POSSIBLE SOURCES OF DEFENSE EXPENDITURES IN THE SOVIET BUDGET. (RR ER 64-42)

Created: 12/1/1964

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INTELLIGENCE REPORT

CIA HISTORICAL REVIEW PROGRAM RELEASE IN FULL

POSSIBLE SOURCES OF DEFENSE EXPENDITURES IN THE SOVIET BUDGET

DIRECTORATE OF INTELLIGENCE Office of Research and Reports

Few analysts of Soviet economic affairs accept the explicitly announced defense allotment in the budget as an accurateof the total expenditures for military and space activities in the USSR. Other allocations in the Soviet budget are probedln thie reportparticularly certain large unexplained residual itemsn order to arrive at an estimate of the total budget funds available for military and space activities* These estimates are compared with the defense series announced by the USSR and with the most recent ORR estimates of total Soviet defense expenditures.

The explicit section of the Soviet budget that deals with defense is held to represent actual accounting and statistical "flows" within the economy, even though presented to the outside world onlyingle number. However, additional large defense expenditures are believed to be concealed within other categories of the budget, and the ratio of these expenditures to total defense expenditures can and does vary widely. Concealment of data rather than outrightis believed to be the method employed by the Soviet leadership for disguising the size and trend of defense expenditures. Concealment is simpler, less time-consuming, and, if uncovered, potentially less embarrassing- There are not two seta of books, one for private and one for public usejust one set of books kept under lock and key.

Previous attempts have been made within and outside thoco-ammity to estimate the concealed funds intended for defense by examining budget residuals. This attempt benefits from additional budgetary material published by the USSR and described in the text of the report.

Summary and Conclusions

I-

ll- Scope and Content Of the Expenditures Residuals

Expenditures Residual in the All-Unlon

Budget

Under the Allocation to Financing the

Hational

to Industry and Construction in the All-

Union

in the Science

E- Sum of the Unexplained Residuals and the Explicit

Defense Budget

III. Comparison of Budgetary Funds Available for Defense

with Expenditures for Defense as Announced by the USSR

and as Estimated by

A. Over-All Comparison

9- Content Of the Explicit Defense Budget

Appendix

Source References

Tables

1. USSR: Budgetary Funds Available for Defense, ORBof Defense Expenditures, and Explicitin the Consolidated State

p. USSR: Expenditures of the Consolidated state Budget,

by50 and Plans

3- USSR; Expenditures of the Consolidated State Budget,

Oy Type ofnd Plan3

M. USSR: Derivation of the General Expenditures Residual

in the Ail-Union

f Wfl

Adjusted General Expenditures Residual

in the All-Unlonnd Plan

Derivation of the Unexplained Residual Under

the Allocation to Financing the National Economy

in the Ail-Union Budget

Unexplained Residual Under the Allocation to

Financing the National Economy in the All-Union

Adjusted Allocations to Industry and Construction

in the All-Unlon

9- USSR: Sum of the Unexplained Residuals Under theto Financing the National Economy and theto Industry and Construction in3

10- USSR: Unexplained Residual Under the Allocation

to Science in the Ail-Union

Ll

6

1

USSR: Explicit Defense Budget and the Unexplained

Residuals in the AU-Union Budget That Kay

12- USSR: Planned and Actual AU-Union and Republic

Budgetary

Charts

Figure 1. USSR: Comparison of Budgetary Funds Available for Defense, ORR Estimates of Defenseand Explicit Defense Allocutions in the Consolidated Stateollowing

Figure 2. USSR: Structure of Announced Expenditures in the Consolidated State Budget following page

IS THE SOVIET BUDC3T"

Summary and Conclusions

Total Soviet expenditures for defense, as independently estimated by ORR, have been consistently larger than expenditures reported in tho Soviet Statenderact that would indicate that some defense outlays are concealed under other categories of the State Moreover, the trend of ORR estimates of defensediffers from the trend of these expenditures reported by the USSR. When certain unexplained residual allocations ln the Soviet budget are added to the Explicit Defensehe seriesalthough exceeding the range of the ORR estimates in every year, matches these ORR estimates much more closoly than does the Explicit Defense Beries that has been announced by the Soviet government.

