The economy of Iran includes a lot of subsidies. Food items, such as flour and cooking oil, are subsidized, along with fuels such as gasoline. However cutting subsidies can cause civil unrest.

The Iranian targeted subsidy plan (), also known as the subsidy reform plan, was passed by the Iranian Parliament in 2010. The government described the subsidy plan as the "biggest surgery" to the nation's economy in half a century and "one of the most important undertakings in Iran's recent economic history". The goal of the subsidy reform plan is to replace subsidies on food and energy (80% of total) with targeted social assistance, in accordance with a Five Year Economic Development Plan and a move towards free market prices in a 5-year period. The subsidy reform plan is the most important part of a broader Iranian economic reform plan.

According to the government, approximately $100 billion per year is spent on subsidizing energy prices ($45 billion for the prices of fuel alone) and many consumable goods including bread, sugar, rice, cooking oil and medicine.. Retrieved February 13, 2010. However, some experts believe direct subsidies are valued at about $30 billion, depending on oil prices.Bloomberg: Iran Gasoline Consumption Falls 13% After Government Price Rise Retrieved January 9, 2011

The subsidy system has been inherited from the Iran–Iraq War era but was never abolished. Iran is one of the largest gasoline consumers in the world, ranking second behind the United States in consumption per car.United States Energy Information Administration: Environmental Issues in Iran (2000) . Retrieved August 16, 2009. The government subsidy reform has been years in the making, for reasons which are unclear. Iran's Supreme Leader has backed the government’s subsidy reform plan.New York Times: Supreme Leader in Iran Supports Bid to Cut Subsidies Retrieved January 6, 2011

Objectives

Iran spends the largest share of GDP on fossil fuel subsidies in the world. Many Iranian experts agree that these unsustainable subsidies encourage waste among goods, including in the production sector, ranging from gasoline to bread that must be stopped and the only way to do that is to redirect subsidies.

The stated goal of the subsidy reform is "to rejuvenate Iran's economy, increase productivity, give it a new footing and bring it out of the slump it has been in for so long". Concretely, the government plans to replace the subsidies with targeted social assistance. Consequences of the economic reform plan are that Iran will be less vulnerable to US sanctions because it will reduce fuel imports.Tehran Times: Iran gasoline import slump softens sanctions . Retrieved October 20, 2011.The Economist: The regime tightens its belt and its fist Retrieved January 17, 2011 The reform plan will also save money for the Iranian people because it will end a multibillion-dollar-a-year contraband (17% percent of fuel production in Iran is smuggled abroad daily).Subsidy reform plan saves Iran $6b: minister . Tehran Times. Retrieved December 5, 2011.RAND Corporation: The Rise of the Pasdaran . Retrieved June 10, 2010. Due to subsidies, Iran had long had one of the cheapest gas prices in the world, 10 cents per liter or 40 cents per gallon.

Implementation of the plan will reduce waste and consumerism. In fact, according to official data, the higher income strata of the population has enjoyed the same subsidies as the poor until now. Subsidies reduction will also reduce air pollution by reducing car traffic in Tehran.IMF: Iran to Cut Oil Subsidies in Energy Reform . Retrieved October 13, 2010. Finally, the subsidy plan will increase social justice through targeted social assistance.Subsidy plan reduces poverty and income disparities in Iran: World Bank . Tehran Times. Retrieved October 19, 2011. According to official data, the richest tenth of households benefits 12 times more from gasoline subsidies than the poorest tenth. Overall, implementation of the plan will increase productivity, efficiency, competitiveness of Iran's economy, economic growth, oil exports and per capita income (all other things being equal).Islamic Republic of Iran: IMF Staff Report Retrieved March 9, 2011

Implementation

For implementation of the bill, an entity has been established as a duly authorized governmental company under the name "Targeting Subsidies Organization".Nourlaw.com: The Bill for Subsidy Targeting Ready for President’s Implementation . Retrieved June 10, 2010.

The amount saved by the government, will be distributed as follows: 50% towards the poorest strata of Iranian society; 20% at the government's disposal (to compensate for increased costs or as safety net); and the remaining 30% will be directed towards improving the efficiency of the utility, fuel and energy production infrastructure, public transportation development, industry and farming.

The plan will commence with energy, fuel and utilities in the first year and consumable goods will start in the second year. The start of the cuts will coincide with the beginning of the second half of the Iranian year on Sept. 23, 2010. At that time, the 2007 Gas rationing plan will come to an end.

Budgeting

In March 2010, the Iranian Parliament approved a $347 billion budget, in which the allocation from subsidies and the oil price were set at $20 billion and $65 per barrel, respectively. According to the Vice President for Parliamentary Affairs, Iran's subsidy reforms would save 20 percent of the country's budget. Iran wants to save up to $100 billion on subsidies within three to four years. In 2011, the Iranian parliament approved a $508 billion budget based on $80/barrel oil price. This bill also factors in $54 billion from price hikes and subsidy cuts.

