Analysis of the Circumstances and Solutions Which Reduce the Government Budget Dependence on Oil: A Case Study of Fiscal Rules

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Abstract

Many oil exporting countries have set out various policies in response to the challenges posed by the dependence on oil revenues, one of which is imposing fiscal rules. In Iran also, various fiscal rules have been adopted by parliament to reduce the dependence of the state’s budget on oil. These are mainly in the form of five-year development plans. The study shows weaknesses in the theoretical foundations of the fiscal rules and that they fail to achieve the desired goals. The mechanism used for the entry of oil resources into the yearly budget, the willingness to change the exchange rate in order to balance the resources and expenditures of the budget, and the lack of incentives to control expenditures by the government and parliament can be identified as the main causes of the failure of financial rules and laws in Iran. Taking into account the country's previous experience in fiscal rules and assuming there is a will to restructure the dependence of the government on oil revenues, this paper proposes a framework in which fiscal rules can be regulated to reduce government budget dependency on oil resources; this framework is obtained using Budget Performance Data. Simulations were carried out during the period of the fourth and fifth development plans (1384-1384). This study aims to find a way in which to control the non-oil budget deficit, and so the proposed fiscal rule must ensure there is a direct connection and dependency between growth in expenditure and growth in non-oil resources. According to the simulation, if this rule were to be adopted, the operating balance deficit of 58,000 billion tomans at the end of the fifth development plan would turn into a surplus of about 10 billion tomans, and government spending would be controlled at about 102 billion tomans

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