Hidden Subsidies Benefit the Rich

EghtesadOnline: The policy of granting costly subsidies to help improve the quality of life of the people have apparently failed, and experts say the rich have benefited much more than those at the middle and lower end of the economic ladder.

News ID: ۷۴۷۲۸۹

11 May 2019

The government pays close to 2,500 trillion rials ($16.5 billion) annually in hidden subsidies to Iranian households. The average hidden subsidy for the highest income deciles is seven times higher than the lowest income deciles.

According to ISNA, Iranian households on average receive 100 million rials ($666) in direct subsidy every year. In terms of deciles, each family in the tenth (highest) decile on average gets 210 million rials ($1,400) in hidden subsidies while the amount for the first decile (lowest) is 30 million rials, a gross injustice in wealth distribution.

Households directly benefit from hidden subsidies, namely for basic goods, pharmaceuticals, gasoline, electricity etc. However, a large part of the hidden subsidy is in the form of indirect payment by the government for cheaper gas, fuel oil and power sold to manufactures and the business community at large, according to Financial Tribune.

In terms of goods for which the government pays subsidies, families in the first income decile receive 16.5 trillion rials in hidden subsidy for gasoline while the tenth decile get over 279 trillion rials.

The poor (first decile) receive 1.7 trillion rials and 2.5 trillion rials for electricity and basic goods, respectively, while the highest strata get 5.9 trillion rials and 39.7 trillion rials.

Likewise, households in the first decile receive 41 tillion rials in hidden natural gas subsidy while the amount for the tenth decile exceeds 110 trillion rials.

The decile gap for basic goods is slightly narrower with the first receiving 14.9 trillion rials and the tenth getting 76.3 trillion rials in hidden subsidy.

Monthly Cash Payment

A report by the Plan and Budget Organization says the government allocated over 1,000 trillion rials ($6.5 billion) in subsidies in the current budget (March 2019-20) which accounts for 24% of the total national budget.

Besides the budgetary subsidies, the government pays  1,500 trillion rials ($10 billion) in subsidy from other sources, namely the National Development Fund of Iran, the government-backed Iran National Innovation Fund and earnings from state-owned companies.

The government pays 35 trillion rials ($233 million) for monthly direct cash payment. The payments are made as per a controversial and costly cash subsidy scheme known as the ‘subsidy reform plan’ passed under former president Mahmoud Ahmadinejad in 2010.

The scheme removed subsidies on some basic goods and energy and instead paid 455,000 rials (less than $3 at current open market currency rates and about $40 when the plan first came into effect) in cash to Iranian households.

The costly plan has been retained by the current administration. Nearly 76 million or 95% of Iranians still receive the monthly grants. Translation: an Iranian in the high-income category receives the same amount as the poorest in the society!

In a bid to reform the cash payment scheme, lawmakers obliged the government to identify and remove three high-income deciles from the list of those receiving the monthly cash payment.

The plan, ratified during the budget bill debate in the chamber in February, stipulates "the government is obliged to use all data banks to identify and remove three high-income deciles from the list of cash subsidy recipients."