According to Khabar Online, Budget Circular 1406 which was announced by the government last week, emphasizes on curbing inflation, economic stability, rebuilding infrastructure, creating jobs and supporting the private sector, in a situation where Iran’s economy is facing a series of serious restrictions, from economic sanctions and blockades to budget deficits, restrictions on foreign exchange resources, production stagnation and increasing government debts. The main question is whether the goals outlined in this circular fit with the real capacity of Iran’s economy and the resources available to the government?
Mohammad Taqi Fayazi, a political economy analyst and macroeconomic expert, in an interview with Khabaronline, believes that although the budget circular has correctly pointed out many of the main problems of the country, it does not provide a realistic solution to achieve these goals. According to him, the government should adjust the next year’s budget based on the actual performance of oil revenues, taxes and bond sales, and consider an independent and realistic scenario for the existing conditions.
budget circular; Diagnosing problems without offering solutions
Referring to the necessity of determining the country’s priorities before drafting the budget, Fayazi says: the first issue is that the country’s priorities should be determined and the budget directive should be adjusted according to these priorities. The next issue is to know to what extent these orientations are reflected in the budget bill and finally, according to the specific economic conditions of the country, with what approach the budget should be prepared and presented to the parliament.
He believes that the budget circular is not alien to the facts in terms of identifying the country’s main problems. Economic sanctions and restrictions, high inflation, reduction in purchasing power of households, dissatisfaction of banks, limitation of foreign exchange resources and exhaustion of production infrastructure are among the issues that are also considered in this circular. Also, curbing inflation, creating economic stability, rebuilding infrastructure, creating jobs, supporting the private sector and reducing unnecessary expenses have been proposed as the main axes of the budget.
However, according to this expert, the main issue is not identifying problems, but providing solutions to solve them. He emphasizes: the budget can help curb inflation when it does not face a deficit. Also, if resources are to be allocated for infrastructure reconstruction, there must be sufficient financial resources for this work. In the current situation, it is not clear how much private sector participation can help the government.
About supporting households, Fayazi also believes that as long as the government incites inflation through its budget deficit and its financing method, partial support cannot solve the problem of reducing people’s purchasing power. In fact, on the one hand, the government reduces the purchasing power of households with inflationary financial policies, and on the other hand, it tries to compensate a part of this loss through various supports; While the process of weakening purchasing power will continue.
The gap between budgetary promises and the reality of government performance
This political economy analyst is not very optimistic about the possibility of achieving the goals of the circular in the budget bill. According to him, the experience of the past years has shown that there is a big gap between the goals announced in government documents and programs and what happens in practice.
He says that curbing inflation, increasing investment and reducing unnecessary costs have always been emphasized in various documents and programs, but in practice, the policies that can achieve these goals have not been implemented sufficiently.
Referring to the high share of current expenses in the government budget, Fayazi explains that probably a large part of the budget resources next year will be spent on paying employees’ salaries. In such a situation, the government will continue to face limitations to finance its expenses, and it cannot be expected to achieve the goals announced in the circular without relying on banking resources and borrowing.
He emphasizes: What is stated in the circular is mostly the expression of wishes and slogans intended for the country’s economy. But it is unlikely that the bill that will be finally submitted to the parliament will be able to match these objectives. Therefore, it cannot be expected that all the issues mentioned in the circular will be realized in the final budget.
Two scenarios for the budget 1406; Continuation of the blockade or economic opening?
Referring to the special conditions of Iran’s economy, including the economic blockade, the limitation of foreign exchange resources, the budget deficit and the growth of the government’s debts, Fayazi believes that the next year’s budget should be adjusted based on two different scenarios; First, the continuation of the current situation and second, the possibility of stopping sanctions and war and creating an opening in economic relations.
According to him, in a realistic scenario, the government should forecast oil revenues based on the actual performance of recent months, not based on the assumption of oil sales under normal conditions. For this reason, the amount of oil sales in the last two months should be one of the main bases for estimating oil revenues in the budget.
In the tax revenue sector, it is not possible to predict a significant increase regardless of the state of production and economic growth. Referring to the negative growth of 10% of the economy in the first quarter of the year, Fayazi says that if the current conditions continue, it is not possible to expect that the activities of companies will improve and their profitability will increase. Therefore, the increase in tax revenues from the place of more pressure on production companies is not very realistic.
He believes that instead of increasing the tax pressure on the production sector, the government should go to the sectors that have not had a proportionate share in paying taxes. Including some institutions and foundations that are difficult to tax. Otherwise, due to the deep economic recession, we should not expect a significant increase in tax revenues in 1406.
Regarding the income from the sale of financial bonds, this expert also emphasizes that the government should base its forecast on the actual performance of the market in recent months. According to him, it is not possible to consider significant revenues for the government in this sector by assuming the forced purchase of bonds by the banking network. The estimation of the resources obtained from the sale of bonds should be done only based on what is possible to realize in practice.
construction budget on the margin of current expenses; The priority is to maintain employment
Regarding the expenditure side of the budget, Fayazi also believes that in the current situation, even the full provision of current expenses and salaries of government employees will face limitations, and as a result, it cannot be expected that significant resources will be allocated for construction projects.
Referring to the backlog of construction projects, he says that in the current situation, many of these projects will actually be stopped or delayed. Therefore, the government should focus on maintaining existing production capacities and preventing the closure of workshops and economic enterprises, instead of defining big and unrealizable expectations.
According to this expert, in the scenario where the current situation continues, even preventing the increase in the number of fired workers and maintaining existing employment can be a realistic goal for the government. He emphasizes that in such a situation, one cannot expect wider measures in the field of investment and infrastructure development.
Fayazi finally concludes that if the current conditions of Iran’s economy are to continue in the next year, the 1406 budget should be adjusted with a contractionary approach. According to him, due to the sharp increase in inflation, the control of inflationary pressures also requires the government to prevent the expansion of expenses and the creation of a budget deficit as much as possible.
optimistic scenario; The return of oil revenues and the possibility of infrastructure reconstruction
This analyst, on the other hand, considers the second scenario based on the possibility of stopping the war and sanctions and creating an opening in the country’s economic relations. In such a situation, with the entry of foreign exchange resources into the country and the return of the possibility of normal oil sales, the government’s income situation can be significantly improved.
According to Fayazi, if this scenario is realized, in addition to increasing oil revenues, it will be possible to improve the economic activity of companies and increase tax revenues. Also, the government can equip more resources by expanding the tax base.
He says that in such a situation, after securing the inevitable costs of the government, it will be possible to allocate resources to invest in various infrastructures of the country. Rebuilding the parts that were damaged during the war, allocating more resources to construction projects and supporting the production boom can also be on the agenda.
In this scenario, the increase in oil revenues can also help control the budget deficit and leave the government more open to implement development programs.
However, Fayazi’s main message for next year’s budget formulation is clear: the government should not write the budget based on optimistic wishes and forecasts. If the current situation continues, a contractionary budget based on realizable revenues will not be an optional choice, but a necessity to prevent the aggravation of the budget deficit and inflationary pressures.
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