Editorial
Iran’s proposed budget for fiscal year 1405 ((March 2026–March 2027) marks a notable departure from the expansionary and inflation-prone frameworks that have long characterized public finances.
On paper, it is one of the most reform-oriented budget proposals in recent years, signaling a shift toward expenditure control, fiscal discipline and structural adjustment. The critical question, however, is whether these intentions can translate into tangible inflation containment.
The draft budget places greater emphasis on curbing current expenditures, limiting the launch of new projects and advancing performance-based budgeting.
It also seeks to reorient subsidies toward targeted groups and increase the share of tax revenues in GDP, reflecting an effort to build more sustainable and non-oil income streams.
Attention to structural imbalances—particularly in energy and water—suggests a more realistic acknowledgment of Iran’s long-term fiscal constraints.
Wide Gap
Yet the gap between design and execution remains wide. Revenue assumptions, especially tax collection in a sluggish economy, are vulnerable to underperformance. Oil revenue projections continue to carry an element of optimism amid sanctions-related uncertainty.
Moreover, the effective implementation of performance-based budgeting across state institutions is far from guaranteed, while energy price reforms risk imposing short-term pressure on households and producers if poorly sequenced.
From a monetary perspective, the budget explicitly aims to reduce reliance on central bank financing and emphasizes “healthier” deficit financing channels, such as bond issuance and private sector participation.
However, Iran’s structural inflation, weak growth and high current spending mean that any shortfall in revenues could still translate into indirect pressure on the central bank. Treasury advances, banking system borrowing or excessive bond issuance at high yields may ultimately expand the monetary base and reignite inflationary pressures.
Three Pillars
Containing inflation in 1405 will therefore require more than formal budgetary commitments. Three pillars must advance in parallel: first, genuine fiscal discipline through realistic spending and durable revenues; second, tighter control over liquidity growth, including stricter limits on bank balance sheet expansion and more credible central bank independence; and third, policies that strengthen production and investment by addressing energy imbalances and stabilizing the regulatory environment.
The proposed budget offers a defensible and reform-minded roadmap. Whether it becomes a truly anti-inflationary instrument depends entirely on implementation.
If expenditure restraint is real, tax expansion targets non-productive assets rather than producers, and energy reforms proceed gradually with adequate social safeguards, inflation could moderate relative to recent years.
Failure on any of these fronts, however, risks pushing fiscal pressures back onto monetary policy—once again making inflation the economy’s default adjustment mechanism.