The selection of these unexplained residuals restsypothesis concerning the location of defense expenditures in the Soviet budget-The consolidated Soviet State Budget is composed of the All-Union Budget and the budgets or the individual republics. Including the local budgets. The financing through the All-Union Budget of works of "national" (obshcheeouudarstvennoye) significance suggests that those expenditures for defense not financed through the Explicit Defense budget would be included in certain unexplained allocations of the All-Union Budget. These suspected appropriations appear as residuals within four major categories of expenditures: General Expenditures, Financing the National Economy, Industry and Construction, and Science. Theare found by subtracting from the total expenditures in each category (l) specified nondefense itemsnspecified nondefensc items identified free other information. Although the residuals still include other nondefense elements, it is impossible with the available data toet series that embraces only expenditures for nd the Planwo separate series.nd Variant II, which are based on alternative assumptions, are presented as estimates of these residuals.

* The estimates and conclusions in this report represent tho best judgment of this Office aa ofU.

Also referred to as the Soviet budget. in addition to the conventional military outlays (for example, personnel and procurement ofefense outlays (oraa used in this report also include outlays on the militarized security forces, on research and development activities related to military programs, and on all space programs.

t The consolidated State Budget allocation to Defense will beto as the Explicit Defense allocation or the Explicit Defense budget.

2

A total budget availability seriesthe Explicit Defense ulloca-tlona plus tho unexplained residualswhich is derived from present information, can provideypothetical upper limit of possible defense expenditures, whereas the Explicit Defense budget alone pre-sumeblyower limit. Throughout the period, the independent ORR range of estimated annual defensehas been within these two limits, as shown Innd 5ll three series went down. The budget availability series began to climb8 and the ORR seriesut the Explicit Defense budget series flattened out. lthough all three series were rising, both the Explicit Defense budget and the budget availability series increased more rapidly than the ORH range of estimated expenditures on defense. Over-all, the trend of the ORR defense estimates does not agree with the trend of the budget availability series any more closely than it does with the trend of tho Explicit Defense budget series. However, the high ORR series agrees more closely in trend with both budget series than docs the low ORR series and, in this respect at least, is oore plausible than tbe low series.

The sudden rise byercentl in the Explicit Defense budget was accompaniedecline ofercent in the allocation to another All-Union Budget category. Financing the national Economy, and probably was the result of surfacing expenditures froo this and possibly other budget categories. rocedure wouldeversal of the Soviet government's policy1 of reducing that part of expenditures for defense presentod in the publicly announced Explicit Defense budget.

Annual changes in Explicit Defense expenditures say well be viewed as more indicative of trends in Soviet political policy rather than as indicators of change in absolute or relative levels of Soviet defense spending. The official effort toertain image of itsposture to foreign and Internal audiences probably Is the major consideration In deciding the absolute and relative annual changes to be announced publicly through the Explicit Defense budget. On the other hand, tho ever-present possibility of shifts in the content of the budget residuals makes the budget availabilityisky alternative guide to short-run changes in the level of defense

The categories of expenditure believed to be excluded from the Explicit Defense budget Include allocations for research andfor militarized internal security forces, and for some major procurement- Although the allocation to Science probably covers alaost all military research and developocnt and although the security

, below.

USSR: Budgetary Funds Available for Defense, ORR Estimates of Defense Expenditures, and Explicit Defense Allocations in the Consolidated State

6 7 8 9 0 1

Budgetary funds available for defense

forces are financed by the residual under General Expenditures, no single residual appears large enough to accommodate all of thethought to be financed outside the announced allocation for defense. The residual under General Expenditures, the all-unionto Industry and Construction, and perhaps some grants from union-republic budgets for increasing state material reserves probably all conceal some items of military procurement.

I. Introduction

According to the Soviet interpretation of Marxist principles, the state appropriates the surplus value produced in the economy (theof labor's output above its wages as reflected chiefly in profit and turnover taxes) and applies it to investment, defense, social welfare, and government administration. The State Budget, administered* by the Ministry of Finance, is the principal instrument for carrying out this redistribution of funds. Other major instruments forthis redistribution are accumulations by state enterprises, collective farms, and the banking system.*

Expenditures in the principal categories of the consolidated State Budget ore summarized in* The category Financing the National Economy provides funds for investment, additions to working capital, and current operational costs to enterprises in all branches of the economy. Under the category Social-Cultural Measures, funds arefor education, science, art, press and radio, health and physical culture, social insurance, and welfare. The budget category Defense represents the officially announced defense allocations of the Soviet government for support of military programs and is referred to in this report as the Explicit Defense budget. Expenditures on Administration support the national and local organs of state power; planning,and economic organs; ministries, departments, and perhaps state committees; councils of the national economy; and judicial organs. Expenditures on Loan Service cover the retirement of principal and interest payments on the public debt. The Reserve Funds of the Council of Ministers of the USSR and of the republics are contingency funds that are spent on the other categories as the need arises during the year. Tn recent years, almost all of these reserve funds have supported the category Financing the Rational Economy.

