President Ebrahim Raisi submitted the budget bill of the upcoming fiscal year (March 2023-24) to the parliament on Jan. 11.
The submission was about one month late as it is due on the 15th of the ninth Iranian month every year, which fell on Dec. 6, 2022, this year, Fars News Agency reported.
The main numbers in the budget bill include 19,840 trillion rials ($49.6 billion) allocated as operating budget (including revenues derived mainly from taxation and exports at the disposal of the government) plus 1,800 trillion rials ($4.5 billion) exclusive to ministries and governmental institutions, which bring the total sum of the general budget to 21,640 trillion rials ($54.1 billion).
The budget of state companies, banks and for-profit organizations has been put at over 30,976 trillion rials ($77.44 billion). On the whole, the ceiling set for the government’s total budget is 52,616 trillion rials ($131.54 billion).
All the figures indicate a significant increase compared to those of the fiscal 2022-23 budget which, considering the high inflation rate in Iran, is not unusual.
The budget bill expects daily sales of 1.4 million barrels of oil at $85 per barrel.
Member of the parliament will now study the bill in a series of sessions until it is passed into law, which also needs the approval of the powerful Guardians Council, a watchdog that ensures laws are in line with the Iranian Constitution and Sharia.
All figures in this report have been converted at the rate of 400,000 rials per USD.
Budget Deficit and Inflation
The annual budget, as the most important economic and financial document of the country, has always been the subject of various discussions and controversies. But the budget deficit has been the focus of media attention, in view of the increasing pressure of sanctions on oil industry and the reduction of oil revenues in recent years. That is because of the prominent role of the budget deficit in inflation. Simply put, a deficit in budget resources encourages the government and state-owned companies to borrow from the Central Bank of Iran and this leads to the growth of monetary base, money supply and ultimately inflation, Tirdad Ahmadi, an economic expert, wrote for the Persian economic daily Donya-e-Eqtesad.
“The important point is that the inflationary cycle is not restricted to recent years; it’s been going on for the past 50 years. In the early 1970s and in the middle of the 2000s, a significant portion of the soaring oil resources entered the budget directly. In other words, the government handed over the foreign currency it obtained from oil exports to the central bank and received its rial equivalent. This financial operation increased the central bank’s foreign assets as one of the components of the monetary base. When there are no sanctions, this cycle gives rise to the inflation of non-importable goods such as land and housing. Keeping the exchange rate stable and tackling the rise in demand through extensive imports leads to deindustrialization, which is called the Dutch disease in economic parlance.”
The economic expert noted that under sanctions, as the access of the government and the central bank to foreign sources is limited, it is not possible to stabilize the currency rate and the price of tradable goods through imports; the government prints money via the central bank.
“In fact, failing to separate foreign currency and rial in the budgeting mechanism has upset the macroeconomic environment; the fluctuations of oil revenues manifest their effect on the foreign exchange rates. This vicious cycle, which gets compounded under sanctions, shows that, contrary to the recent propaganda by the media—trying to blame the banking network as the only culprit of the unbridled growth of liquidity—the budgetary and extra-budgetary financial operations of the government is the main factor in creating money in the Iranian economy. Notably this fact does not negate the overt and covert violations of the banking network and flaws in the central bank supervision over banks,” he said.
He explained that the so-called “asset productivity” has been proposed to deal with the shortage of government budget resources.
“The government is hard-pressed for income because of the treasury’s lack of cash but at the same time, it owns a large number of properties, land and buildings in particular. This huge wealth can finance public budget resources as well as programs to improve the livelihood and well-being of Iranian households. Taking advantage of these resources to create cash requires careful planning and the employment of capable executives who should be granted legal authority and decision-making power. Sale or repurposing of assets and forging partnership with the private sector and the like can provide the government with princely sum of cash to address current expenses,” he said.
Ahmadi said other solutions such as expanding taxation at a time when the country has registered zero economic growth for the past 10 years cannot lead to a desirable result.
“Without economic growth and development, and given the decline in social capital, even with the assumption that the Iranian National Tax Administration could strengthen its facilities and human resources, a broad taxation plan won’t be possible,” he added.
Counting on Tax
Taxation has been the focus of budgeting in recent years for compensating the decline in oil sales.
The government earned more than 3,480 trillion rials ($8.7 billion) in tax income during the first three quarters of the current Iranian year (March 21-Dec. 21), according to the Economy Ministry.
Data released by INTA show earnings stood at 380 trillion rials ($950 million) in the ninth month of the year, Mehr News Agency reported.
Total tax earnings during the Q1-3 period were estimated at 3,390 trillion rials ($8.47 billion), which means over 100% of the target were realized.
From the total income (3,480 trillion rials [$8.7 billion]), direct taxes stood at 2,190 trillion rials ($5.47 billion) and tax on goods and services at 1,280 trillion rials ($3.2 billion).
From total direct taxes, 1,440 trillion rials ($3.6 billion) came from legal entities, 624 trillion rials ($1.56 billion) from income tax and 13 trillion rials ($32.5 million) from capital tax.
Total tax income stood at 3,250 trillion rials ($8.12 billion) in March 2021-22 Iranian year and 2,070 trillion rials ($5.17 billion) in 2020-21.
