Latsis: Economic Reform in USSR, page 3

Swollen State Budget Deficit

The main reason behind the destruction of the market seems to be the dramatically swollen state budget deficit. These figures were a closely guarded secret until recently. The first ever admission that over the years state expenditures had been in excess of revenue was made at the session of the USSR Supreme Soviet in October 1988. The budget deficit therefore is not a recent problem, but the result of economic Imbalances, huge subsidies, enormous losses and other factors over past years. The first session of the newly-elected USSR Supreme Soviet learned in August 1989 that the budget deficit stood at 120 billion roubles. This is a huge amount, almost a quarter of the state's annual spending. The huge mass of paper money not backed by commodities is a result of years of overprinting and unchecked state spending.

The budget deficit is explained primarily by the drop in world oil prices in the second half of the 1980s, which forced the country to save its hard currency. That was done, unfortunately, according to ministries' recipes rather than in the interests of the population and the state budget The country continued to buy a lot of industrial equipment for new plants in order to boost production. Basically there is nothing wrong with such spending, but in the later years much of the imported equipment was consigned to warehouses because there were no plants to use it. Grain was imported as well, while domestically grown crops were left to rot in the fields. It has been revealed that vast amounts of hazardous chemical fertilisers, which capitalist countries do not use but fob off on developing states, were bought by the USSR. At the same time the smallest item of expenditures, one which does not offer much in terms of savings but which is badly needed by people and greatly benefits the budget, was cut back drastically. I mean the import of consumer goods, which offers the largest rouble returns on hard currency expenditures.

As a result of a saving of several hundred million hard-currency roubles on consumer imports in 1985-1987, retail trade did not get 8.2 billion roubles' worth of goods, and the financial situation worsened considerably. The trend continued into 1988, and imports were cut by another 400 million hard-currency roubles. But every hard-currency rouble spent on consumer Imports brings in 10 to 12 roubles from domestic sales. As a result, during the last three years around 40 billion roubles were lost because of the drop in the world oil prices and the resultant reduction of consumer imports.

The ham-fisted campaign against alcoholism has cost the state almost as much again. It was too straightforward, I think, with vineyards being destroyed, distilleries closed down and hundreds, if not thousands, of beer breweries converted to soft drinks production. Undeniably, such measures, especially during the first year of the campaign brought down drink-related crime, helped improve industrial performance and increased average life expectancy. But in 1986, some 10 billion roubles in revenue were lost because of the decline in taxes on vodka and wine sales. At the same time, drug addiction and other substance abuse increased, as did moonshining, with bootleggers and illegal distillers pocketing money once earned by the state.

Another dent in the budget was caused by the outlays on the clean-up after the tragic incident at Chernobyl more than three years ago. Originally put at 8 billion roubles, the cost of the clean-up has certainly exceeded this figure.

The slackening of control over cash earnings has also contributed to the shortages. For example, although in the nine months of 1989 GNP increased by 3.6% and labour productivity by 2.2 %, the country's wage fund swelled by 8.5%. It is of course a good thing that enterprises themselves now apportion their wage funds. But wages are not always pegged to the real end results of production, and many shopfloor workers or research engineers are receiving double their wages for an infinitesimal improvement in performance. In October 1989, the USSR Supreme Soviet enforced taxes on the wage funds of enterprises in order to prevent them from paying out unearned money.

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