Skip to main content
Markaz

Iran Press Report: The Quest to Cut Cash Subsidies

With Iran’s economy rife with inflation and its budget beset by deficit, attention in Iran has turned to further reform of the targeted subsidies law, passed under and championed by former president Mahmoud Ahmadinejad, which cut subsidies on various commodities and redirected much of the savings to cash handouts that were paid to each Iranian household.  Seeking to rein in spending, last week the Majlis gave its initial approval to a plan to remove the top 30 percent of earners from the subsidy payment system, meaning that 22 million people are to be dropped.  This now means that the administration of President Hassan Rouhani must, along with the Parliament, come up with a plan for how to identify the top 30 percent and remove them.  This has led to some intense debate in the Iranian press over whether the plan will go smoothly.

Many news outlets have expressed skepticism of the ability to effectively identify the top 30 percent of earners.  In addition to commentators in Mardom Salari and Tehran-e Emrooz suggesting that it will be too difficult to identify the rich, economist Hossein Raghfar told Shargh that Iran doesn’t have the advanced tax system needed to clearly note the top earners: “Countries which make economic policy decisions based on people’s income have coherent tax systems.  In those systems, it is easy to see who is in which income bracket.”  However, he said that Iranian officials can, if desired, use other metrics to determine who is not in need of sanctions, and avoid mistakes that would keep middle class Iranians from being struck from the rolls: “For example, it is very clear what major possessions people have, such as luxury cars or other wealth, and it’s even clear who has taken foreign trips during the year.  This shows completely that such people do not belong in the low-income group and can be placed in the high income group.”  

Some have suggested that the difficulties of identifying and removing Iran’s richest citizens will lead to the Majlis’s plan ultimately being unrealized.  In Mardom Salari, Ashkan Bankdar Jahromi wrote that the government may have to settle for diminishing the subsidies of all Iranians instead out of a desperation to do something to solve Iran’s budget problems, summed up by Economy Minister Ali Tayyeb Nia who said this week, “The money that should be spent on the infrastructure of the nation is being spent on the cash subsidies.”  Meanwhile, a Tehran-e Emrooz analysis argued that the vast budget crisis, which has been evocatively described by Rouhani – who mentioned last week that “180 trillion tomans [$72 billion at official exchange rates] in deficits from the previous administration have remained with us” – will prompt his administration to merely use this Majlis bill as a first step toward removing all cash subsidies across the board, in part due to a desire to avoid internal conflict by dividing Iranians into two separate groups.   

Many commentators have turned their attention to casting blame on past governments for the current predicament.  Raghfar argued that the issue of need-based subsidy disbursal should have been solved at the start of the reform during the Ahmadinejad administration, but, “In truth, the government wanted to remain popular among all segments of society,” and thus it did nothing to exclude the rich. In the reformist Shargh, Hojjatollah Mirzai also blamed Ahmadinejad, writing that “the insistence of the previous government on a wasteful procedure that let an opportunity pass… was a policy undertaken not with the goal of resolving societal or regional imbalances but rather to transfer resources from the production sector to consumers…”  An editorial in Jomhouri Eslami looked back even further to 2005, when a conservative-dominated parliament in the last year of Mohammad Khatami’s administration passed efforts to control prices, populist measures that had negative effects on the efficiency of Iranian industry for years to come, leading to an spike in inflation when producers could not adapt to higher fuel prices: “As experts at the time noted, this Majlis decision dealt one of the biggest shocks to the economy of the nation, a shock that not only forced the Ahmadinejad administration into the creation of the targeted subsidies law, but now has also left the Rouhani administration facing great challenges.”

Finally, commentators discussed the negative effects any eventual cash subsidy removal will have on the Iranian people, and the political challenge it will pose – even if economically necessary.  Jahromi argued that the government has a major dilemma on its hands: “Now the Rouhani administration on the one hand has become heir to a subsidy payment policy that, if continued in current form, will easily cripple the government, and on the other hand, as a legacy of the previous [Ahmadinejad] government, inflation is dominating society in such a way that if the subsidies are cut off altogether, it will break the backs of many of the poor.”  Also in Mardom Salari, Majid Salim Borujeni echoed his thoughts: “All official statistics indicate that the government does not have enough money to continue to pay subsidies; on the other hand, people need cash subsidies in order to manage their lives.”


APPENDIX: Translated Summaries of Selected Opinion Pieces



“The Question Mark of the Payment of Subsidies.” Ashkan Bankdar Jahromi, Mardom Salari, 8 Aban 1392 / 30 October 2013.

Jahromi writes in the moderate daily Mardom Salari that the most ideal method for dealing with the deficits caused by the subsidies without unduly damaging the standard of living of Iran’s poor – that is, removing only the richest Iranians from the subsidy rolls – looks like it may be too difficult to undertake and that, therefore, Rouhani’s government may have to settle for diminishing the subsidies of all Iranians, and doing it slowly to diminish the burden on Iran’s citizens.  He begins by noting the words of Economy Minister Ali Tayyeb Nia who said this week that “The money that should be spent on the infrastructure of the nation is being spent on the cash subsidies.”  He notes the dilemma facing the current government, saying, “Now the Rouhani administration on the one hand has become heir to a subsidy payment policy that, if continued in current form, will easily cripple the government, and on the other hand, as a legacy of the previous [Ahmadinejad] government, inflation is dominating society in such a way that if the subsidies are cut off altogether, it will break the backs of many of the poor.”

