December 22, 2014 | The Wall Street Journal

Iran’s Repressive Apparatus Gets a Raise

To pay for it, Rouhani will have to tax a disgruntled middle class. Luckily he’ll have well-paid Guards to quash any potential unrest.

Hasan Rouhani submitted his 2015 budget proposal earlier this month to the Majlis, Iran’s parliament. The proposal suggests that, contrary to the Iranian president’s reputation for moderation in the West, “Rouhanomics” is really about bolstering the regime’s repressive apparatus while at the same time modifying some of the more reckless policies of his predecessor, Mahmoud Ahmadinejad .

Mr. Rouhani came to power last year riding a wave of discontent with Mr. Ahmadinejad’s mismanagement of the economy and the pain inflicted by mounting international sanctions. With a looming economic crisis at hand, Mr. Rouhani successfully extracted sanctions relief from the West and launched widely publicized corruption probes against Ahmadinejad cronies while restoring competent technocrats at the helm of state-owned companies.

In his first year in office, Mr. Rouhani and his foreign minister, Javad Zarif, softened outside pressure on Iran’s economy, leading the country partly out of recession and international isolation, slicing inflation almost by half to 18% in October 2014 from 34% in June 2013 and reducing unemployment to 9.5% in summer 2014 from 10.4% a year earlier, if official statistics are to be believed.

You might think Mr. Rouhani would aim over the coming years to consolidate these gains. Yet his 2015 budget is a boon to the Islamic Revolutionary Guard Corps, or IRGC, the intelligence branches and clerical courts—suggesting that the great moderate’s real agenda is primarily to preserve and strengthen the regime’s core institutions of repression. Rouhanomics, in other words, is less about growth than it is about regime self-preservation.

Consider the total expenditure. Mr. Rouhani plans in the next year to spend 8.4 quadrillion Iranian rials, or $293 billion at the regime’s official exchange rate of 28,500 rials to the dollar. That’s 4% higher than the previous year, and relies on a 23% increase in government tax revenue to partially offset oil revenues, which are expected to drop by 8%, or about $5 billion. Mr. Rouhani is also proposing to reduce subsidies by 26%, including a 40% decrease in bread subsidies. On the other hand, Mr. Rouhani will spend 59% more on Iran’s broken health-care and insurance system. This will benefit lower- and middle-class Iranians and fend off potential social unrest.

This isn’t a recipe for economic growth but for balancing middle-class discontent. At the same time, Mr. Rouhani is requesting a dramatic increase in the budget for the IRGC, which serves as the regime’s praetorian at home and the tip of its spear abroad. The proposed budget increases Iran’s defense spending by 33%, to $10 billion, although the real figure is probably much higher since much military funding is off the books, coming as it does directly from the office of the Supreme Leader.

Sixty-four percent of public military spending will go to the IRGC and the basij, the paramilitary force that answers to the IRGC. The IRGC is also benefiting from increased government appropriation for its holding company, the U.S. sanctioned Khatam al-Anbia, whose budget Mr. Rouhani plans to double. Assessing each branch of the military separately, the IRGC’s budget rises an astounding 48% under the 2015 budget, while the regular army’s budget shows only a slight increase.

Not only is Rouhanomics going to inflict economic pain on the very constituency that swept the new president to power, but it will also empower the regime apparatus tasked with taming the inevitable discontent of Mr. Rouhani’s constituents. His largess to the Guards is a sign of continuity with the repressive past. It also means that the Islamic Republic will continue its aggressive expansionary regional policy through the IRGC’s Quds Forces.

In addition, Mr. Rouhani would strengthen the other branches of Iran’s authoritarian regime. His budget would grant Iran’s Ministry of Intelligence $790 million, a 40% increase in funding, and give a 37% raise to a special religious court that polices dissent among clerics.

Mr. Rouhani’s economic agenda faces severe challenges: falling oil prices, stalled nuclear negotiations and sanctions, which, though weakened, remain in place. His budget assumes an average oil price of $72 per barrel. Oil revenue is estimated to be roughly one-third of the public budget—or 13 percentage points less, on average, than its rate for the past 20 years.

Both of these assumptions are too optimistic. Unless oil prices bounce back, Iran will have to deplete its oil-stabilization fund to meet spending targets. Crucially, there are three steps needed if Mr. Rouhani is serious about significantly increasing tax revenues. First, he must tax the numerous foundations linked to the IRGC, the Supreme Leader and religious foundations, which are currently tax exempt. Second, he must raise revenue from the Bazaar merchant class, whose cash-driven wealth and political connection make it impervious to scrutiny. And third, he must increase the tax burden on the middle and working classes. While some efforts are underway to tax foundations, for the moment only taxing the middle and working classes seems realistic.

The bottom line is that Mr. Rouhani’s budget appears aimed at streamlining public spending without cutting off welfare completely, but at the same time strengthening the institutions tasked with internal repression and external adventurism. Rouhanomics is sure to disappoint those who put faith in the charm offensive Tehran launched soon after the new president’s election.

Far from turning a new page, Hasan Rouhani is mixing technocratic, pragmatic economic decisions with commitment to the ideals of the revolution. Those in the West, and inside the country, who had entertained illusions of reform will be disappointed.

Mr. Ottolenghi is a senior fellow at the Foundation for Defense of Democracies, where Mr. Ghasseminejad is an associate fellow.