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Regular version of the site

Financial Front

The USSR State Budget during World War II

After June 1941, the Soviet budget was no longer the same. Marking the end of peaceful life, budget revenues dwindled, and the Treasury was drained of billions of rubles. But because the war required money, the government had to find it from somewhere. Oleg Khlevnyuk, Professor at the HSE University’s School of History, examines the Soviet Union’s wartime and post-war financial policies in his paper.

Command Economy: No Deficit Allowed

'Our plans are not about forecasts and guesswork, but they are directives which are binding for all government agencies and guide our progress.' This – or something like this – was what Joseph Stalin said as he addressed the Communist Party Congress in 1927. Indeed, the USSR economy was governed by annual economic plans approved by the Kremlin.

The country’s centrally-controlled economy was financed by a centralised budget system. There were three types of public budgets in the Soviet era, developed and adopted at different levels: local level, constituent republic level and national level, respectively. Budgets of the three levels were then consolidated in the country's main financial document, the State Budget.

The State Budget was published annually, and the official reports on its implementation always had to show a surplus. According to a 1940s university textbook, the Soviet budget was designed to fully cover all expenses by revenue, while the latter consistently increased due to continuous growth in industrial profitability and output, labour productivity and people's wellbeing.

This was more fairy tale than reality, but the data in published financial reports always showed a picture of an 'extremely stable and deficit-free' budget. The 1940 year-end results reflected a surplus of 5.9 billion rubles, and in the first six months of 1941, public revenues reportedly exceeded total expenditures by 9.6 billion rubles. But then the war came and everything changed.

Historian Oleg Khlevnyuk reviewed archive documents, including those from the USSR Council of Ministers and the Communist Party Politburo archives previously not covered by scholars, to examine how Soviet financial policy became militarised to finance the war.

Financial Gaps

Even in peacetime, the armed forces consumed a substantial portion of the Soviet budget: 18.7% in 1938, 32.6% in 1940, and in 1941, 32.9%, mostly to finance the People's Commissariat of Defence (NKO) and the People's Commissariat of the Navy (NKVMF).

After June 1941, the state budget was urgently revised to allocate an additional 12 billion rubles to the military commissariats, so the share of defence spending exceeded 40% of the total. The average annual defence expenditures were close to 51% of the entire Soviet budget (582.4 billion rubles) during the war. While some scholars consider that this reflects overall military spending, it is not quite the whole picture.

In addition to financing NKO and NKVMF, budget funds were spent on hospitals, military pensions and benefits, in total 60.1% of the state budget, according to the 1945 estimates published by Gosplan (State Planning Commission). But even this number did not take into account the financing of the People's Commissariat for Internal Affairs (NKVD), and the military industry and construction fields.

So the total, according to Khlevnyuk, stands at 71.4% or 642 billion rubles. The researcher warns, however, that these figures are approximate, as no detailed data is available on how much was actually spent during each war year.

Reality vs. Ideal

This enormous redistribution of public finances required a new approach to drawing up the state budget. It could now no longer be stable or deficit-free, although the authorities in charge of adopting it had not realised this at first, hoping that the country had sufficient reserves available to cover the deficit and unwilling to part with the ideal picture they were used to. 'Despite a worsening situation, the country's leadership (most likely Stalin himself) refused until the last moment to approve a deficit budget', Khlevnyuk explains.

However, neither the reserves nor the officials’ loyalty to the ‘zero deficit’ idea made a difference. With most of the budget spent on financing the war, there was no source of funds available to replenish it.

In peacetime, almost 90% of budget revenues consisted of 'proceeds from the socialist economy', mainly taxes and duties paid by enterprises (turnover tax, income tax, etc.), while the remaining 10% was contributed by citizens in the form of personal taxes and voluntary contributions (subscriptions to government loans). But starting in mid-1941, these sources went into decline.

The turnover tax levied mainly on consumer goods relied on consumer supply and demand. But in wartime, there were fewer purchases and producers struggled to survive at a time when funding for agriculture and for industries producing consumer goods was cut, with the funds redistributed to the army.

As a result, by the end of 1941, the share of turnover tax in Soviet budget revenues dropped by almost 1.5 times from 73.3% to 49.6%, resulting, together with other losses, in budget deficits of 24 billion rubles in the second half of 1941, almost 18 billion in 1942, and 5.6 billion in 1943.

Looking for Solutions

Three government departments—the People's Commissariat of Finance (Narkomfin), Gosplan, and the State Bank of the USSR – were on the lookout for solutions. Issuing more money seemed like the easiest one, so between July and December 1941, a total of 14.3 billion rubles were issued, and the overall monetary emission in the next four years totalled 41.4 billion rubles.

But printing money brings the risk of inflation, and the authorities were required to come up with new and better sources of income. There were differences of opinion as to where this cash should come from: Narkomfin argued for allowing more trade at uncontrolled prices, while Gosplan did not consider that feasible but instead proposed austerity measures and raising funds from households via loans and lotteries. The resulting solution was a compromise, which enabled the government to raise considerable additional funds.

