Policies, prospects, priorities and perceptions so imperfectly explained in the 2020-21 fiscal budget President Hassan Rouhani presented on Sunday are yet another reminder of the truth that the government’s economic footprint can be seen all over the place.
And this is bad for our economy in more ways than one. Proponents and opponents of centralized economies (on the verge of extinction) have often been quoted as saying that about 80% of Iran’s economy are under state and government control.
It is the government and state apparatus that decides almost everything in this country of over 80 million people. And the results are astonishing. For each and everything, economic or otherwise, the government and its inefficient agencies should be at the forefront.
A vivid and dismaying example of how things can go in the wrong direction is the controversial multibillion-dollar cash subsidy policy crafted in late 2010 by the government of former president, Mahmoud Ahmadinejad.
In the catastrophic case of cash subsidies, better known as handouts, the government says it pays money to almost 70 million people every month.
Put together, the sum total of the two bands of subsidies and cost of living allowances (before and after the latest gasoline price rise), as stipulated in the budget bill, would be $5.6 billion.
Fault Line
Now put the oil export revenue beside this prohibitive subsidy payment and see the fault line. How this crisis of shrinking revenue and ballooning expenditure will be solved remains to be seen.
The budget numbers for the coming year are enough to give you a nightmare.
Those in charge of the government’s income and expenditure accounts have said that in the coming year, the treasury would “earn 1,982 trillion rails ($14.52 billion) from taxes”.
Strangely but not surprisingly, the president and his aides do not say how this is possible given the recession, forex rate volatilities, the monumental difficulties of business owners coupled with insolvencies and the miserable conditions of banks.
It is highly likely that they too do not have the answers to such awkward and bitter questions.
Taxing the rich is a wonderful idea and a norm in many countries where the rule of law is king. Most economists and the academia in our land hope the day will soon come when the tax regime will be airtight.
Lifelong Exemption
Informed minds often refer to the large number of cartels, economic, social and religious organizations, financial and non-financial institutions along with their army of affiliated companies (deeply involved in trade and manufactures) that do not pay tax. Many of these have the habit of implying that they have “a tax-exemption for life.”
Simple arithmetic tells us that big economic enterprises making huge (undeclared) profits must see the writing on the wall. The government is being buried under the burden of deficit spending and can be salvaged if these big and selected companies pay their taxes.
If all the talk about shared responsibility and mutual concern of key economic participants and big money carries any weight, now is the time to practice what they preach.
Government coffers are now such that it seems it never existed. In a news item in Financial Tribune (Oct. 12), a senior lawmaker was quoted as saying, “In the first half of the current fiscal year (March-September), the government budget deficit reached $5.59 billion.”
What Mohammad Husseini, a member of Majlis Plan and Budget Commission, said was that the government is swimming in red ink and spending money it does not have.
In the same report, the Tribune said the Economy Ministry was approaching the bond market with plans to issue debt securities to pay its bills. The ministry said the budget deficit for 12 months ending next March would be in the neighborhood of $12.5 billion. In the past few days, it was also reported that there is hardly any money for infrastructure and development projects.
Why, one may ask, should government funding for health, education, housing and development programs be scarified while the above-mentioned organizations add to their “non-taxable profit”?
Dysfunctional Tax Regime
The immense power and influence of the rich companies and their lobbies aside, we have the problem of the omnipresent and tainted tax exemptions, tax holidays and tax evasion.
Policies and practices that have brought the economy to where it is today must be revised.
According to Director of Iran National Tax Administration Omid Ali Parsa, 40% of Iran’s economic participations are tax exempt.
Gholamali Jafarzadeh Imenabadi, another member of Majlis Plan and Budget Commission, puts the size of tax evasion at 400,000 billion rials ($2.93 billion) a year.
“Up to 800,000 billion rials [$5.86 billion] will return to government coffers [annually] if tax exemption laws are revised. I believe the value of tax exemption and tax evasion together is almost 1,000 trillion rials [$7.32 billion],” he added.
Independent observers say the amount is much higher.
Fixed-wage earners and small businesses must pay their taxes (social security, medical, retirement, VAT) regularly or face penalties. The time has come for the deficit-spending government(s) to mobilize and let it be known in unambiguous terms that we cannot have summer and winter on the same roof.
To this entire burden, add the US economic sanctions—the worst penalties any nation has been subjected to in history. The gamut of restrictions imposed by the controversial US President Donald Trump (now facing serious corruption charges and fighting for his political survival) has almost nearly wiped out our oil exports—the lifeblood of the economy.
When it comes to oil export earnings, the budget bill has it that 482,986 trillion rials ($3.7 billion) would be generated in 12 months, starting mid-March.
Here again a question arises: Even if this is true, how does the treasury intend to bring back the oil export revenue when Washington has cut off all our ties to international banking for more than a year?
All said, the government’s bottom line does not look good at all. However, this does not mean that it has no options or Plan B.
If and when a responsible government sees that its policies and plans are not producing the desired results and the people are suffering, it shifts gears and tries other ways and means.
Of course, there is no one size fits all. Problems, economic conditions, foreign policy and bottom lines differ from one country to another.
Insofar as we are concerned, one solution that can and will deliver is for the government to explain to the people the reality on the ground and once and for all, place transparency and the fight against corruption on the highest pedestal.
Tried and tested clichés of the past have failed to fix the economy. It’s time to change and come up with new ideas that will make a difference.
