On Saturday, the Supreme Council of Economic Coordination, chaired by the heads of three branches of government, held a meeting for drawing up the outlines of the budget and exchanging notes on its sources of revenues, spending and the impact of structural reforms.
The Plan and Budget Organization has announced time and again in recent months that current spending levels from oil revenues will be cut to zero as of the next fiscal year, indicating that the government will have to run the country by only tapping into other sources of revenues.
"In the next fiscal year's budget, oil will be removed from sources of financing current expenditures altogether," said the head of Plan and Budget Organization, Mohammad Baqer Nobakht, adding that all revenues gained from crude sales will be spent on development projects and acquisition of capital assets, Financial Tribune reported.
3 Budget Funding Sources
As a result, the government has come up with three main sources of funding for the next year's budget: the first being hefty subsidies—hidden and apparent (cash, non-cash)—the government pays every year.
Nobakht put the value of these subsidies at 13,000 trillion rials ($103.17 billion).
"Part of these resources [from the removal of subsidies] will replace oil revenues," he said.
Taxation will be the second source of funding the budget next year.
"We don't intend to increase taxes already paid by taxpayers," Nobakht clarified, noting that manufacturing enterprises will even see their tax bases reduced next year.
"We have introduced new taxes, such as capital income tax," he added.
According to the PBO chief, by annulling part of the staggering volume of tax exemptions, the government will also be able to make up for the breakaway from oil revenues.
According to Director of Iranian National Tax Administration Omid Ali Parsa, 40% of Iran’s economic players are exempt from paying taxes.
Besides tax exemption, the government budget in Iran also suffers from widespread tax evasion.
Gholamali Jafarzadeh Imenabadi, a member of Majlis Plan and Budget Commission, puts the size of tax evasion at 400,000 billion rials ($3.17 billion) annually.
“Up to 800,000 billion rials ($6.34 billion) will return to the government coffers [annually] if the current legislation on tax exemption is reformed and reviewed. I believe the value of tax exemption and tax evasion together is more than 1,000 trillion rials ($7.93 billion),” he was quoted as saying by Fars News Agency.
Value added tax accounts for the lion’s share of total tax revenues in Iran with 23.5%, as per INTA figures, followed by corporate tax and import tax. This is while income tax makes up the biggest share of tax revenues in high-income countries. Corporate (company) tax is the second top earner of such revenues in Iran.
The government is mulling over introducing new forms of tax, including green tax, besides having to curb widespread evasions and exemptions.
And the third source of financing next year's budget, according to Nobakht, will be the sale of government assets.
The PBO chief puts the total value of these assets at 70,000 trillion rials ($555 billion).
"Selling part of these assets will help fund the budget," he said, without specifying what assets will be up for sale.
Expenditure
Some reports suggest the government’s operating expenditure for the next year is set at the same level envisioned in the revised budget of the current year i.e. around 3,100 trillion rials ($24.6 billion).
So the government’s operating expenditure would remain the same, despite the fact that it is now almost bereft of oil revenues.
Earlier, Nobakht said wages of government employees would see an average rise of 15% next year. In doing so, the government needs to cut many of its general expenses to keep its level of operating expenditure unchanged and afford the rise in emoluments.
Other reports also say the overall level of budget expenditure will be finalized at 4,200 trillion rials ($33.33 billion), indicating that an 8% rise compared with the revised budget law of the current year that was set at 3,860 trillion rials ($30.63 billion).
Around 1,100 trillion rials ($8.76 billion) will also be allotted to capital expenditure and bonds as per next year’s budget; it is not yet known which of them will have a bigger share.
Revenues
On the side of revenues, next year’s tax earnings have been set at 1,600 trillion rials ($12.74 billion). Clearly, the government will run a deficit of 1,500 trillion rials ($11.95 billion) to finance its operating expenditure, as oil money won’t be spent on these expenses.
Latest figures, according to Director of Iranian National Tax Administration Omid Ali Parsa, show the government’s tax revenues reached 890 trillion rials ($7.06 billion) during the first eight months of the current Iranian year (started March 21).
That’s a 4% rise over the same period of last year’s tax earnings, according to data provided by the Central Bank of Iran.
Tax revenues stood at 855 trillion rials ($6.78 billion) in the eight-month period leading to Nov. 21, 2018.
Last week, Nobakht put oil revenues for the next year at $10-12 billion. However, it remains to be seen at what rate the Supreme Council of Economic Coordination will set the exchange rate for the dollar.
According to Nobakht, all essential goods will be imported at the subsidized rate of 42,000 rials per dollar as ordered by President Hassan Rouhani.
President Rouhani seems to have refused the proposal by the Plan and Budget Organization of Iran to allocate oil revenues, in their entirety, to development projects, the Persian economic daily Donya-e-Eqtesad reported.
In actuality, no proportion of oil revenues has been specified for capital expenditure next year. In addition, the Supreme Council of Economic Coordination has yet to decide on the amount of oil sales and income next year.
According to the head of PBO, about 3,020 trillion rials ($23.96 billion) in targeted subsidies are projected for the next fiscal year, of which 1,860 trillion rials ($14.76 billion) will be redistributed among people. A table published by Fars News Agency on earnings from the reduction of subsidies on energy carriers, the so-called Targeted Subsidies Plan, for the next year, shows two distinct differences compared with the current year’s budget.
First, the Budget Law of 2019-20 (the current year) had projected an income of 1,407 trillion rials ($11.16 billion) from the implementation of Targeted Subsidies Plan. These projected earnings have increased 114% to 3,020 trillion rials ($23.96) for the next year.
Another difference is the addition of two budgetary sections to the resources gained from reducing hidden energy subsidies: 1. Natural gas exports 2. Export of petrochemical feedstock and condensates.
Resources gained from these two chapters were not included in the current year’s earnings of Targeted Subsidies Plan.
Notably, the highest increase in the Targeted Subsidies Plan revenues (172%) has been predicted from the sale of water. A total of 90 trillion rials ($714.28 million) are expected from selling water.
The highest increase in domestic sales and exports of oil products would come from the rise in gasoline prices. The government has projected that next year it will earn 405 trillion rials ($3.21 billion) more from the domestic sales of oil products compared with the current year.
As the government has previously put its revenues from the hike in gas prices at 310 trillion rials ($2.46 billion), the deficit will probably be addressed by introducing the rise in the prices of other oil products.
The government also predicts that it will earn 385 trillion rials ($3.05 billion) more from oil export revenues next year than in the current year. All these new revenues in the Targeted Subsidies Plan will be generated through gasoline export.
With the gasoline price hike and rationing on Nov. 15, the government is eying around $3 billion per annum from the export of its excess supply. The government has probably set the exchange rate of such foreign currency revenues from gas exports with the rate traded through the so-called secondary FX market, known by its Persian acronym Nima.