The key point regarding budget deficit is the discussion on the difference between resources and expenditures.
In economics, resources are taxes. Now, if we consider oil as one of the resources, in principle, we consider it a financial ability that should be spent later as an asset acquisition and for development projects.
If we consider oil and taxes as public resources, the difference with the expenses will be the budget deficit. The sale of bonds and withdrawals from the Currency Reserve Fund are considered public resources but the main sources are taxes and oil revenues, economist Hadi Haqshenas prefaced an article for the Persian daily Donya-e-Eqtesad with this note. A translation of the full text follows:
An official of the Plan and Budget Organization had said the budget deficit amounted to 8,000 trillion rials [$16 billion at the current exchange rate in open market]. The sum of tax and oil revenues and similar items are real sources and the rest, i.e., borrowing, selling bonds or treasury bills, are not considered sources.
As for the budget deficit in the current year [March 2023-24], the argument that was raised last year, that is, we take only oil and tax revenues into account and the difference will be the budget deficit, is also true for the current year. Therefore, just as we had a budget deficit last year, we will naturally have one this year as well; but part of this appears in the budget figures. For example, it is said that taxes will generate about 8,000 trillion rials [$16 billion] and oil sales will generate about 4,000 trillion rials [$8 billion] this year.
So, where will the public resources of 2,000 trillion rials [$4 billion] come from: from the Currency Reserve Fund or from the sale of documents? Just like the last year, we will have this budget deficit in the current year, unless the expenses in the budget are reduced or taxes and oil sales are increased. The important point is that one of the roots of inflation in Iran's economy is the open and hidden budget deficit: the bigger the gap between resources and public spending, the higher the budget deficit. Budget deficit means borrowing and borrowing means inflation.
For example, in the past year, it seemed that the growth of liquidity decreased by almost 8%, but inflation was still growing. Part of the increase in inflation is caused by the budget deficit and another part is caused by changes in exchange rates or disruptions in exchange rates and foreign trade.
When the exchange rate increases, imported goods and raw materials become more expensive, and the high prices in the supply sector cause an increase in the finished price of goods, which we see as inflation. Therefore, as long as the government budget is not controlled by reducing expenses or the rational estimation of revenues, the budget deficit will remain in Iran's economy and its manifestation will be inflation and an increase in the exchange rate.
