Cash Subsidies: Another Failed Project?

Gholamali Jafarzadeh Iman Abadi, a member of the Parliament's Program and Budget Commission, elaborates on the details of the targeted subsidies in the first six months of this year, stating that 95.21% of the country's population receives subsidies. This comes despite government officials repeatedly claiming that subsidies for wealthier segments have been eliminated. The same parliament member notes: "In Esfand 1395 (March 2017), there were 75 million subsidy recipients. By Shahrivar 1396 (September 2017), the number of subsidy recipients had risen to 76 million, indicating an increase of about 600 thousand recipients." Currently, as the budget for the next solar year is being drafted, Mohammad Mehdi Mofatteh, spokesperson for the Parliament's Program and Budget Commission, criticizes the government for not eliminating subsidies for the wealthy from the new proposal by representatives to cut cash subsidies for the affluent next year. The main reason that has compelled the Parliament to cancel cash subsidies for wealthier segments is the end of the law's execution period, which was supposed to last five years but continued beyond that. Additionally, the ineffectiveness of the cash subsidy law in achieving its goals is seen as another motivation to end this project. The cash subsidies, given the inflation caused by the previous government and excessive waste, not only failed to achieve targeted distribution but also did not prevent class disparity; instead, they led to financial resource wastage, increased budget deficits, and negative effects such as borrowing from the Central Bank and increased liquidity. According to calculations, the total amount paid in subsidies exceeds the total investment in infrastructure in the country. Meanwhile, various reports from institutions within Iran indicate that class disparity is increasing, and the quality of life for the impoverished and marginalized segments shows no significant improvement. Providing cash subsidies, especially to those who do not need them, is an inefficient use of resources. These subsidies not only serve as a disincentive for job-seeking but also imply unemployment for those who receive them, as the financial resources allocated for subsidies could be used for productive activities and employment, instead being diverted to provide false and short-term satisfaction to certain influential segments within the ruling establishment. Why did cash subsidies continue despite their ineffectiveness? The total amount paid in subsidies exceeds the total investment in infrastructure in the country. Meanwhile, various reports from institutions within Iran indicate that class disparity is increasing, and the quality of life for the impoverished and marginalized segments shows no significant improvement. Providing cash subsidies, especially to those who do not need them, is an inefficient use of resources. According to the law passed by Parliament, the implementation of the targeted subsidy law was supposed to be a five-year law, and thus it was supposed to end two years ago - in 1394 (2015) - but continued due to political reasons and factional competition within the establishment. Although government officials have repeatedly acknowledged the detrimental nature of continuing cash subsidy distribution and criticized the payments, the government, being weak in social standing and wanting to retain executive power for a second term, refrained from ending the cash subsidy distribution. Otherwise, protests from some factions within the establishment or even from certain segments could have jeopardized Hassan Rouhani's second presidential term. Thus, cash subsidies began and continued with populism. Can subsidies stop the increase in class disparity? Various economic, political, social, and cultural reasons explain the increase in class disparity in Iran, and the issue is not limited to income distribution inequality. Iran's main income, namely oil revenue and related rents, is in the hands of the ruling elite and their affiliates, who monopolize the distribution of resources, including wealth, income, power, status, knowledge, and information. Therefore, the primary condition for equitable distribution of wealth and income and reducing class disparity in its economic sense is the distribution of political power and public participation in it. In the absence of widespread and institutionalized public participation in political power, it is natural that wealth and income will ultimately be distributed in favor of the dominant political groups, namely the clergy and their allies, including military personnel, state bureaucrats, and dependent private sector entities. The increase in class disparity is a long-term consequence of the past policies of the establishment. Although short-term measures such as cash subsidy distribution can somewhat conceal the emergence of increased class disparity, such actions are not fundamental; with the emergence of inflationary waves, as well as recession and decreased employment, class disparity will manifest itself. Can cash subsidies to wealthy segments be stopped? Since a significant portion of Iran's economy is opaque and there is no precise and transparent tax system, identifying individuals who need subsidies is difficult. This is why, despite the government's efforts and relevant agencies, what is termed "identifying vulnerable deciles" has not been successful. Global experience shows that subsidies should be targeted and provided by institutions that are accountable, transparent, and politically and religiously neutral to achieve their main goal of empowering vulnerable segments, rather than fostering dependency and consumerism. Otherwise, financial corruption, clientelism, vote-buying in elections, and political maneuvering with public resources become inevitable. Conclusion: The distribution of subsidies is seen as a populist action, and its function is framed within the struggle between power factions. The government currently faces an increasing budget deficit, which is likely to grow further with rising current expenses next year. Additionally, the government is one of the largest debtors to the banking system and contractors. Therefore, it seems that the government must stop the targeted subsidy project in Iran and the current form of cash subsidies for the sake of budget balance. Thus, after nearly seven years, another populist project of the establishment has reached a dead end. It may be said that the most significant positive effect of the cash subsidy project for the establishment was to adorn the facade of governance with a display of justice-seeking, which ultimately bought time for the regime's survival. In this way, the government offered rent subsidies instead of real improvements in living standards to certain segments.