Tyranny of numbers

The budget for the new Iranian year 1399, which started on March 20, was presented to the parliament back in November but fell victim to the devastating coronavirus crisis and the election of the new, conservative parliament.  I was not inclined to invest the time to update this blog on the proposed budget because they seemed subject to radical modifications.  However, the deliberations of the parliament were cut short on orders from Iran’s Supreme Leader, and a slightly modified budget was submitted to the Guardian Council, which approved it last week. So now is a good time to update my budget tables.  I did not have the numbers below when I wrote this piece for ForeignAffairs.com a week ago.  I could not find all the details (like the total revenue from taxes) in the final budget that the parliament sent back to the government.

I list below three tables that include the budget bill for 2020/2021 and as it went into law. Table 1 is the actual nominal numbers, Table 2 shows the real values, and Table 3 presents their share in the budget. The main change in 2020/21 compared to the recent past is the sharp decline in oil revenues (share down from 30 to 17 percent) and increase Islamic bonds (up by more than three-fold), which is borrowing from the public (or the banks if the public is not willing to borrow) as I discuss this in my Foreign Affairs article. 

If you want to a get a rough idea of these numbers in dollars, you can divide them by 20,000, which is my guess for the PPP exchange rate (if you divide them by 140,000 — the free market exchange rate, you will get silly numbers).

The proposed budget was very contractionary, allowing for only a 25 percent increase in total expenditures at a time when the economy is sinking under the burden of the coronavirus and pressure from sanctions.  Current expenditures were proposed to go up by 15 percent and wages and salaries by 19 percent, which are well below the rate of inflation this year (28 percent) and likely the same or higher in 2020/21. Development expenditures, the one item that is the best fiscal instrument for creating jobs and boosting the economy, received the least attention — proposed to increase by 13 percent.

The amended budget is slightly less contractionary. It raises current expenditures by 19 percent, most of which is because of adjustments to wage and salaries (which I have not seen separately reported), and development expenditures by 42 percent, a major improvement if the allocated amount is actually spent on development projects, something that has not happened much in the past.  Even with the adjusted higher numbers, development expenditures are, in real terms, only two-thirds of their value in 2016/17. (see Table 2)

The revenue assumptions are very optimistic.  According to press reports, oil prices were assumed to be around $50. With a major global recession underway, $30 per barrel seems more likely.  From the budget numbers, it is difficult to guess what is the level of oil exports behind the 988 (or the 1075) trillion rial values for oil and gas revenues.  At 100,000 rials per USD, it would be close to 600,000 barrels per day, which sounds about right.  (I have not included in my calculations the 14.5% of oil and gas earnings that go to the oil ministry and the 20 percent deposits into the National Savings Fund.  Shortfalls from predicted values of oil revenues can be withdrawn from this fund.

In addition to the standard budget items, the government has proposed to pay 739 trillion rials in the coming year (428 tr in monthly transfers according to the 2011 Ahmadinejad program and 310 tr in new payments instituted after the November gasoline price hike), equivalent to 11 percent of the total budget expenditures. These figures do not include the new “corona transfers” of up to 6000,000 rials to 3 million individuals which were announced by the Plan Org head more recently.

Table 1. Budgets for 2016-2020 (trillion rials)

Table 2. Budget numbers in real terms (2016 prices) show big contraction over time

Table 3. Budget shares show the dramatic shift in revenue sources from oil to sale of government property and financial assets