Domestic Economy

Gov’t, MPs Clash Over Cash Subsidies

Business & Markets Desk
Gov’t, MPs Clash Over Cash Subsidies
Gov’t, MPs Clash Over Cash Subsidies

A parliamentary addition to this year’s budget to cut 24 million receivers of cash handouts out of the government’s subsidy program has created a row between the parliament and the government.

The government contends that the proposal is illogical and impractical. Accusations of political agenda behind the parliamentary decision and the government’s response have come from both sides.

The conservative government of former president Mahmoud Ahmadinejad substituted indirect subsidies on energy and foodstuff with a nationwide cash handout plan in 2010. No distinction was made between the rich and poor. However, a minority in the 80 million country opted out of directly receiving the public money.

The plan has been characterized by inefficiency and cost overruns during its six-year run. The payouts to the public left no money for factories and businesses, some of which were also named as recipients.

The government was supposed to pay half the money raised from increasing energy prices in cash handouts to the poor, use 30% of the money to support industries and save 20% for its own expenses.

In practice, Ahmadinejad added other government funds to the money raised from cutting subsidies just to hand out cash to the public. Industries received nothing.

  Change in Direction

The cash handout started by the former conservative administration was an “unbaked” plan based on global standards, says Hossein Abdoh-Tabrizi, a top advisor to the Minister of Roads and Urban Development Abbas Akhoundi. “For the government taking away this right and reclaiming this source of funding that has become part of the family’s budget will be hard.”

To cut costs, the moderate government of President Hassan Rouhani cut 3.3 million people from the program, officially called the “Targeted Subsidies Plan”. The administration has been striking names out in a deliberately slow manner. The reason behind the deliberation has been a lack of data on people’s assets and income—an issue that is plaguing tax collection and the fight against fraud.

Now the parliament is proposing to speed things up. It wants the government to cut the subsidies of 24 million of the Iran’s top earners, so the funds can be used elsewhere. The parliament’s line for eligibility is an income over 350 million rials ($10,000 at market exchange rate) per year. In their view, this puts an individual in the top three deciles of the population.


The government does not agree on the parliament’s categorization and census about the number of people in the first three deciles.

“The strata of the population considered by the parliament for cutting subsidies are between 7 and 7.5 million people,” says Majid Ansari, the president’s parliamentary representative.

Based on the criteria, Iranian expatriates, government, public, private and bank executives, civil servants, armed forces officers, merchants and business owners, along with professionals, including doctors, judges, lawyers and university professors and even Social Security Organization retirees are ineligible for cash handouts if they make over $10,000 annually.

The main problem is identifying people who run private businesses.

“There are more people who have much higher incomes that the government cannot cut from the plan, because it has no information about them,” says Jamshid Pajouyan, an economist.

“Identifying ineligible people with [the parliament’s] method is not precise. We must create a database that utilizes tax statements.”

However, this gap in information does not make expatriates or judges any more eligible for getting public money.

The administration questions the practicality of the parliamentary plan over data gaps. The scarcity of data on top earners has been the main challenge all along.  

“If we reduce our accuracy, finding and removing three deciles is possible,” says Seyyed Abolhassan Firouzabadi, deputy labor minister.

Officials are pitching the argument that by lowering accuracy and doing the parliament’s bidding, they risk cutting needy people from the subsidy plan.

“People may earn over 350 million rials a year, but also have greater expenses. For example, they may have a sick family member or kids in college, or they may be paying rent or a mortgage,” Government Spokesman Mohammad Baqer Nobakht told IRNA.

There should be debates about whether having kids in college or a mortgage you can afford with a salary double the average wage in urban areas makes you a person in need of government assistance. But, the core government argument is right.

“As handing out cash to the entire population was a wrong move, so is cutting people off with broad strokes,” said Ansari.

  Political Mischief

Hence, analysts believe the outgoing conservative lawmakers are pushing the cuts to alienate voters from the moderate administration of President Rouhani who faces reelection in a year.

“I think barring 24 million people from getting subsidies in an election year is difficult for any government, irrespective of its logicality,” said Abdoh-Tabrizi.

He added that if lawmakers, “most of whom voted for the nationwide cash handout plan” at its inception, are not following a political agenda, “they are ignorant of the fact that carrying out such a plan borders on the impossible under the current circumstances”.

On the other hand, a counter argument could be made that the government is putting off executing an essential economic reform to an essentially populist blunder for fear of losing votes.

The government’s position is a precarious one. Public finances are in ruin and the cash handout plan is a large draw on a diminishing income.

“The government is facing a severe shortage of funds and is stuck between pursuing a 6% growth and paying cash handouts as before,” says former MP Hadi Haqshenas.

The government has to pick between economic growth and subsidies, regardless of the political costs or by weighing the political and economic costs of each plan, as is customary with politicians.