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Iran's 2006–07 Budget Puts More Emphasis on Economic Justice

18 Jan 06

by Nader Habibi

President Mahmoud Ahmedinejad submitted his cabinet's fiscal 2006¬–07 state budget proposal, covering April 2006–March 2007, to parliament on January 15. The draft budget calls for 1.956 billion rials (US$217.4 billion) in total spending, 27% more than in the fiscal 2005–06 budget. As in previous years, oil export revenues are a significant portion of fiscal revenues. The oil-revenue projections in the budget plan are based on a US$39.70/barrel price forecast for oil exports. This is a significant increase compared with last year's US$28.00/barrel projection, although it will be smaller than the actual price change for Iran's oil. Moreover, the draft budget projects an inflation rate of 12.5–13.0%, which is in line with average rates for the past three years. Real GDP growth is expected at 8.0%, stronger than what has been achieved in the past few years.

The higher price of oil in the budget proposal will allow the government to use a larger portion of the country's total oil revenues. Over the past three years, oil revenues in excess of budget projections have been saved in a special oil stabilization fund. Since the projected oil price in the budgets has been significantly smaller than the actual price, the amounts contributed to this fund have been substantial. The higher projected price of oil in next year's budget implies that a smaller amount will be deposited in this fund. At the same time, the higher base price will lead to a substantial increase in oil revenues, and some critics are worried that it will encourage greater fiscal spending.

The priorities under the draft budget reflect Ahmedinejad's views on economic justice and development. The plan calls on state-owned banks to allocate a larger portion of their resources to consumer loans for low-income families and small enterprises in underdeveloped regions. There is also a visible increase in housing subsidies for low-income families. In the current fiscal year, the government is spending more than US$1 billion on the construction of housing for the worse off. It is also proposing to reallocate the development and infrastructure budget towards underdeveloped and rural regions. At the same time, a number of requests for administrative expenditures have been rejected as being wasteful or luxurious; for example, the president rejected the suggestion that several bullet-proof vehicles be purchased for high-ranking government officials on these grounds.

President Ahmedinejad has argued that, contrary to the claims of his critics, his proposed budget will support and strengthen the private sector. The draft budget will continue the privatization of state-owned enterprises, which began in the late 1990s, but will see a redirection towards those on lower incomes. The government plans to sell the shares of privatized firms at subsidized prices to low-income households, under a program called "Justice Shares Sale." The subsidies and incentives for the export of non-oil commodities have also increased. The draft budget allocates more than US$3 billion in loans to export-oriented industries, to encourage the export of technical and engineering services.

Parliamentary approval of the fiscal 2006–07 budget proposal might not be as easy as Ahmedinejad hopes. Although parliament is clearly dominated by conservatives, in the past few months it has shown strong resistance to some of the president's proposals. His candidates for the post of oil minister, for example, were rejected. Parliament introduced substantial changes to the draft budgets of former president Mohammed Khatami; recent comments by several MPs suggest that things might not be any easier for Ahmedinejad. Parliament is likely to hotly debate his proposed oil price, which some MPs believe could add to inflationary pressures, and may therefore impose a lower baseline.

Since this is Ahmedinejad's first budget proposal, the fiscal 2006–07 plan is a major test of his parliamentary support. The draft budget reflects the president's election slogans about economic justice and elimination of waste in the government sector. The growth in government spending under the plan is substantially larger than the projected inflation rate for the next fiscal year, and points to an expansionary fiscal policy. If Iran's foreign-policy tensions lead to a reduction of private-sector economic activity during the next fiscal year, this fiscal growth might help offset such a slowdown. Yet at the same time, it may place added inflationary pressures on the economy.

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