Author



“Is the Government Thinking of Abolishing the Targeted Subsidies Law?” Tehran-e Emrooz, 1 Aban 2013 / 23 October 2013.

The Tehran-e Emrooz report writes that the government appears to be heading towards an attempt to completely eliminate the system of cash subsidies.  “Based on comments made by government officials, one can come to the conclusion that the government is seeking to change the cash subsidies scheme bit by bit, first by removing the top 30 percent from the system.  This change could eventually culminate in the elimination of the entire payment of cash subsidies.”  Among other evidence, the report points to remarks made by Rouhani about the dire state of Iran’s treasury and the need for state expenditures to be cut.  Specifically, it is cited that the president complained last week that “180 trillion tomans [$72 billion at official exchange rates] in deficits from the previous administration have remained with us.”  The paper argues that while the Majlis appears in favor of only cutting the highest earners from the recipient list, the Rouhani government recognizes the complexity of the process and may think that a messy attempt to exclude a portion of Iranians from a widespread benefit will lead to domestic tension – and thus may seek a more uniform approach as an eventual strategy.



“The Economic Perils of Populism.” Jomhouri Eslami, 1 Aban 2013 / 23 October 2013.

The editorial in Jomhouri Eslami  focuses on looking at the costs of Iran’s battles over inflation and subsidies, saying that the Principlist 7th Majlis did not realize the effect that price control laws it passed in 2005 would have on the future of Iran’s economy.  Citing self-congratulatory remarks from then-speaker (and 2013 presidential candidate) Gholam-Ali Haddad Adel, the paper writes, “As experts at the time noted, this Majlis decision dealt one of the biggest shocks to the economy of the nation, a shock that not only forced the Ahmadinejad administration into the creation of the targeted subsidies law, but now has also left the Rouhani administration facing great challenges.”  It writes that the price controls of the past, including heavily subsidized energy rates, led to inefficient practices in Iranian industries, who scrambled to raise prices when subsidies were finally cut.  Now with the Rouhani government looking to cut cash subsidies, the paper argues that those who complain that the current government is raising the effective prices on its citizens should instead realize that the mistakes of the past have led to today’s problems.         


“15 Million of the Middle Class at Risk of Losing Cash Subsidies.Interview with Hossein Raghfar by Dooman Sahand, Shargh, 30 Mehr 2013 / 22 October 2013.

In an interview with the reformist Shargh, Alzahra University economist Raghfar stands by the criticism of the methods of Iran’s subsidy reform that he has held since before the original rollout of the program.  However, while many in the government say it will be difficult to identify the richest 30 percent in order to remove them from the rolls, Raghfar believes “those who have no need to receive subsidies can be easily recognized.”  Iran would like to separate its citizens by income for this reform, but Iran is not able to, he says: “Countries which make economic policy decisions based on people’s income have coherent tax systems.  In those systems, it is easy to see who is in which income bracket.” Iran, he notes, does not have such an accurate tax information system, but says that the government has other forms of information available which can determine who needs subsidies and who doesn’t.  “For example, it is very clear what major possessions people have, such as luxury cars or other wealth, and it’s even clear who has taken foreign trips during the year.  This shows completely that such people do not belong in the low-income group and can be placed in the high income group.”   He argues that the issue of need-based subsidy disbursal should have been solved at the start of the reform during the Ahmadinejad administration, but, “In truth, the government wanted to remain popular among all segments of society,” and thus it did nothing to exclude the rich.  Overall, he estimates that approximately 32 million people in Iran are in need of subsidy assistance.



“Everyone Looking for a Target for the Targeted Subsidies.” Hojjatollah Mirzai, Shargh, 30 Mehr 2013 / 22 October 2013.

Mirzai writes that years, even decades, of debate over Iran’s subsidy program have failed to bring about consensus about the nation’s objectives for dealing with the issue.  He writes that the main challenge facing Iran’s leaders is deciding how to identify who should and should not receive subsidies, but that no consensus has been reached on this as there is no easy way to perform such a task.  He writes that “the insistence of the previous government on a wasteful procedure that let an opportunity pass… was a policy undertaken not with the goal of resolving societal or regional imbalances but rather to transfer resources from the production sector to consumers…”  He writes that the question of identifying people to remove from the subsidy rolls has become such a concern that it is now displacing the necessary attention on the exact problems that Iran needs to tackle, such as inflation, unemployment, budget deficits, and even sanctions.  He writes that besides vehicle and insurance registries, which are not perfect methods, it is difficult to come up with any database that can divide people by wealth, and thus the current government must find a way to manage the crisis created by its predecessors.

 

Get daily updates from Brookings