borne out of his supply side economic views, is partly to blame.  If you expected to see a more expansive and stimulating budget because you heard oil minister Zanganeh say that oil exports will double in 2017/18, or noted the one-third higher expected oil price in the proposed budget, you might be wondering why this budget is only 10% larger than last year’s (see the number in the table below). You are not alone.

To come up with an austere budget in an election year, when every other candidate is promising big spending, is commendable for its anti-populist politics, but not for its economics.   In my review of last year’s (2016/17) proposed budget, I criticized it for its austerity, but then sanctions were still in place and oil income was expected to remain very low ($24 billion).    The parliament revised oil revenues up by 8% and expenditures by 10%, but it was not enough to help the economy get out to its rut.  In 2016/17, non-oil GDP grew by less than one percent, according to the Central Bank.

True, there are serious structural problems with Iran’s economy, most importantly its frozen banking system, so fiscal stimulus may not be enough, and the threat of return to double digit inflation is still real.  But waiting for foreign and domestic private investment to pull the economy out of its rut ignores the fact that, except in the 1960s, economic growth has always been led by the public sector investing in infrastructure. Reviving overall investment in the economy is an urgent task since, according to the latest CBI report, it fell by 18% in 2105/16 and fell again by 9% during the first 9 months of 2016/17. And this is while good economic news was filling the front pages of the newspapers and the economy was on a clear upward trajectory.

But, you will ask, can the government spend more without fueling inflation?  The answer is yes, and there are two places where more revenues can come from (and the parliament may well raise the limits on both): oil income and taxes.  According to the proposed budget bill, oil revenues are expected to increase only by one third, to $35 billion.  This seems like an under-estimate to me because the budget’s predicted oil price is reported to be $55 per barrel (compared to $40 for the year that just ended), and oil experts are now running at 2.6 million barrels per day according to the oil minister Zanganeh (up from 1.7 mbd last year).  So, next year’s oil revenues could well be up by 90%, instead of the 36% anticipated in the budget bill.

As for taxes, inexplicably, for an economy expected to grow by more than 6%, collection is expected  to stay constant, even falling a bit as a proportion of the GDP.  Given Iran’s already low taxes, the only way to understand this is through the supply-side lens of the Rouhani administration, which believes that letting the private sector off easy would encourage it to invest.  The tax-to-GDP ratio in Iran is below 10%, less than half of Turkey’s, a country with a much more robust private sector.

So, more revenues could come from oil and taxes that can finance  job-creating activities, such as infrastructure.  While hundreds of incomplete public projects and three million young people are idle, there is no justification for such conservatism.  The inaction is most visible in the budget’s development expenditures, which are set to remain below last year’s level, at $19 billion.  Historically, Iran’s periods of high growth have been accompanied by much higher shares of public investment in GDP.  This share, which was as high as 24.9% in 1978, was at the astonishingly low level of 2.3% in 2013/14, the year that Ahmadinejad and Rouhani shared a budget (according to the World Bank World Development Indicator database).

The idea that the smaller the government the more vibrant is the private sector is sound has to be understood correctly.   In fiscal terms, and by global standards, Iran has a relatively small government: the share of government consumption in GDP is less than 10% compared to twice as much in Turkey.  A small government in terms of regulation and corruption is what is desired, not one that invests only half of what it earns from the sale of the country’s natural wealth when development projects need to finish and youth need to use their skills.

Table.  Rouhani’s Four Budgets at a glance

Note: All values are in trillion current rials.
Source: Management and Plan Organization.

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5 Responses

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  1. Baddu said, on August 23, 2017 at 10:45 am

    Does it not distort the budget when the Iranian goverment,,while extracting the equivalent of 9 million barrells of oil and natural gas daily, choses to include in the budget only a fraction of this.

    • Djavad said, on August 23, 2017 at 10:59 am

      This is an excellent point. While I do not know the details of how budgets are prepared in Iran, transparency would require that all revenues are included (energy barrels x opportunity cost) on all energy products that Iranian citizens have allowed the government to use on their behalf. Then the government can decide how much subsidy to give on each item, and put them along under subsidies as an expenditure item.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sdjdrtgohldg4u-2dkk@comment.wordpress.com” <comment+2i1eh_sdjdrtgohldg4u-2dkk@comment.wordpress.com> Date: Wednesday, August 23, 2017 at 10:45 AM To: Djavad Salehi-Isfahani <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “The 2017/18 budget”

  2. […] economists, including Djavad Salehi-Esfahani, have argued that Rouhani’s austerity economics are misguided, depriving the economy of vital […]

  3. Lon Crow said, on April 27, 2017 at 9:34 am

    Thank you for preparing this information. I have started down a long road to try and change the relationship between Iran and the US. I have studies enough of the history to know that I am ashamed of my country’s persecution of the Iranian people. I started just trying to dig into why medications cannot get to the Iranian people which involved setting up http://www.Mariamswish.com. That has evolved into a draft video located at http://www.TheOnlyPath.com. My push is to fix the medication issue with the suggestions of a study also linked at this latter website. The other component is to try and arrest barriers between the private sector in Iran and the business interests in the US. At this latter point I am stuck. If you have thoughts let me know. Thank you for reading this.

    • Djavad said, on May 13, 2017 at 7:21 am

      Good luck with your worthwhile goal of bringing the private sectors in Iran and the US closer in medicine. I don’t have much to add here except that the free flow of medical ideas, if not medicine, has been the best part of globalization for more than a century. Millions of lives have been saved with vaccines and medications that have eradicated and reduced the calamitous effects of disease in the poor world. All of which has brought great benefits to the richer parts of the planet, not just profits but also reduced incidence of diseases. Iran has a fairly well developed medical industry, which could benefit from quality control that trade with the US and the rest of the developed world could encourage.


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