The ceiling on tax revenues have increased from 4,540 trillion rials ($11.35 billion) in current Iranian year’s (March 2021-22) budget to 6,800 trillion rials ($17 billion) in the upcoming year’s, indicating a 50% increase, the head of Fiscal Planning Center of the Iranian National Tax Administration said recently.
Allaying concerns about a further increase in taxes on businesses and salespeople, Mehdi Movahedi added that there will be no new tax bases or rise in tax rates.
“A significant part of the 50% rise [in tax income] owes to high inflation, which is expected to remain above 40%,” he was quoted as saying by IRIB News.
Stressing that tax rates will remain the same as in the preceding year, he said efforts have been made to minimize pressure on the production and real economic sectors.
“Tax incomes have a 50% share in funding the government’s expenditure. We plan to maintain this share in the year ahead,” he added.
Movahedi explained that INTA is looking to raise its income by collecting tax arrears and stemming tax evasions.
The Iranian rial has lost more than 60% of its value against the dollar since the start of last Iranian year. Since the beginning of the fiscal 2020-21 to date, the value of the dollar against the rial has increased by around 160%.
Inflation should also be taken into account when studying the changes in tax income. The average inflation rate has been around 40% since fiscal 2020-21.
The Ministry of Economic Affairs and Finance announced earlier this year new measures taken by the government, including connecting nine million point-of-sale (POS) terminals to the national taxation system and activating another nine million POS terminals.
“As such, the number of taxpayers increased by three million by August 22 … The number of tax declarations submitted to the Iranian National Tax Administration increased from 3 million to 4.5 million by July 22.”
The Comprehensive Taxpayers System, which is the main platform for the implementation of the law on shopping terminals, requires all sales and purchases to be registered in the form of electronic invoices.
The government says it aims to increase the share of taxes and reduce the share of oil revenues in the public budget, as the income from the sale of natural resources, including oil, gas and mines, is earmarked for the development of the country instead of being used for current budget expenditures.
The Budget Law stipulates that social media influencers with more than 500,000 followers who generate income from commercial activities will be subject to income tax.
Economy Minister Ehasan Khandouzi earlier communicated the directive on taxing influencers to the Iranian National Tax Administration.
“For INTA, it is not important whether the owner of the bank account is a dairy seller or a celebrity or an athlete. Artists will be exempt from tax if they earn less than 2,000 million rials [$5,000 per year]. All other celebrities who earn more must be taxed,” Davoud Manzour, the INTA chief, said.
As per the new approach employed by INTA, whistleblowing on tax evaders and other tax violations will be incentivized. The whistleblowing guidelines were communicated to tax offices on Feb. 27.
The public has been asked to log on to Intamedia.ir and report tax schemes and evasions to receive a special reward.
The Face of Public Sector’s Anomalies
In Iran, debates on the government’s budget are mainly seasonal; each December sees a raft of budgetary discussions on topics, including the increase in salaries of government employees and pensioners, the price of fuel and tax issues. Most of these topics won’t be touched again until the next December, said Mohammad Qasemi, an economist, in an article for Donya-e-Eqtesad.
“The annual budget is like a snapshot of the public sector taken at a specific moment [every December]. At present, this photo shows a dismal reflection of the public sector. In the past decades, the parliament and the executive branch set numerous tasks for the government, but you can say with utter conviction that these tasks are beyond the means of the government resources.”
He explained that there are thousands of unfinished road, railroad, port, hospital, school, university, dam and power plant projects the government does not have the money to complete.
“Billions of rials have been invested in hundreds of state-owned companies whose economic feasibility is unknown. You can’t find regular and up-to-date report on their efficiency [although the Ministry of Economic Affairs and Finance’s attempt to publish the financial statements of these companies over the last year is praiseworthy]. Nearly 18 years after the promulgation of the general outlines of Article 44 of the Iranian Constitution, some government companies are still producing private goods, including all types of machinery and agricultural products,” he said.
“Oil and gas companies are entangled in the trap of paying cash subsidies while facing a lack of investment as a result of sanctions; their problems manifest in the form of lack of electricity, gas and petroleum products, hurting production sector and people’s daily lives.”
Qasemi noted that among the anomalies of the public administration are the imbalance between resources and expenditures of pension funds, the inadequacy of the salaries of many government employees and pensioners, and their dissatisfaction, public disappointment with the quantity and quality of educational and judicial services, and many more.
“Experts believe that these problems are to blame on the lack of a government strategy in Iran, problems stemming from Iranians’ long-standing mistrust in the government’s efficiency and its handling of abundant oil and gas resources in the past five decades. Some people attribute all issues to the lack of resources; they believe the solution is to delegate public affairs, including education and healthcare, to the private sector,” he said.
“It is very sad that people involved in budgeting have also tried to ignore the above-mentioned problems. The preparation and approval of budget are a unique opportunity to discuss these problems with the people and the legislative branch, and seek effective solutions. Politicians’ resistance to understand that running the country at the present time is different from the time the country wallowed in oil revenues is one of the reasons we don’t feel good these days.”