* State enterprises accumulate almost all of their own funds fromprofits; collective farms accumulate theirs fromixed share of gross receipts. The banking systemechanism for redistributing fur.ds through financing bank loans to state enterprises. For additional details on the role of the State Budget in the Soviet financial system, see source if. (For serially numbered source references, see the* P.elow.

The Soviet State Budgetonsolidated budget, including all-union, republic, and local government budgets. The Republic Budgets finance activities under the control of the sovnarkhozes and theministries, including almost all industry, state farms, internal trade, municipal economy and housing, some transportation andand various social-cultural measures. The Republic Budgets also encompass local budget expenditures on these same activities. The All-Unlon Budget finances activities of national, importance or "works of all-union significance" such us defense, foreign trade, almost all

The scorch for the sources of this additional financing of defense has drawn the attention of Western analysts to several unexplainedof expenditures in the announced annual budgets. These sizable, unexplained allocationshereafter referred to as residualsore not explicitly separated in Soviet reporting from the categories shown inut are derived by (l) deducting from the highly aggregated major categories known ruble expenditures for nondefense elements andeducting from these derived residuals those allocations for some of the nondefense elements included therein, insofar as they can be estimated from nonbudgetary sources.

Previous attempts to refine the budgetary expenditure residuals have been confined to the residuals in the over-all consolidated State owever, the Soviet governmenttatistical handbook hj that provided more detail on expenditures within thecategories of the consolidated State Budget and alsoetailed breakdown of the consolidated State Budget into its component budgets: the All-Union Budget and the Republic Budgets (including the local budgets). From this information it was possible to construct separately the all-union and republic components of the expenditure residuals in the consolidated State Budget5

As the All-Union Budget finances "works of national or all-uniont is believed that almost all defense expenditures not financed from the Explicit Defense budget are contained within the All-Union expenditure residuals of the consolidated Staten other words, expenditures made through the budgets of the republics are not believed to be related to defense, with twoppropriations for the militarized security forces of the republic "ministries for the preservation of public order"dditions to state material reserves for defense purposes, which possibly could be financed at the republic level.

The consolidated State Budget of the USSR is divided into its two major components, and the budgetary categories that either are known to contain or are believed to contain defense expenditures arein Figure 2. After known nondefense outlays are deducted, these categories yield the principal residuals under the All-Union Budget withthis report is concerned(L) the residual under Generalhe residual under Financing the Nationalhe allocation to Industry and Construction, and (U) the residual under the allocation to Science.

This report presents estimates Of und defines the scope of these residuals ir. terras of the known or suspected but not quantifiable

See, for example,.

** ecent Soviet source states, "Expenditures on defense are fully realized from the funds of the union

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categories (defense and nondefense) remaining in them and then compares the budget availability series (the sum of the unexplained sections of the various residuals in the All-Union Budget and the Explicit Defense budget) with the Explicit Defense budget and the ORB defense estimates. The first two objectives are developed in II, below, and the third in III, below.

Scope and Content pf the Expenditures Residuals

The four unexplained categories in the All-Union Budget that could finance defense expenditures are the residuals under GeneralFinancing the National Economy, and Science and the allocation to Industry and Construction.* This section explains the derivation of these residuals. These allocations in the budget clearly include items of expenditure other than those related to defense, but large parts of these unexplained sums probably were allocated to defense programs.

The reliability of these estimated residuals is affected by aof shortcomings in concept and data, and these weaknesses arein the following sections. Although the budgetary residuals are presented to the nearest tenth or hundredthillion rubles, the sums are not that accurate.. The unknown location of certain accounts in the Soviet budgetary system necessitated same arbitraryand planned data have been used to supplement the less detailed actual data that have become available The lack ofdefinitions of budget categories in Soviet texts and the lack of knowledge of the effects on the budget categories of the frequent reorganizations of the economy7 also have caused some.

A- General Expenditures Residual in the All-Union Budget

The steps followed in deriving the General Expenditures residual under the All-Union Budget are shown in f the All-Union Budget include the major groups of outlays in the Soviet budget, and these outlays are the highly aggregated elements that usually appear in the published version of the budget.

" Although the allocations to Industry and Construction are not true residuals, they have been included in the list of budget residuals of possible defense significance because they are suspiciously large in relation to that part of the Soviet economy that they are intended to support.