+IMF Projections/Scenarios as at 2008/09 2014/15Baseline 2014/15Energy price reform Real GDP growth −3.7% 3.5% ~8% (1/3 from productivity improvement) Real GDP growth (non-oil) 2.9% 3.8% ~8% Crude oil exports 2.4 Mb/dIEA: Oil (Iran) . Retrieved December 29, 2010. 1.8 Mb/d ~2.5 Mb/d Current account 7.2% 0.2% ~2.5% CPI inflation 25.4% 10% ~7% (peaking above 30% in 2011) Gross official reserves $80 billion $98 billion ~$170 billion

+Overview of 2011–12 budget and comparison with 2010–2011 budget.Turquoıse Partners (Aprıl-May 2011): Monthly Report. Retrieved July 29, 2011. Item 2011–12 2010–11 % Change General Budget, of which 170 129 31.8% Development Expenditure 35 31.7 10.4% General Expenditures & Other Items 135 97.3 38.7%Budget for State-Owned Banks and Enterprises 355 252.5 40.6% Total* 508 368.4 37.9% Resources from Subsidies Phase Out 54 20 171.7% * Totals may not add up due to rounding and deduction of double-counted items Note: all numbers are in billion dollars.

Income data

According to the IMF, until recently a four-member Iranian household received an average of $4,000 a year in subsidies for oil and natural gas, compared with a typical annual income of about $3,600 a year.

In 2010, Iran's Department of Statistics announced that 10 million Iranians live under the absolute poverty line and 30 million live under the relative poverty line.Radio Zamaneh: Ten Million Iranians Under "Absolute Poverty Line" Retrieved May 28, 2010 President Mahmoud Ahmadinejad says implementation of the targeted subsidy system will eradicate unemployment and poverty in Iran within three years.

Data collection

The administration has said earlier that it will be able to allocate different payment amounts to different people. To that end, in 2009, forms were distributed asking Iranians to report income, assets and property but the question remains on how the government will verify this information gathered by self-reporting. Many people have chosen not to report or withhold information. The administration has categorized the people into three income brackets; namely lower, middle, and higher for the implementation of the subsidy reform plan.Tehran Times: 40 percent of families in lower income bracket . Retrieved February 2, 2010. On the other side, it was not clear in what form the compensation would be distributed, direct cash or goods. Another concern is the accuracy of government information on family incomes.

In September 2010, Iran's Statistics Bureau announced that implementation was delayed by one month because they were still collecting information regarding the financial situation of households and opening bank accounts for them.

Plan revision

Later in 2010, the government announced that it had revised its plan because of lack of reliable data on personal incomes. To ease the economic loss from lost subsidies, the government indicated it would distribute $40 per person/month (i.e. 455,000 rials/month) to 90% of the general population, starting on December 18, 2010.Wall Street Journal: Iran Tightens Security as Subsidy Cuts Loom. Retrieved November 6, 2010.

+ Original vs. Revised plan Item Original/Budgeted plan (2010) Revised plan (2011)% population receiving cash handouts 50% >90%United States Institute of Peace: The Subsidies Conundrum . Retrieved November 17, 2010.Amount re-directed from subsidies $20 billion/year <$54 billion/yearMore subsidy cuts in Iran budget . Aljazeera. Retrieved May 1, 2012.Central bank: Income equality improved in Iran . Tehran Times. Retrieved May 4, 2012.Cash handout per capita/month $25 $40Cost in 2011 budget for this handout $10 billion >$30–35 billion (>$2.5 billion/month)Amount allocated for production & government from subsidies re-direct $10 billion ($6 billion for production and $4 billion for government to cover increased costs) >$10 billion for production

Price adjustments

The government took control of deciding how much the prices should rise in a year, as long as the subsidy cuts on gasoline and other refined products, natural gas, electricity, water, food (sugar, rice, cooking oil and bread), health and education are between $10 and 20 billion dollars annually. Estimates indicate that the government has to increase existing prices by an average of 2.5 times to achieve the lower target and by 4 times for the maximum target. According to the IMF, Iranians can expect the first price hike to lift energy product prices between four and 20 times previous levels, with prices surging even higher eventually.

Other determinants

According to the plan, the type of consumption (i.e. whether agricultural, industrial and civil) will also be considered when setting energy prices. The subsidy plan will be implemented in proportion with geographical regions because warm regions consume more electricity during summer while cold regions consume more gas during winter. Finally, the time of consumption (i.e. during peak and off-peak hours) and the consumption demand (i.e. whether it is low or high) will be taken into consideration.