Appropriate fiscal rules for financial policy in Iran

Nonconformity of financial rules and means of injection of resources resulted from oil export into government budget are two crucial issues which has been transformed into a significant hurdle with respect to the stabilization of financial policy. During the booming years, relying on the substantial revenues earn through the oil export in dollar, current expenditures becomes more expanded and civil projects start, and due to lack of a proper management in foreign exchange resources, oil revenues are spent for the import of consuming, intermediate and capital goods which contribute to an unstable and non-continuous economic growth. Previous experience indicate that in order to overcome the problem, a wide variety of measure are taken including increasing the foreign exchange rate, cutting civil projects spending, increasing the price of goods and rate of public services, raising taxes which all contribute to the deterioration of budget deficit (as per Olivera-Tanzy effect) and establish stagnation. Majority of studies demonstrate the necessity for designing of fiscal rules in order to prevent the oversizing of government as well as hinder the fiscal instabilities in short term. Such rules can be quantitative indexes aimed at limiting political intervention or procedural rules working toward the improvement of budgetary’s institutional performance and management of public sector. Foreign Exchange Reserve Account, National Development Fund, and goal setting for deficit of operational level are major fiscal rules designed in Iran. In practice, however, they failed to restrict government in utilizing of recourses from oil export. Current study addresses the available fiscal rules and experience of other countries and then proposes three fiscal rules including setting ceiling for budget deficit without oil and its annual reduction, setting ceiling for spending Rials from oil recourses in budget and its annual adjustment and associating the expenditure increase with the growth of non-oil revenues.