** elow.

hroughre the only known elements in this residual under General Expenditures. 6/ The iten> Refund of Taxcovers refunds to enterprises and individuals for overpayment of taxes in previous years. The content of the category Accounts with Banks is not clear; it may include deposits directly allocated from

Table k

USSR: Derivation of the General Expenditures Residual in the All-Union Budget

1- Total expenditures in the All-Union Budget Less appropriations to

Financing the Rational Economy

Social-Cultural Measures

u. Administration and the Courts 5- Loan Service 6. Defense

7- Reserve Funds of the Council of Ministers (plan only) Equals

S. General Expenditures residual Of which:

of Tax Revenues

Accounts with Banks

Ministry of Internal Affairs (MVD) and the Committee for State

Security

Payments and Other Expenditures, including an un-

specified element (possibly related to defense)

the budget for granting long-term credits.* The category Variousand Other Expenditures is known to include minor outlays not elsewhere classifiedxpenditures for the manufacture of medals and other decorations, reimbursement of postal expenditures incurred in the transfer of tax payments, and the like. If defense expenditures arc included in the General Expenditures residual, it is believed that they would be classified in this catchall category.

Although no information is available for estimating expenditures underndnd the nondefense elements ofhe over-all ruble outlay on nondefense items is thought to beless than the ruble magnitude of the General Expenditures

* Such allocations would be in addition to the funds available for this use from the budget surplus explicitly allocated for this purpose.

Ol Mi':s i" I" :it (see

USSR: Adjusted General Expenditures Residual in the All-Unionnd Plan3

Billion Hew Rublei

7 8 9 0 1 2 Plan

) y 28 7

Derivation of the5

General Expenditures residual inBudget

) ) )

Plus

Expenditures for the Internal Security-Forces (foncer KVD) cj

lM ) 2 3 ) ) ) )

Equals

Adjusted General Expendituresthe All-Unlon

a^ , see source Data7 include ar. estimateillion rubles for Loan Service. Datand those of the plan3 are estimated from data in the annual plans and fromof plan fulfillment. 8/

in parentheses are ORR estisates.

estimateillion rubles0 is suggested by the over-all changes in the residualsAll-Union and the Republic Budgets9 The actual outlays are assumed to havethe same magnitude12 and in the plan

With but two minor exceptions, defense expenditures probably are not included In the budgets of the union-republics. One of these probable exceptions relates to the militarised security forces of the republic internal security organs. xpenditures for the internal security organs were financed at the all-union level, but in that year the Ministry of Internal Affairs (MVB) was abolished, its functions were transferred to the republic "ministries for theof publicnd the financing of this element of internal security was transferred to the budgets of the union republics.xpenditureu for the other militarized security forces, the Committee for State Securityrobably are still financed at the all-union level. Because expenditures on the former mvd organs9 are believed to have been transferred from the General Expendituresof the All-Union Budget to the He public Budgets, the all-union ruble seriesG2 and the Plan3 have been adjusted to include these expenditures on internal security forces.

Thus the adjusted General Expenditures residual shown inncludes ruble outlays for at least one element of defensemilitarized security forcesand probably other defense expenditures as well. Sumo procurement of major military equipment very likely is financed from funds in this residual.*

B. Residual Under the Allocation to Financing the national Economy

This budget residual under the allocation to Financing the Rational Economy is obtained from the All-Union Budget by theshown in Table 6.

* Sec Hi, B,elow. ** State reserves refer to stockpiling of goods not normallyas working capital. Thus they axe special inventories set aside for emergency use in times of mobilization or of crop Several Soviet sources have stated that one of the components of state reserves is armaments"reserves of means of defense whichpecial nature." It is possible that [footnote continued on

Of the four unexplained residual categories considered, the residual under Financing the Rational Economy is the ssallest, and in allowing for the probable inclusion of at least some nondefense pro-grass, it is quite likely that this residual does not contain defense expenditures. Soviet sources indicate that additions to "stateare partly financed from funds included in Financing the Rational On the other hand, because the total magnitude of these annual increments to reserves greatly exceeds the size of the residual under Financing the National Economy, It is clear that this source of financinginor role. The greater part offinancing additions to state reserves probably Is divided asang the several categories, for example. Industry and Agriculture,to the type of commodity

USSR: Derivation of -the Unexplained Residual Under the Allocation to Financing the National Economy in the All-Union Budget

expenditures for Financing the National Economy

in the All-Unlon Budget

Less appropriations to

and State Agriculture

Agricultural Procurement 5- Trade

6. Transport and Communications

Municipal Economy and Housing

Equals

8. Gross residual under Financing the National Economy Less

9- Premium payments for agricultural

to Ministry of Culture

Equals

residual under Financing the National Economy

Of which:

Additions to state reserves (nonmilitary)

Unspecified (possibly related to defense)

defense-related accumulations to state reserves are financed directly from explicit budgetary appropriations to defense, ll/

To achieve comparability in coverage of this residual within the All-Union Budget for all years5inormust be made for appropriations that were included in the All-Union Budget only in the early years. Rough estimates orefor these elements,n Table 6. Direct grants from the All-Union Budget were madeoprocurement organizations for the premium payments that they made to farms for technical crops. 8 these budgetary

allocations are believed to have been transferred to the Republic 6 the entertainment and publishing industries operated by tho Ministry of Culture*mall allocation from the All-Unlon Budget. 7 these budget grants also are believed to have been financed by the Republic Budgets.

