Prof. Dr. Nassif Jassim Al-Jboory The budget deficit is one of the most prominent challenges facing the Iraqi economy, resulting from the persistent imbalance between public revenues and expenditures, and the associated impacts on financial and economic stability and the state's ability to finance services and investments. This problem is particularly significant in Iraq due to the rentier nature of the economy and the heavy reliance of public finances on oil revenues, coupled with high current expenditures and a weak contribution from non-oil revenues. Iraq's budget deficit is not merely a temporary financial problem resulting from exceptional circumstances, but rather reflects accumulated structural imbalances in the economy and public finances. Fluctuations in oil prices, production, and exports directly impact government revenues, while a significant portion of public spending is characterized by its continuity and the difficulty of rapid reduction, particularly salaries, wages, pensions, and social transfers. Therefore, addressing the budget deficit requires moving from short-term solutions, such as increasing borrowing or relying on high oil prices, to structural reforms aimed at diversifying revenue sources, rationalizing spending, improving the efficiency of financial management, and revitalizing non-oil economic sectors. First: The concept of the general budget deficit: - A budget deficit refers to the situation where public expenditures exceed public revenues during the fiscal year, and it can be expressed in the following formula : Budget deficit = Total public expenditures − Total public revenues A deficit may be temporary, resulting from unforeseen economic circumstances, or structural, persisting due to an imbalance between the sustainable structure of revenues and expenditures. The danger of a structural deficit lies in the fact that it does not disappear automatically once economic conditions improve; rather, it requires reforms to the structure of public finances. In Iraq, the deficit is largely linked to fluctuations in oil revenues on the one hand, and to the continuous rise in public spending, particularly current expenditures, on the other. Therefore, addressing the deficit requires examining its root causes, rather than focusing solely on the deficit amount in a single fiscal year. Second: The structural reasons for the budget deficit in Iraq 1. Reliance on oil revenues The heavy reliance on oil is the primary reason for the fragility of Iraq's public finances. Oil revenues are linked to external factors beyond the state's control, such as global oil prices, demand levels, production, and exports. This dependence leads to fluctuations in public revenues from year to year, while most government obligations continue even during periods of low revenue. Furthermore, abundant oil revenues in some years can lead to increased spending, which is difficult to reverse when oil prices fall. 2. Increase in current expenditures Current expenditures, particularly salaries, wages, pensions, transfers, and operating expenses, place a constant strain on the public budget. These expenditures are highly rigid, as reducing them requires complex administrative, social, and political decisions. High current expenditures reduce the resources available for investment spending, limiting the state’s ability to build infrastructure and develop productive sectors that can contribute to diversifying the economy and increasing revenues in the Al-Mustaqbal. 3. Weak non-oil revenues Non-oil revenues suffer from relative weakness compared to the size of public spending, as a result of the limited efficiency of tax and customs administration, the expansion of the informal economy, tax evasion, and weak collection and monitoring systems. The weakness of these revenues leads to an increased dependence of the budget on oil, making it more vulnerable to external shocks and weakening its ability to achieve financial sustainability. 4. The public sector has become too large. The widespread reliance on government employment has led to a continuous increase in the number of workers and retirees, and consequently, a rise in financial obligations related to salaries and retirement. The problem is not only related to the number of employees, but also to the efficiency of human resource allocation and productivity. Therefore, public sector reform should focus on restructuring, increasing productivity, and linking employment to actual needs, while simultaneously encouraging the private sector to create job opportunities. 5. Weak economic diversification The weak contribution of non-oil sectors to GDP, employment, and public revenues is a primary reason for the continued fiscal imbalance. An economy heavily reliant on a single resource is more vulnerable to external shocks. Weak domestic production also leads to increased dependence on imports, limits the economy’s ability to generate stable tax revenues, and makes government spending the main source of economic activity in many sectors. 6. Decreased efficiency of public spending The deficit problem is not only related to the size of the expenditure, but also to the efficiency of its allocation and use. Stalled projects, weak planning and follow-up, high costs of some projects, and their failure to achieve expected returns lead to the depletion of public resources. Therefore, budget reform should target the quality and efficiency of spending, as well as controlling its size . Third: The economic effects of the budget deficit Continued deficits increase the government’s need for additional funding sources, particularly borrowing, which may lead to an accumulation of public debt and higher costs for servicing it in the Al-Mustaqbal. Furthermore, persistent deficits can limit investment spending, as current expenditures consume a large portion of available resources. This leads to weak investment in infrastructure and productive sectors, thereby limiting economic growth and job creation. On the other hand, the high degree of dependence on oil revenues makes the deficit more sensitive to oil shocks. When prices or exports fall, the financing gap can widen rapidly, putting pressure on fiscal and monetary policy. Furthermore, prolonged deficits may weaken the state’s financial ability to cope with future crises, due to the reduced room for financial maneuvering. Fourth: Mechanisms for addressing the budget deficit 1. Diversifying revenue sources Increasing non-oil revenues is a key requirement for fiscal reform. This necessitates developing the tax and customs system, improving collection procedures, reducing tax evasion and leakage, and expanding the use of electronic systems. The reform should focus on improving collection efficiency and expanding the revenue base, while taking into account not imposing burdens that negatively affect economic and investment activity. 