We will reduce corporate tax rates by 5% and reduce our reliance on bonds. We hope to reduce the budget deficit by raising the salaries of government employees at rates below the rate of inflation, Iranian Finance Minister Dr. Ehsan Khandouzi wrote in a Financial Times article.
The full text of the article is as follows
In Iran, sanctions, currency fluctuations and high inflation rates have led to below average economic performance and a negative growth rate in recent years. Other negative shocks such as the Covid-19 pandemic and natural disasters have further increased fiscal pressure. Consequently, the budget grew faster than inflation – that of 2021 was about three times that of 2019.
I don’t know yet what the outcome of Iran’s current nuclear negotiations with the 4+1 in Vienna will be. Either way, we need to take a cautious approach to our next budget so as not to upset the administration of the economy. Our government’s strategy was first to stabilize the economy and then to stimulate inclusive growth. Over the past few months, part of the first target has been achieved, with point-to-point inflation declining on a monthly basis (from a 3.8% increase to 1.6%). The 2022 fiscal framework, which begins with the Iranian New Year on March 21, must continue this strategy.
Given the current hurdles from crude oil export sanctions, the previous government’s strategy to finance the growing budget deficit has increased our dependence on the bond market. Reimbursement and settlement of these debts is the responsibility of the new administration. We have also tried, during our seven months in office, to sell more oil within the existing restrictions (with a 40% increase) and to increase tax revenues.
The recent proliferation of the Iranian budget is the direct result of an increase in the current expenditures of the government, while its investments in various sectors have decreased. This, along with widespread uncertainty about the country’s economy due to the pandemic, has also led to a decline in private sector investment. This, in turn, has resulted in negative net investment in recent years, severely compromising future production and household welfare.
Against this backdrop and in response to growing inequality, the new government has sought to alter the course of fiscal policy. Our goal is to promote economic growth, price stability and inclusive growth. We are also seeking institutional reforms to improve financial discipline and reduce spending.
Thus, our budget for 2022, already approved by parliament, includes several structural reforms. We will reduce corporate tax rates by 5% and reduce our reliance on bonds. We hope to reduce the budget deficit by raising the salaries of government employees at rates below the rate of inflation. We also expect an increase in oil export revenues.
Iran’s new budget is designed to promote equitable growth, including by increasing public investment. The public sector needs to play a more active role in investing in physical capital. The acquisition of capital assets has fallen from 24% in 2012 to 14% in 2021, but in the new budget the share of appropriations for the acquisition of capital assets has increased by 4%. This is an essential step in strengthening public investment.
We also want to reduce current spending growth. In the 2021 budget, this amounted to around 60%. This percentage has been reduced to 38% in the new bill.
Finally, we plan to increase tax revenue. Despite the reduction in corporate tax rates, the government has increased its reliance on sustainable tax revenue instead of relying primarily on oil. This has happened through substantial reforms to the tax system as well as increasing financial transparency to reduce tax evasion and introducing a capital gains tax.
Our models suggest that Iran’s new budget will lead to positive results in the medium term for variables such as production, investment, employment and inflation. The approach adopted in the 2021 budget should significantly reduce inflation over the next three years. Moreover, total investment and non-oil production will grow faster.
Needless to say, the government is determined to keep the money supply and monetary base under strict control. This will require significant reforms in the banking sector, as well as in areas outside the state budget (such as pension funds, national wealth fund, etc.). The ongoing negotiations in Vienna could potentially lead to positive economic outcomes for Iran, particularly in banking and foreign exchange. We are prepared for any scenario that emerges, pessimistic or otherwise.