Gov’t Urged to Cut Spending

EghtesadOnline: Two-thirds of government expenditures are unnecessary, the parliament speaker said.

News ID: ۷۳۹۶۶۰

06 February 2017

“We are short of [financial] resources. Unfortunately, our spending is high and we refuse to admit it,” Ali Larijani was quoted as saying by ICANA.

Larijani called for a reduction in government spending for the next Iranian year (March 2017-18), whose budget law is being finalized by lawmakers.

President Hassan Rouhani proposed the 10.85-quadrillion-rial ($280.6 billion) budget bill early-December, according to Financial Tribune.

Government companies, banks and for profit organizations will get 7.56 quadrillion rials ($195.5 billion) to finance their operations, up from 6.83 quadrillion ($176.6 billion) rials of last year.

Also, 511 trillion rials ($13.2 billion) are associated with the revenues of the ministries and state institutions while 3.2 quadrillion rials ($82.7 billion) are under “public resources”, which include government expenditures. The two categories combined have seen a 10.6% rise compared to the current year’s budget.

Larijani’s remarks, if based on reliable analysis, show two-thirds of the public resources are wasteful, meaning $27.6 billion would suffice as expenditures.

“The government’s operational and development budgets would easily be covered by 1.1 quadrillion rials ($28.4 billion) of tax revenues predicted for next year,” Hassan Khoshpour, a former Planning and Budget Organization official, wrote in the Persian weekly Tejarat-e Farda.

“[In that case] Revenues obtained from the exports of oil and petrochemicals could be used for investment [in infrastructures],” he wrote.

More Tax, Oil Revenues

Next year’s budget bill projects more revenues from taxes and oil exports, though the weaker exchange rate for the rial against the dollar will put it firmly below this year in dollar terms.

“Issuance of sukuk and participation bonds shows we have a budget deficit of 500-600 trillion rials ($13 billion-$15.5 billion),” Larijani said.

Khoshpour adds: “Based on Larijani’s remarks, the government need not issue bonds. Moreover, it will be able to buy back those issued so far and pay their interests.”

But to what extent could the estimate of the head of Iran’s legislative branch be considered realistic? And will the government be able to immediately cut its so-called “unnecessary” costs amid financial issues created by the low price of oil?

Hassan Sobhani, Tehran University professor and a former lawmaker, goes through the details of the stipulated expenditures to answer these questions.

“We can exclude the development sector, which accounts for 20% of the budget, from the unnecessary expenditures,” he said.

Sobhani notes that based on next year’s budget bill, 40.2% of the expenditures are earmarked for the salaries of government employees.

“You could say these salaries contradict productivity, but … even so, the payments do not suffice the employees’ cost of living. So this part cannot also be included in inessential spending,” he said.

A quick look at the breakup of state expenditures from the 2,000-page budget bill reveals a schematic of the government’s fiscal policies and the serious problems it faces.

Most of the budget covers operational expenses while less than a fifth is invested to help drive recovery from the 2011 economic crisis, which had Iran’s economy shrink for two consecutive years.

The high operational expenses mainly stem from the large number of public servants and retirees the state supports.

The president has set aside 950 trillion rials for the 3.9 million civil servants and 4.6 million government retirees. Together, they make up about 11% of Iran’s population.

The Labor Ministry is one of the chief spenders. It has a 240-trillion-rial budget. But not much of it is going to job creation or the ministry.

The bulk of the money, 220 trillion rials, belongs to the Civil Servants Pension Fund of Iran, which like other Iranian pension funds cannot cover its pension payments. Add to this a separate 178 trillion rials for the Armed Forces Social Security Organization and the administration is paying close to 400 trillion rials to aid pension funds.

There are, however, costs that Sobhani believes could be cut.

“Budget categorized under ‘donations’ seems to be reduced. Based on Iran’s budget, some entities and individuals receive donations, part of which is not based on law,” he believes.

Sobhani says there are other budget groups such as “use of commodities and services” and “non-categorized spending” that contain inessential costs that could be omitted or reduced.

He says extravagant expenditures can be blamed on flawed management and inefficient systems and procedures that inflict additional costs on the government, citing Iran’s inefficient banking sector as an example.

“That our budget is not meticulously drafted is certain,” Sobhani says. “If we move toward precision, we can reduce expenditures by 25% within a four-year period.”