ahmadinejad - AP - December 6 2011
Iranian President Mahmoud Ahmadinejad Photo by AP
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Iran's defense spending would more than double under plans set out by President Mahmoud Ahmadinejad on Wednesday, but critics said his overall draft budget took too little account of economic pressures posed by mounting international sanctions.

Ahmadinejad presented to parliament a budget based on a 20 percent rise in tax revenues, but some analysts thought this unrealistic as Iran struggles with threats to key oil revenues from sanctions linked to its disputed nuclear ambitions.

The president said the public budget for 2012-13 was worth around $90 billion, with an increase of 127 percent in the defense budget. The public budget covers items like wages,
subsidies and development projects.

"The total budget is around 510 trillion tomans (around $415 billion), of which 400 trillion tomans covers state firms and entities," Ahmadinejad told lawmakers in a speech broadcast live by state radio.

Tension with the West rose last month when the United States and the European Union imposed the toughest sanctions yet in a drive to force Iran to curb its nuclear work. The measures target the ability of OPEC's second biggest Oil producer to sell its crude.

Iran has suggested it will fight sanctions with sanctions, with the oil minister saying Iran would soon stop exporting crude to "some" countries.

Iran has repeatedly said it could close the Strait of Hormuz shipping lane if sanctions prevent it from exporting crude, a move in the vital waterway which the U.S. said it would not tolerate.

Ahmadinejad said the draft budget proposed a 5.6 percent drop in government spending. Parliament has often criticized Ahmadinejad for allowing government spending often to exceed what was initially planned.

"The budget is aimed at securing a growth rate of eight percent, higher than 7.3 percent growth in the current year. The budget bill for 1391 (the Iranian year starting on March 20) has been drawn up by taking into account the price of oil and the international economy," Ahmadinejad said, without giving a figure.

Iranian media said the budget was based on an oil price of $85 a barrel, which is below international crude prices. Brent crude rose above $111 a barrel on Wednesday, gaining for a second straight session on fears that tensions between Iran and the West may escalate further.

Revenues from oil exports above the proposed oil price should be transferred to an Oil Stabilisation Fund, part of foreign reserves meant to be used in situations like now when
Iran faces economic hardship due to international sanctions.

In practice, analysts say, even in oil windfall years like 2008/9, the government has often tapped those reserves to support budget spending.

The president has been accused by his hardline rivals, including lawmakers, of stoking price rises with profligate spending of petrodollars.

"The submitted budget is too optimistic. It is not compatible with the realities of our economy," lawmaker Ali Akbar Olia told Reuters.

Analyst Hamid Farahvashian agreed.

"The government has adopted a contractionary policy for next Iranian year. It is unfeasible for the government to meet its spending needs with such a budget ... Parliamentarians will
challenge the budget," Farahvashian said.

Critics say international sanctions and the government's economic policies are hurting many and economic growth has fallen below targets. MPs can amend the budget bill.

"The economic problems in Iran arise from the government's wrong economic policies rather than imposed sanctions," reformist politician Majid Ansari was quoted as saying by the Arman daily on Wednesday.

Increased defense budget

The president said without elaborating that defence spending would increase by around 127 percent.

Iran is at odds with the West over its nuclear work, which the U.S. and its allies say is aimed at building bombs. Iran, OPEC's second biggest producer, says it needs nuclear technology to generate power.

The United Sates and Israel have not ruled out military action if diplomacy fails to resolve Iran's nuclear dispute with the West.

Iran has threatened to hit back at Israel and U.S. bases in the Gulf if attacked.

"Considering increasing pressure and threats against Iran, it was necessary to increase the defence budget," MP Jahanbakhsh Amini told Reuters.

Ahmadinejad, whose camp faces a popularity test in a March 2parliamentary election, said the budget aimed to promote social equality, which analysts say is aimed at winning votes of working-class Iranians.

Soaring food prices are the most explosive issue for many people ahead of the vote.

While steadily climbing double-digit inflation could make the president's supporters vulnerable at the ballot box, increased social and development spending aimed at helping the poor since his government took office may limit the impact.

"Ahmadinejad's camp wants to win the vote by spending petrodollars. This will pave the ground for winning the presidential vote," said Farahvashian.

Iran's economy is feeling the bite from sanctions. Iran's inflation is now officially running at about 20 percent, although economists say prices of the goods most Iranians worry
about are rising at a much faster rate.

Inflation has been climbing steadily in recent months and Iran's rial currency has declined 40 percent against the U.S. dollar on the black market over fears of a military strike against Iran.

Some economists questioned whether the government could achieve the forecast 20 percent rise in tax revenues.

"Ahmadinejad has always had lavish spending and he has never respected the budget framework. How can people pay higher taxes when they struggle to make ends meet," said a former official, who asked not to be named.