Fiscal Illusion in Iranian Economy Emphasizing the Five-Dimensional Indicators and the NARDL Approach

The phenomenon of fiscal illusion has always been an intriguing topic in the public finance literature. Fiscal illusion is a concept in which misinterpretation of fiscal parameters and tax expenses and liabilities lead to bias in budgetary decision making at all levels of the government. The current research presents an empirical analysis of the fiscal illusion in the Iranian economy, using five-dimensional indicators of fiscal illusion. For this purpose, the monthly data from 2001-2017 and the linear and Nonlinear Autoregressive Distributed Lag approach have been used. Overall, the results suggest that a nonlinear approach, compared to a linear approach, can provide a better explanation of fiscal illusion in the Iranian economy. Therefore, while confirming the existence of asymmetric effects of the explanatory indicators of fiscal illusion, it is emphasized that there is a fiscal illusion whenever there is an increase or decrease in the desired indicators. The fiscal illusion is confirmed based on the positive decomposition of the deficit illusion index, the negative decomposition of the first index of elasticity illusion (a decreasing trend in the ratio of income tax to total government revenues), the negative decomposition of the complexity index, the negative decomposition of debt illusion index, and the negative and positive decomposition of second index of elasticity illusion (the ratio of indirect tax to direct tax). Also, the results for real exchange rate in the nonlinear estimation show that this factor is associated with asymmetric effects. So, in short-run, the real government spending increases when real exchange rate decreases.