The 2016-17 budgetary directives indicate a tight fiscal policy that is contradictory to the inflation-reducing monetary policy since only current expenditure absorbs the growth in the budget.
While it was previously stated that the government considers inflation as enemy number one, the new budget shows a change of direction toward stabilizing the economy as some experts consider it to be as important as lowering inflation.
The latter is mostly controlled by monetary instruments. In modern economies, the inflation target is set and other economic variables are optimally determined to reach the target, as the economy is an intertwined whole. While conflict between macroeconomic objectives is not hidden from anyone, the jump from one objective to another is rather controversial.
Hence, the proposed budget is only justifiable if, for instance, one believes the nuclear deal, which is expected to lead to lifting of sanctions by early 2016, will lead to the development of industries.
In view of the decline in oil prices, the size of the budget has only increased by 13% nominally. The 1,770-trillion-rial (nearly $59 billion at official exchange rate) budget shows a growth of 210 trillion rials as compared to the previous budget.
The increase in budget is only absorbed by current expenditure instead of development, as one might expect. In particular, while current expenditure sees an increase of 23%, the development expenditure, which has a multiplier effect and is aimed at reducing unemployment, has decreased by 25%.
Looking at the details of the current expenditure, public affairs have seen the highest increase of 30% as compared to the previous budget. In the meantime, social and cultural affairs faced the lowest increase of 20%. This is strange, indeed. With “cultural reinforcement and uplift” touted as one of the three central themes of the budget, the development budget of all sectors categorized under “social and cultural affairs” has declined.
In fact, the development budget for economic affairs, with a 29% increase in current expenses, also indicates a 27% decline compared to last year’s budget. And the only two sectors registering an increase in their development budgets are ‘environment’ and ‘communications and information technology’.
The real increase of 8% (at a 15% inflation rate) in current expenditure will give rise to more consumer spending, which will lead to inflation that, in turn, lowers the purchasing power. However, changes in the development expenditure can lead to lower unemployment rate and higher production capacities that will eventually give the much needed boost to productivity. On the whole, the contractionary budget can be regarded as a positive sign of stability.
