Rouhani’s new budget aims to eliminate cash transfers
This post is in keeping with my past practice of reviewing proposed government budgets, but this year’s review takes greater urgency in view of the recent protests in Iranian cities that have been linked to the budget for 2018/19 sent to the parliament just three weeks ago. The basic elements of the budget are the same as in previous years — keeping the size of the government in check and assigning a minimalist role to public investment. But there are big cut to a popular cash transfer program that has been in existence since 2010.
To put the cuts in perspective, and to get a sense of what the budget is doing for more important things on the minds of protesters — jobs — let’s review the numbers. The short answer is little. In keeping his right-of-the-center economic ideology, Rouhani is putting his faith in the ability of the private sector, domestic and foreign, to invest and expand employment while the government tries its best to stay out of the way. So the story of jobs and growth is not so much in the budget numbers; it is better told by the policies that will be enacted to improve Iran’s business climate. These policies are part of the sixth development plan, which I will not go into here.
How effective will this strategy be in the current external climate set by an anti-Iran US administration that has promised to shred the nuclear deal and a Europe hesitant in how to respond, is anyone’s guess. What we do know is that the talk of continuing sanctions is keeping foreign investors at bay, at least for the moment. With weary foreign investors, the private sector-led growth strategy does not seem very promising.
One of the main stated goals of this budget is to create jobs, but it is hard to see how it can do that by slashing the development budget at a time that interest rates are very high (they exceed inflation by 5 percentage points or more). The unemployment rate has been rising in the five years that Rouhani has been in office, mainly because of increased supply pressure, but low demand has been an equal culprit. With unfavorable news about the future of the nuclear deal and the removal of sanctions, thanks to the 180 degree turn in US policy toward Iran, the prospects for a foreign-investment driven recovery are dim. With public patience running low, the debates in the parliament over this budget should be more serious than the usual haggling over the needs of special interests.
The large items in the budget reveal two important changes from last year (see the table below, which updates a previous post). This is the so-called general budget, which pays for the usual government operations and does not include the budget of public enterprises. The general budget, while still fairly austere, is on the large side by developing country standards, about 23% of the GDP, where it has been recently. It is much larger when you add public enterprises, which spend twice as much, and the share rises to 68%. The larger number shows the obstacles the government faces in improving the business climate, but from a public finance point of view, the general budget is what we should look at.
The investment budget, or development expenditures, are expected to decline by 13% in real terms in 2018/19 compared to 2017/18 (assuming an inflation rate of 12%, higher than the 9% assumed by the government). As a share of total government expenditures it will be down to 14.2% from 16.9%. Of course, these are planned not actual realized numbers, and are on the optimistic side. Often expenditures designated for development are often spent on other things. According to the Central Bank, development expenditures for the first 7 months of the current Iranian year 1396 (March 21 to October 20, 2017) were only one-third of the amount proposed (and approved). The government is hoping to do more with its limited money partnering with private sector in completing public projects. I have not seen any report of how well that has worked in the past, but I am not optimistic. The private sector is smothered by a financial crisis defined by insolvent banks, high interest rates, and a large government debt to the private sector.
On the revenue side, oil’s share appears to be declining, down to 25.1% from 30.4% this year, though this is not a signal that the government expect to sell less oil — it is planning to sell the same amount and at a 10% higher price — but it is assuming an unreasonably low exchange rate of 3500 rials per USD. There is no change in the ability of the government to collect taxes. Taxes are expected to contribute about the same amount as in the past to expenditures (30.3%). Keep in mind that tax revenue projections are notoriously optimistic; the current year’s tax revenues are running at 76% of the forecast amount, according to the Central Bank.
Table. Proposed budget for selected Iranian years (trillion rials)
| 2016/17 | 2017/18 | 2018/19 | 2016/17 | 2017/18 | 2018/19 | |
| Revenues | 3073.8 | 3711.2 | 4249.1 | 100.0 | 100.0 | 100.0 |
| Taxes | 1011.3 | 1127.3 | 1287.2 | 32.9 | 30.4 | 30.3 |
| Oil | 730.5 | 1161.4 | 1065.6 | 23.8 | 31.3 | 25.1 |
| Sale of assets | 453.2 | 442.7 | 680.9 | 14.7 | 11.9 | 16.0 |
| Other | 878.8 | 979.8 | 1215.5 | 28.6 | 26.4 | 28.6 |
| Expenditures | 3073.8 | 3711.2 | 4249.1 | 100.0 | 100.0 | 100.0 |
| Current | 1971.9 | 2363.7 | 2764.3 | 64.2 | 63.7 | 65.1 |
| Development | 597.0 | 627.1 | 604.3 | 19.4 | 16.9 | 14.2 |
| Other | 505.0 | 720.4 | 880.5 | 16.4 | 19.4 | 20.7 |
Source: dolat.ir
Now about the distributional implications of the budget. The biggest budget cut is reserved for the popular cash transfer program, which is much maligned by government experts and the business press. Started in 2011, under president Ahmadinejad, the program gave each Iranian a stipend of about $90 per month (USD PPP), financed by savings from energy subsidy reform and printing money. Rouhani has been against this program from the beginning and has been undermining it since he was elected, but this year he gets to deliver the death blow: he proposes to cut the funding for the program by more than half, from 10% of total government expenditures to 5.4%. He is not proposing to cut the level of individual transfers, which inflation has done already — they are now worth less than one-third of their original amount — but to cut the number of recipients. The government intention to cut cash transfers is highly controversial, and has been hotly debated in social media since it was made public three weeks ago. Along with the announcement that the price of gasoline will be 50% higher next year, it is undoubtedly a source of discontent that has been displayed in Iranian cities in recent days. With inevitable errors in cutting people out of the roll, expect more disgruntled citizens.
To reduce the impact of the cuts on the poor, the government is proposing to triple the payments to the poor who receive welfare from the traditional channels, the government’s own welfare agency (Behzisti) and the Imam Khomeini Assistance Committee (Komiteh Emdad). If the recent unrest has anything to do with the proposed cuts to the cash transfer program, it may be telling the government that people prefer to get their payments directly from an ATM and avoid the hassle and the stigma that comes with handouts from these organizations.
Tyranny of numbers 
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Reblogged this on Economics Iran and commented:
An informative nicely written piece by Djavad on Iran’s 2018/19 budget…
[…] which is urgent and at the heart of popular dissatisfaction. As economist Djavad Salehi-Esfahani has written in response to Rouhani’s most recent […]
Hi, thanks for informative post about this year proposed budget.
I don’t understand how you have reached to $90 per month based on ppp for each Iranian energy subsidy? It seems that it should be much lower now.
Thanks for your kind words. The $90 USD PPP was for 2010-2011, when the PPP conversion factor was about 5000 rials per USD (WDI puts it as 4657 to be exact). As I note in the post, this is now less than one-third, about $30 per person per month. The World Bank estimates PPP conversion factor for 2016 at 8196 rials, which would put the amount at $55 PPP. I think the PPP rate is closer to 15000 rials.