This study examines the effects of government expenditure cuts on total production and employment in Iran’s economy, which faces persistent challenges such as chronic budget deficits, dependence on oil revenues, and sanctions pressures. To this end, a static two-sector Computable General Equilibrium (CGE) model, calibrated to the 2023 Social Accounting Matrix (SAM), is employed. The model incorporates the Armington approach for foreign trade, a Cobb–Douglas production function, and endogenous integration of public investment inefficiency (40%) into Total Factor Productivity (TFP), thereby capturing inter-sectoral, price, and external interactions. Nine combined policy scenarios—including balanced reductions in current and capital expenditures, efficiency improvements, implementation of Value Added Tax (VAT) and payroll tax, as well as sanction shocks under fixed and flexible exchange rate regimes—are evaluated. The findings indicate that expenditure cuts generally reduce production and employment; however, combined scenarios with efficiency gains and VAT offset the adverse effects and enhance welfare. In contrast, sanctions impose severe welfare and production losses, with energy production declining by up to 63 percent. The study highlights the necessity of integrated policies aimed at improving public investment efficiency, reforming the tax system, and strengthening economic resilience to ensure sustainable growth and social equity.