How did the Soviet Union run a budget deficit?

| Saturday, July 16, 2011
Sometimes a single sentence or phrase jumps out at me, offering many questions in just a few words. Reading an article about the Soviet Union and its unexpected collapse, I read this, "Budget deficits, which since the French Revolution have been considered among the prominent portents of a coming revolutionary crisis, equaled less than 2 percent of GDP in 1985."

Obviously budgets don't need to be balanced perfectly at all times. A bit extra now can compensate for by a bit less then. Or the reverse. Maybe some bills are left unpaid, which in effect would be a spending cut rather than an actual deficit. It's not as if a totalitarian regime has much to worry about if some peasant doesn't get their expected government benefits.

But an actual deficit, to spend more money than it taken in, without having a reserve of cash that is being run down, means the money must come from somewhere. Where? It could have simply been printed or inked, but that would be inflation, not a deficit. It must have been loaned, but who loans money to the Soviet Union? Other, similarly poor communist states? From the similarly deficit-ridden West?

Were capitalist bankers loaning money to the Evil Empire? That would be quite amusing to me: the communists dependent on the evil capitalist pigs, while the evil capitalist pigs happily get richer from communism. On top of that, it seems to me that a totally government-controlled economy would be incapable of running a deficit. With no private wealth to borrow from, it would have to balance its books and economy. Or there is the North Korean model of progressive starvation, extracting more work from citizens than the food required (or even less, if you count foreign aid), but eventually even that must be balanced, if only by the physical necessity of needing the population alive to get anything done.

Maybe the Soviet Union just needed a balanced budget amendment.


Wilhelm Arcturus said...

Soviet economic history is a big subject to jump into, and in the 80s when I was in a Soviet studies program, it was crazy.

The simple answer is, all of the above, and then some.

The SU got loans from the west. They also "printed" money freely. But since the ruble was not freely convertible to other currencies, it was always officially worth approximately a dollar. But on the street you could trade a dollar for hundreds of rubles at some points.

The SU got away with all of this for a long time because it was, and Russia remains, a resource rich country. Oil, natural gas, rare minerals, they have it all. They just made up their deficit most of the time by selling stuff to the west. They rode high in the 50s and 60s on natural resources.

But they rarely invested in infrastructure to keep the wells pumping, so in the 70s and 80s oil output sagged, just about at the point where Reagan restarted the arms race.

All of which is a drastically simplified version of what went on. I didn't even start in on agricultural issues or the great Pepsi/Vodka exchange.

dsj said...

The soviet union in fact did print the money ... they also experienced inflation but the key point there is that with no actual consumer products on the shelves and complete control over setting the official prices for all goods and services the inflation wasn't visible. What you saw was a massive black market and an entire economy of paying the right people to get moved to the front of the line when purchasing anything. Where did the Soviet Union go for foreign currency? --- International arms sales... the USSR was second only to the USA on sales of weapons to foreign countries. In addition the USSR had and continues to have vast natural resources in oil, timber, and metals.

Klepsacovic said...

@Wilhelm: "They just made up their deficit most of the time by selling stuff to the west."
Maybe it's just how I use words, but if you're able to "make up for it", that's not a deficit.

@dsj: Again, if they're selling weapons for funds, that's reducing deficit.

Perhaps the problem is that economics does not use words the same way as common speech. Or more accurately, that common speech doesn't use words well at all.

Nils said...

The most common way is to borrow money from the rich citizens of your own country ...

Wilhelm Arcturus said...

@Klep - What is really a deficit becomes an odd answer when the government and the CPSU owns everything, prints the money, decides what gets produced, and sets the price for everything. You can always get the books to balance in that situation, but your currency becomes worthless outside. And even in that situation they actively lied to themselves about what was really going on.

In the SU, the government effectively "made up" the shortfalls in the plans by increasing oil production (usually in ways that only work in the short term, but which hinder long term, sustained production), selling it for hard currency, buying what they needed (usually food), and then deferring all sorts of infrastructure items. Mortgaging the future is a deficit of sorts, the same way that borrowing against the future is for the US. GOSPLAN had often allocated the resources that got pulled and sold, so production of something else in the economy generally got trashed. Usually consumer goods.

Meanwhile, internally, they still had to make things work. CPSU members were actively encouraged to buy government subscriptions, bonds of sorts, while the day to day ability to pay salaries and that sort of thing was financed by things like the government's sale of Vodka. Gorby's anti-drinking campaign actually caused a serious revenue gap.

Sthenno said...

When I see people talking about how the SU "made up" their deficit, I know they are talking about "making up" as in "covering"; but it is hard not to read it is "making up" as in imagining or pretending. I'm sure there is a lot of fascinating, real, economic history here (and thanks to Kelps for asking the question and to commenters for the tip-of-the-iceberg answers), but if you are looking for a high level, short answer, I think you can stick with: The official economy of the SU was a complete fabrication.

Anonymous said...

Saying that Soviet economy was a "fabrication", as you so eloquently put it, is frankly incorrect and belies a lack of understanding in economics. As surprising as it may sound, Soviet economy was based on GDP, from the extensive mining, heavy industry and extensive military and science production. Furthermore, the growth rate of the Soviet Union, was calculated by the West, to be equal to or greater than that of Japan up to the Brezhnev years. So the "official economy" was not a lie.

Anonymous said...

"It could have simply been printed or inked, but that would be inflation, not a deficit."

I'm guessing this author has never taken a course in macroeconomics and is completely unfamiliar with how deficits are funded an awful lot of the time...

Klepsacovic said...

Inflation is one way that deficits are made to disappear. If it is "funded" then it isn't a deficit.

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