Tuesday , 11 December 2018

Iran’s Budget Troubles: Favoring The Privileged Insiders

Radiofarda – As the Iranian budget is submitted to parliament, few expect full clarity and transparency in the budget approval process this year.

Iran is under tremendous economic pressure, mostly self-made and partly brought about by U.S. sanctions.

So far, few details have been disclosed. The head of the Planning and Budget Organization Mohammad Bagher Nobakht promised in a news conference on December 6 that President Hassan Rouhani will unveil details later.

However, he said next year’s budget is 12% more than the budget for the current year and should reach 4,330,000 billion rials. But with a higher dollar exchange rate they have set for the new budget, the figure in doolars will come to around $75 billion, $29 billion less than the current budget passed last December.

What Nobakht said created more ambiguities and questions than answers about the budget. A few local news agencies were observed not to update their initial news stories after the press conference, apparently trying to figure out what to write.

It appears, unlike the transparency that characterized last year’s budget and revealed allocations of unjustifiably huge funds to favored institutions, next year’s budget bill is shrouded in opacity.

Iran's President Hassan Rouhani presenting his budget proposal in parliament, December 10, 2017
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It is worth noting that last year’s budget transparency showing huge allocations to regime insiders played a role in igniting the large nationwide protests that rocked Iran from December 28 to early January 2018.

The perils of Iran’s economy include the allocation of financial resources among government institutions that suppress dissent, or propagate state ideology, distribution of benefits among a privileged few, as well as 30% tax evasion and 40 percent of Iranian economy being tax exempt.

In an economy such as Iran’s, the budget is mainly about “taxation effect” and “spending effect”. With so much tax evasion, tax exemptions and subsidies for the favored few, it is an economy marked by discrimination to the benefit of a privileged few.

This means tax revenues constitute only a small share of the government’s budget. The spending effect, on the other hand, is about allocating financial resources to government’s supporters including institutions that suppress dissent and the ones that promote the government’s religious ideology and political agenda.

In Iran’s economy, companies and institutions linked to Ayatollah Khamenei’s office, the Islamic Revolution Guards Corps (IRGC), the holy shrine of Mashad, and Shiite seminaries are exempt from tax. Many also receive money from the government.

The government injects oil revenues to state and pseudo-state institutions in order to create artificial employment and conceal widespread unemployment. In this way, as bureaucracy grows government’s supporters find a job to make ends meet and the government continues its illegitimate authority by spending public resources. Some officials do not conceal the fact that this way of spending resources only expands bureaucracy.

Iran: Hassan Rouhani , Iran`s President, gave next year budget to Ali Larijani , Speaker of parliament.
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According to Western Azarbijan province’s Tax Office Chief Yaqoub Mazreali, “Nearly 40 percent of the Iranian economy is legally tax exempt and tax evasion is around 30 percent.”

Part of the tax evasion is related to the unofficial opaque part of the Iranian economy. There are various economic, political, managerial, social and cultural reasons that explain why taxation’s share in the economy is so narrow.

A large part of the economy is opaque and benefits from special privileges based on connections. This sector uses national resources but does not pay tax. It includes economic organizations affiliated with IRGC, the shrine in Mashad and similar organizations that are directly supervised by Khamenei. They are exempt from some taxes and evade others.

The combination of the taxation effect (tax exemption and tax evasion) and spending effect (generosity in allocation and consumption of government funds) leads to budget deficits. The most significant consequence of budget deficit is an inflation that fuels devaluation of the national currency.

Meanwhile, as a result of budget deficits, the government cannot complete infrastructural development plans. Other implications of budget deficits include low economic growth and high unemployment.

A comparison between Iran’s ailing economy with those of other oil exporting countries such as Norway and Canada gives rise to the question of whether discriminatory allocation of funds is inevitable in oil-based economies?

The answer is “No.”The devil is in the socio-economic background, policy making and utilization of resources resulting from oil revenues. The most important factors that lead to allocation of funds to the privileged few are opposition to modernity, apocalyptic thinking, ethnic disputes, low living standards, inappropriate demographic structure and widespread illiteracy.

An economy based on privileges and discrimination is technologically backward as its traditional technology is neither effective nor profitable.

Confronting and correcting such an economy needs balanced and sustainable growth, sustainable and integrated development and human resource development which are absent in the Iranian style of governance, which is reliant on basically handing out oil revenues at Supreme Leader’s directives.

The views expressed in this analysis are the author’s own and do not necessarily represent those of Radio Farda.

 

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