Iranian president Hassan Rouhani’s apparently firm determination to convince at least a third of Iranians to voluntarily decline the monthly cash payouts that replaced certain subsidies from March 20—the first day of the new Persian year—clearly stems from economic necessity.
Both the decision to cut subsidies and the government’s warning that it would penalize Iranians who incorrectly reported their incomes are dangerous in a political sense—especially since they most affect the socioeconomic brackets responsible for Rouhani’s success in last summer’s elections.
But the plain fact is that Iran has faced a budget deficit of 4 to 4.5 billion dollars per year since the subsidy regulation scheme began 27 months ago, and the monthly handouts have helped push the country’s inflation rate to around 45 percent.
Rouhani’s government now faces a difficult choice between paying cash handouts to everyone, or dropping the top 33 percent highest earners in the hopes of curbing the runaway inflation rate and bolstering growth. If his government intends to live up to the promises he made Iranians during the elections, it will have to stop giving handouts to the affluent.
Since the subsidy reform plan was implemented under former president Mahmoud Ahmadinejad, the government has earned 10 to 11 billion dollars per year from price hikes on commodities and government services, particularly energy. But it has also spent 15 billion dollars per year on the cash handouts and its development budget allocation, one indicator of economic growth, was in deficit in the last fiscal year.
In the next stage of the reform plan, which takes effect in early October, the government plans to slash the payments to 10 or 11 billion dollars per year, mostly based on the hope that wealthier Iranians will voluntarily give up their handouts and that there will be an increase in revenues from energy carriers to 20–25 billion dollars per year. It is hoped that the money left over can be put to the original goal of the subsidy reform plan: investment in the health sector and in public transportation, as well as insurance for poorer villagers.
It will be incredibly difficult to convince some 25 million Iranians—about eight million families—to voluntarily give up the money they’ve been receiving regularly for two and a half years. The reason they were receiving it in the first place was down to bureaucratic incompetence. In 2007, Ahmadinejad discovered that there were no accurate records of Iranians’ incomes, and his attempts to gather such information failed. Government sources have acknowledged that up to half of the information the government received from people about their incomes was incorrect.
And although Rouhani is reasonably popular and enjoys a certain amount of legitimacy (two things his predecessor lacked), even if his government tried to collect data on incomes, it is not clear people would volunteer the correct information now. His threat to penalize those who provide incorrect information lacks teeth, mostly because of the same flaw that worked against his predecessor: there is no comprehensive and up-to-date information about people’s incomes, and so there is no way of knowing if people have made accurate statements.
It is important to remember that Rouhani is pursuing a national unity policy; he is not looking to pit the rich against the poor, and any attempt to force only a portion of society to give up their cash handouts is likely to do just that. Given the urgency of the issue, it will inevitably be exploited by the government’s hardline opponents.
And so Iran’s government has arrived at a middle path of letting people voluntarily agree to not receive the payouts. This policy has been proposed and debated in recent weeks among debate-leading social groups, such as university professors, artists, ministers and others in the reformist elite. It is estimated that between 7 and 10 million Iranians would agree not to receive the money, saving the government up to 2 billion dollars in the current fiscal year. That may be half of what the government needs to reduce the deficit to zero, but it would be enough to start work on one of the subsidy reform program’s goals: renovating the public transportation system and updating busses and rolling stock.
Since the reform plan began more than two years ago, the real value of the payouts has been falling due to rapid inflation. Today, the payout buys less than half what it bought 27 months ago. If Iran continues to experience the same rate of inflation, by 2016 the payout will purchase only a third of what it did at the start of the program. This is placing a great burden on Iran’s poorest.
Rouhani’s administration has no option but to implement the second phase of the subsidy reform program, and to do so it has to encourage at least 9 million Iranians to forego their handouts. If they are successful, Iran will leave a difficult stage in the country’s tumultuous history behind—and this government will be remembered for achieving a monumental political and economic success.