MRC Proposes Ways to Curb Deficit and Improve Revenue

EghtesadOnline: The Majlis Research Center says the March 2021-22 budget is facing “huge deficits” and needs early reconsideration to minimize its detrimental impact on the economy.

News ID: ۷۸۷۱۰۰

04 October 2021

While budget deficits are permanent dilemmas of the Iranian economy, the parliament’s research arm says the deficits have been of the ascending order in the past three years, partly due to the severity of the US economic sanctions.

The deficit in fiscal 2018-19 -- the beginning of the new US sanctions imposed by the controversial former US president Donald Trump – was 1,300 trillion rials ($4.8 billion).

This expanded to 1,800 trillion rials ($6.6b) a year later and the MRC estimates the shortfall to balloon to 3,000 trillion rials ($11b) in the calendar year that ends in March 2022.

“Covering deficits of this size, by any means, will have dire consequences for the economy,” the MRC said, recalling that the former government in the past two years tried to sell bonds and borrowed money from the National Development Fund of Iran, the sovereign wealth fund, to plug the deficit holes but those solutions are no longer viable.

“Printing money, either via direct borrowing from the Central Bank of Iran or the NDFI will cause high inflation in the coming months,” the center said.

Central bank officials have often expressed serious reservations about using NDFI resources, which in effect means changing the fund’s currency assets, (which are not always accessible due to the banking restrictions) into the rials.

“Issuing bonds is tantamount to transferring the government’s financial liabilities to the future,” the MRC warned.

Moreover, the government is highly unlikely to realize income projections from selling its shares in state/government owned companies this year as was the case last year, thanks to the booming stock market.

Last year the government generated 1,257 trillion rials ($5b) by selling debt and the practice continued in the current fiscal year.

Some Alternatives

To enable deficit spending, the think tank presented four options: securing sustainable sources of revenue, cutting expenses, reforming budget drafting policies and restructuring the finances of state-owned and affiliated companies.

The MRC’s proposals could be narrowed to short and midterm measures in the tax system, government policies to support the needy and improving the efficiency of pension funds and state companies.

To improve tax revenues, the MRC said the government and lawmakers must “make tax exemptions focused and conditional”. In addition, the Iranian National Tax Administration should complete infrastructure for establishing a smart tax system to curb and control tax evasion.

Improving the tax system also includes enforcing capital gains tax and connecting the national payment system to tax platforms to better monitor transactions via payment gateways.

As for changes needed in the government support policies, the MRC said it must reconsider the subsidies given to both households and industries.

The subsidies paid to households should be limited to only needy families and the government must “tap the existing information data to end subsidy payments to high income deciles.”

Likewise the government needs to revise feedstock prices to industries that create high profit as result of energy subsidies. In the mid-term the government should create the conditions  to end support measures to these industries in phases.

As for measures to cut government expenses, the MRC said the government needs to avoid “unconventional increase in wages  and administrative bodies and state companies should be obliged to cut expenses.

In the same vein, pension funds and government-controlled companies are required to improve financial transparency by regularly publishing performance reports.