Iran’s recent adjustment to gasoline prices has reopened a long-running policy debate: can fuel reforms succeed without a parallel effort to curb government overspending?
While the latest decision aims to correct part of the six-year gap between fuel prices and inflation, analysts argue that without fiscal tightening, the burden of reform will fall disproportionately on households already strained by high inflation.
Earlier this month, the Cabinet approved a new pricing mechanism that keeps the long-standing subsidized quotas of 15,000 rials ($0.13) and 30,000 rials ($0.26) per liter but introduces a 50,000-rial ($0.43) rate for consumption beyond those quotas, subject to quarterly adjustments.
Fuel quotas for newly registered vehicles, imported cars and government fleets were also suspended. Although many experts view the reform as modest, they acknowledge it is better than continued price stagnation since 2019.
Still, higher gasoline prices inevitably squeeze households—especially lower-income groups—at a time when annual inflation is hovering near 50 percent.
Economists stress that fuel reform must be accompanied by government reform. They argue that the state, which has been a primary source of inflation through persistent budget deficits, must also “share the burden” by cutting wasteful expenditures.
Data from the Majlis Research Center show that current expenditures in the 2024-2025 budget reached 111 percent of their approved ceiling, overshooting by 2,100 trillion rials (about $17.9 billion).
This overrun stems from misaligned welfare schemes, inefficient energy subsidies and structural weaknesses in administrative spending.
Tip of the Iceberg
One example is personnel costs: although the budget authorized a 20 percent wage increase for public employees, actual spending rose by roughly 32 percent, driven by a proliferation of special allowances across government agencies.
Analysts describe this as only “the tip of the iceberg,” pointing to a large number of low-productivity organizations that continue to consume public funds without delivering measurable value.
Budget deficits remain a major inflationary engine. The government’s 2024-2025 deficit—estimated at 7,910 trillion rials (about $67.6 billion)—was financed through off-budget borrowing, additional bond issuance, withdrawals from the National Development Fund and tapping accounts of state-owned companies.
A significant portion of the deficit came from the 3,050 trillion rials (about $26.1 billion) shortfall in the Targeted Subsidies Organization, highlighting structural imbalances in Iran’s subsidy framework.
Officials now signal a shift. On December 7, the head of the Plan and Budget Organization announced a new approach for the 2025-2026 budget: eliminating or merging ineffective agencies and reducing the financial footprint of state-owned companies.
Analysts say that downsizing the state, along with rationalizing corporate budgets, could reduce inflationary pressures while freeing up resources for core public services.
Ultimately, gasoline price reform can only be the first step. Without a credible effort to cut redundant expenditures and narrow the deficit, economists warn, the inflationary effects of fiscal imbalances will continue to erode household welfare—undermining the very reforms intended to stabilize the economy.
