Economy, Domestic Economy

Singing the Blues Over Cash Subsidies

Singing the Blues Over Cash SubsidiesSinging the Blues Over Cash Subsidies

Ever since the so-called ‘subsidy reform plan’ was launched in December 2010, the government has been annually spending nearly 420 trillion rials (about $15 billion at official exchange rates) on payment of cash subsidies to households. This means 35 trillion rials ($1.25 billion) in monthly expenditure for the government. Multiplying the figure by 40 – the number of months passed since the plan was implemented –the astronomic amount is 1,400 trillion rials ($50 billion).

The question is what could have been done with this amount of money to improve the economy or develop infrastructure?

“Approximately 900,000 jobs, 920,000 housing units or 35,000 kilometers of railroad,” is Eghtesadnews’s estimate of what the government could have achieved using this amount.

According to the minister of cooperatives, labor and social affairs, it costs 1.6 billion rials to create a single job in Iran. This means the money spent towards payment of cash subsidies could have generated about 900,000 permanent jobs, the report points out.

This is while according to experts, payment of cash subsidies to low-income households in rural areas has in some cases encouraged them to stop their agricultural activities, which earned them meager incomes, thus depriving the economy of productive workforce.

Also, according to housing market experts, the cost of construction in Iran ranges from 6 million to 30 million rials per square meter. Considering 18 million rials to be the average cost of construction per square meter, the money from cash subsidies could be used to construct 46 million square meters of housing, equivalent to 920,000 houses each with 50 square meter area.

Railroad construction in Iran costs between 25 to 60 billion rials per kilometer. Assuming 40 billion rials as the average cost of railway construction, the cash subsidies could have been utilized to construct 35,000 kilometers of railway for the country.

 Heavy Burden

The controversial plan has been the subject of many debates ever since it was proposed by the former administration, and passed by the parliament on January 5, 2010.

As part of the subsidy reform plan, part of the subsidies on food and energy were replaced with targeted social assistance to households: a monthly sum of 455,000 rials or $13 per household member.

But, generating the financial resources to pay the cash subsidies has become a serious challenge for the government. “The government is annually spending nearly 420 trillion rials ($15 billion) on cash subsidies, whereas the revenues generated from raising the prices of energy hardly reach 320 trillion rials (about $11.8 billion) per annum, First Vice-President, Es’haq Jahangiri said in February.

Meanwhile, the parliament has lowered the cap for the total cash subsidies anticipated in the proposed budget bill for the upcoming Iranian year (starting March 21) from 420 trillion rials ($15 billion) to 390 trillion rials ($14 billion), compelling the government to  exclude the households with monthly incomes of more than 30 million rials (about $1000) from the subsidy list.

This is while according to Jahangiri, the number of individuals with income beyond the said limit “hardly reaches one million.”

“Excluding the high-earners from the list of subsidy receivers is no easy task. The government has updated its database and listed the people who own luxury cars, pay high income tax, handle large transactions and take regular trips aboard. The number of such people hardly reaches one million,” he was quoted by Eghtesadnews as saying.

“The government has no intention to confront the citizens on the issue by cutting subsidies,” said Jahangiri, adding that the government will not cut cash payments “unless it is convinced that the receiver is a high earner and will not be affected by being eliminated from the subsidy list.”