Hidden public expenditures and the economy in Iran

Fiscal accounts are meant to show how much and where the government spends public funds or commits a country's resources to future payments. Information from government accounts is essential for evaluating government policies and programs in terms of their contribution to addressing social and economic needs and their impact on macro-economic performance. But there is a common problem in published fiscal data that must be addressed before they can be put to use: governments typically have some expenditures and debts that are not reflected in their official accounts. The extent of concealment varies across countries and activities, and the users of fiscal information need to be sensitive to the causes and consequences of such variation. Middle Eastern countries have their own share of hidden spending and liability, and some-such as Iran, Turkey, Morocco, Syria, and the Persian Gulf countries-stand out among nations in the scope and size of fiscal activities that they keep off their budgets. In this paper, we examine the case of Iran, where huge public funds are appropriated and redistributed outside the formal budget. The case is instructive because it shows the wide range and size of hidden government expenditures and commitments that affect the public. It also displays the dire consequences that lack of proper government accounting and reporting can bring to a country. The existing studies that deal with various forms of extra-budgetary activity typically describe the different ways in which governments incur hidden expenditures and argue for fiscal transparency. The literature has paid little attention to the reasons that such activities are more common in some countries than in others or which factors may encourage governments to keep fiscal information explicit and transparent. Also, there have been few attempts to produce a broad picture of the scope and size of such activities in a given country. Thus, in addition to coming up with a comprehensive measure of off-budget public funds and commitments in Iran, this article explores the reasons that the use of such funds has grown to such an extraordinary proportion in the country. The analysis has important implications for the need and possibilities for reform in Iran and other countries where off-budget activities are substantial. The data and analysis in this paper refer to the general government budget. We start with the official budget data, which include all levels of government except municipalities, public enterprises, and the quasi-public institutions under the control of the Supreme Leader. The budget shows part of the transactions between the excluded entities and the government, but the actual values are disguised by the accounting practices. Our assessment of extra-budgetary funds (EBFs) completes the picture and covers all resource transfers to and from government and para-statal units. We begin with analysis of the issues and experiences regarding extra-budgetary funds. We then discuss the role of government in the Iranian economy and assess the off-budget revenues and expenditures, and discuss the reasons that an inefficient fiscal system has come about in Iran, deriving implications for reform.