2. Rationalizing public spending The reform requires reassessing spending items according to economic and social priorities, reducing unnecessary spending, and improving the management of government procurement and projects. Program and performance budgeting should also be adopted, and resource allocation should be linked to achieved results, rather than focusing solely on the volume of spending. 3. Public service reform The growth of the wage bill should be addressed through workforce planning, staff redeployment, increased productivity, improved training, and linking employment to the actual needs of government institutions. At the same time, reform requires support for the private sector to be able to absorb a larger portion of the workforce, thereby reducing pressure on the public sector. 5. Developing non-oil sectors Economic diversification represents the most sustainable solution to the deficit problem. This requires supporting agriculture, industry, tourism, and productive services, improving the investment climate, and providing financing for productive projects. The role of banks in financing small and medium enterprises and productive projects should also be strengthened, in order to contribute to creating job opportunities and expanding the economic and revenue base. 5. Improving public investment management Government projects should be subject to feasibility studies and economic evaluation before being included in the budget, and projects should be arranged according to priority and expected return. Digital monitoring and control systems should also be developed to address stalled projects and reduce waste in resources allocated for investment. 6. Developing accounting and control systems Public financial management requires integrated accounting and financial systems that provide accurate and timely information on government revenues, expenditures, and obligations. Furthermore, strengthening internal controls, risk-based auditing, and electronic monitoring can contribute to reducing waste, duplication, and financial irregularities. Fifth: Towards a more sustainable fiscal policy Addressing Iraq's budget deficit requires a medium- to long-term fiscal policy, not isolated annual measures. This policy should be based on balancing three main objectives: fiscal sustainability, achieving economic growth, and social protection. In years of high oil prices, uncontrolled expansion in spending should be avoided, and a portion of the exceptional revenues should be directed towards reserves and productive investments, which will help the state cope with periods of low revenues. A medium-term framework for spending and revenues should also be developed that sets a clear path for deficits and public debt, and prevents short-term financial decisions that lead to obligations that will be difficult to finance in the Al-Mustaqbal. Conclusion It is clear that the general budget deficit in Iraq does not represent a temporary accounting or financial problem, but rather a reflection of structural imbalances in the economy and public finance, most notably the heavy dependence on oil, high current expenditures, weak non-oil revenues, the inflated size of the public sector, weak economic diversification, and low efficiency in some aspects of public spending. Therefore, addressing the deficit cannot rely primarily on borrowing or high oil prices, as these tools offer temporary solutions and do not address the root causes of the problem. A sustainable solution lies in building a more diversified, efficient, and transparent public finance system by increasing non-oil revenues, rationalizing spending, reforming the civil service, improving investment management, developing the private sector and productive sectors, and improving accounting and oversight systems. The success of these reforms will reduce the budget's sensitivity to oil shocks, enhance the state's ability to finance services and investments, and achieve greater financial stability, thus supporting the gradual transition from an oil-dependent economy to a more diversified and sustainable one. Recommendations 1. Developing a medium- and long-term national strategy to address the budget deficit. 2. Diversifying public revenues and reducing dependence on oil revenues. 3. Reforming the tax and customs system and developing electronic collection. 4. Controlling the growth of current expenditures and improving the efficiency of government spending. 5. Developing a program and performance budget and linking spending to results. 6. Reforming the structure of the public service and increasing employee productivity. 7. Supporting the private sector and non-oil productive sectors. 8. Improving the selection, implementation, and monitoring of government investment projects. 9. Developing and digitally linking government accounting and financial systems. 10. Strengthening internal control and risk-based auditing to reduce waste and financial corruption. 11. Building financial reserves during periods of high oil revenues to cope with Al-Mustaqbal shocks. 12. Adopting a medium-term framework for managing the deficit and public debt and achieving fiscal sustainability.