This study investigates the relationship between budget deficits and inflation in Iran, emphasizing inflation as a hidden instrument of government financing. Budget deficits in Iran are not episodic but structural, persisting across both boom and recession, with significant implications for macroeconomic stability and social justice.
The research pursues three objectives: first, to provide a theoretical explanation of the deficit–inflation nexus; second, to conduct an empirical analysis of historical budgetary and inflationary trends, particularly during periods of declining oil revenues and international sanctions; and third, to assess the social and distributive consequences of this mechanism.
Employing a qualitative–analytical methodology, the findings reveal that Iranian budget deficits have frequently been financed through borrowing from the Central Bank and monetary expansion. This approach has fueled liquidity growth and entrenched chronic inflation. Historical evidence from the 1980s to the 2010s demonstrates that successive governments repeatedly resorted to this mechanism under fiscal stress, particularly when oil revenues declined or sanctions intensified.
The consequences include economic instability, reduced investment, erosion of public trust, and widening social inequalities. The study concludes that inflation in Iran should not be viewed merely as a monetary phenomenon but as a deliberate tool for financing persistent budget deficits.
Policy recommendations highlight the need to reduce dependence on oil revenues, broaden the tax base, enhance fiscal transparency, strengthen Central Bank independence, and reinforce supervisory institutions to mitigate the structural reliance on inflationary financing.