The outlook for the Iranian government’s finances in the current Iranian year (which began March 21) is bleak. The economic downturn that started with the May 2018 US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), and the consequent nonrealization of planned oil and gas export revenues, has squeezed the government’s finances. While external pressure is expected to continue, the Iranian authorities have some remedies to address the expected budget deficit. However, each of these remedies will have socioeconomic consequences. The key question, then, is how potential actions by the authorities could help the government reduce the expected budget deficit in order to contain its devastating inflationary impact.

At the same time, the government has an opportunity to initiate some structural reforms to the overall approach to generating and expending state revenues in light of the instructions by Supreme Leader Ali Khamenei to introduce needed reforms.

Generally, in the absence of solid structural reforms, the tactics of any government facing a budget deficit would either focus on the expense side through austerity measures or on the revenue side to generate additional income. Below, we will take a closer look at what tactics could be used to address the current bottlenecks:

The government budget divides its expenses into the following categories: current expenditures (including monthly cash subsidy handouts to most Iranians and other subsidies), infrastructure investments, and budgets for government companies and banks. The latter relates to the overall allocations to entities owned by the government, which, on paper, are balanced by the revenues of the same entities. This position alone covers two-thirds of the overall government budget, and even though increased efficiency can improve government finances, it is outside the scope of this analysis.