Revenues from 'emergency mobilisation measures' brought some 51% of all wartime revenues to the state budget, totalling 433 billion rubles – 14 billion more than the traditional pre-war sources.

The new revenue sources included proceeds from imports (in particular, from the sale of goods received under the Lend-Lease programme), confiscation of idle balances from enterprises, and receipts of reimbursements and other contributions from foreign states. But there was also something else, even more important.

Over 70% of the state's new revenues were generated by taxes and other payments levied on households and by higher prices and tariffs, which brought, respectively, 163 and 147 billion rubles to the treasury. While the budget surplus was restored, these measures imposed a heavy burden on the Soviet people, requiring them to make huge new sacrifices.

Sources of additional mobilisation revenues in the USSR State budget (2nd half of 1941 - 1st half of 1945, billion rubles)

People's Billions

Tax revenues accounted for more than half of the 163 billion rubles contributed by the public. In addition to existing ones, new taxes were introduced: all citizens aged 18 and older were required to pay the annual military tax, a monthly tax was imposed on unmarried, single and childless individuals, and additional duties were levied on the owners of livestock, vehicles and other property.

Voluntary and compulsory subscriptions to war loans accounted for more than one in five rubles in the State's wartime revenues, while approximately one in six rubles came from donations to the Defence Fund and the Red Army Fund, and one in sixteen rubles was obtained by confiscating funds intended as cash compensation to employees for unused vacation days. The government also restricted the amount of cash people were allowed to withdraw from their savings accounts.

Contributions from households as a source of additional revenues in the USSR State budget (2nd half of 1941 - 1st half of 1945, billion rubles) *

* A total 159 billion rubles, plus 4 billion of the 163 billion rubles received from households which Gosplan did not attribute to any specific source.

During the war years, contributions from households accounted for up to 19% of the total budget revenues, followed by price rises which brought in 17%. Consumer prices at least doubled in government-controlled retail stores and increased even more in commercial trade. But city markets showed the highest and fastest price increases: by 7.5 times in 1942, by 13 times in 1943, and by 10 times in 1944, all compared to 1940.

Unexpected Surplus

These price rises affected some but not all consumer goods, because the majority of essential items were card-rationed and distributed at fixed prices by government-controlled retailers. Combined with higher taxes and revenue confiscations by the state, this approach kept inflation in check. It was good for the government's financial policy, but negatively affected people's living standards. The budget deficit was gradually shrinking, but this policy could not continue forever.

An excerpt from Narkomfin's memo to Stalin on September 7, 1943: 'Further tax increases would be unfeasible, because the budgets of industrial and office workers are already under sufficiently high pressure, while taxes on the rural population have recently been raised. It is also unfeasible to cut spending on the national economy and culture, as it has already been drastically reduced... over the war period'.

The USSR budget in 1944 was originally conceived with a 17 billion-ruble deficit, but the reality was better than expected: revenues exceeded expenditures for the first time since the war started.

Surplus/deficit of the USSR State budget (1940–1945, billion rubles)

Factors contributing to the budget surplus included expansion of commercial trade, increases in customs duties (mainly from the sale of goods received as Western aid) and, most importantly, taxes such as a turnover tax – which, in turn, benefitted from a boost in production and sale of vodka, resulting in 11 billion rubles of additional revenues and accounting for some 11% of all turnover tax income.

'The Last Sacrifice'

Equal amounts of budget revenues and expenditures were planned in the 1945 budget. 'Narkomfin, Gosplan and the government assumed a worst-case scenario', according to Khlevnyuk. 'Indeed, the year was difficult financially. Victory in the war brought new burdens, as well as some relief, for the State budget. Demobilisation of the huge army and subsequent industry conversion to peacetime purposes required more money'.

Military spending decreased slightly, but mobilisation-related revenues from contributions to the Defence Fund, war loans and lotteries also went down. A return to traditional instruments was now on the agenda.

The 1945 budget was closed with a surplus of 3.4 billion rubles. However, 35 billion rubles – almost half (47%) of the total cash in circulation – was held by households. The government decided to confiscate what it believed to be idle cash.

‘The State makes most of the sacrifices. But the public should also bear some of the sacrifices, especially since this will be the last sacrifice', the Soviet government promised as it announced the monetary reform on December 14, 1947. Old ruble bills were exchanged for new ones at a ratio of ten to one, resulting in a sharp decrease to 4 billion rubles in the monetary stock held by households.

The war was over, but the people still had to bear the burden of additional costs required for the country's return to peacetime financial policy. Thus, the now famous slogan 'people are the new oil' was already relevant during WWII and in the post-war era.

IQ
 

Study author:
Oleg Khlevniuk, Professor, HSE School of History, Leading Research Fellow, HSE International Centre for the History and Sociology of World War II and its Consequences
Author: Svetlana Saltanova, September 06