The adjustments outlined above result in the net estimate of the residual under Financing the Rational Economys shown ln Table 7. Because the USSR has not revealed actual budgetarywithin this category, there is no basis foreasonably accurate estimate of the residualather this residual is lumped together with another cot ago ry under Financing the National Economythe all-union appropriations toand Constructionwhich is suspected of containing expenditures related to dorense. The derivation of this latter series ia described in tho following section.

C. Allocutions to Industry and Construction ln the All-Union Budget

The main reason for including allocations to Industry andln the category of budget residuals is the unaccountably large size of these allocations, the years for which firm data are available. During those years, budgetary appropriations through the All-Union Budget to Industry and Construction were aboutercent of the total budgetary (consolidated) appropriations to all Industry and Construction (see Yet, in the same period. Industrial and construction enterprises of all-union subordination produced annuallyercent of the gross value Of industrial output ln the

This small part of total industrial output seems to havein enterprises controlled by three state production committees subordinated to the Council of Ministers of the USSRedium machine building, construction of electric power stations, and the gas industryand the state production committees that are engaged in defense. of the high capital intensity required in producing electric power und nuclear materials (medium machinehese all-union enterprises may well require larger budgetary allocations ln relation to the value of their output. It is unlikely, however, that the character of all-union enterprises explains why the ratio of budgetary allocations to gross value of output for sll-union Industry andshouldimes as large as the ratio for Industry and Construction that is financed from the Republic Budgets.

This miniatry controls the movie producers, ballet and operaand the like. mall number of printing andenterprises ln the USSR are under the Ministry of Culture. ** elow. The balance of the budgetary appropriations5 percento Industry and Construction were channeled through the Republic Budgets.

- lU -

USSR: Unexplained Residual Under the Allocation to Financing the national Economy in the All-Union

Billion New Rublei

Derivation of the

Gross residual under Financing thein the All-Union Budgetb/ ) l) )

Premium payments for

Allocations to Ministryenterprises ) )

Squals

Net residual under FinancingEconomy in the All-Union Budget ) ) ) i)

obtaining the series for the residual under Financing the National Economy, as shown abovethe series shown inas adjusted further. Estimated outlaysillionadded to the other specified categories under Financing the National Economy to cover theof the agricultural procurement organizations.

in parentheses are ORR estimates.

grants, which arose because procurement organizations paid premium markups to faros forwere plannedillion rubles8 and are assumed to have been realized at thisf*/ If these payments have continued8 (they could have been eliminated byadjustments9, the assumption is that they have been included in the residualsthe National Economy ln the Republic Budgets. The increaseillion rubles in theseand the decreaseillion rubles In the residual under Financing the National Economy inBudget89ransfer ofillion rubles.

d- The assumption is that these allocations were made from the All-Union Budget8 and from the Republic Budgets thereafter.

. a

Table 8

USSR: Adjusted Allocations to Industry and Construction in tbe AU-Union Budget

industrial reorganization7 Is reflected ln the budgetransfer of funds freeBudget6 to the Republic Budgets 7llocations toand construction in the AU-Unloo Budget variedndercent of allocationsand construction in the consolidated State Budget. Thus, to obtain estimates5 percent of appropriations ln the consolidated State Budget in those years were allocatedAll-Union Budget.

Billion Kev Rubles

Derivation of the Residual

to Industry and Construction

the consolidated State Budget a/

Allocations in the Republic Budgets b/

allocations to Industry and

in the All-Union Budget

c/

c/

-

r

Expenditures on other economic activitieB that nay be included under this category possibly provide for organizations whose functions cross territorial and sovnarkhoz lines and therefore logically would bo financed through the All-Union Budget. For example, operationalon geological surveying, clearing land for nonagriculturalfish-breeding, and the like may be financed under the allocation to Industry and Construction. The State Geological Committee of the USSRudget organization, and all of its activities are fully financed by the State In addition, there is the possibility that the allocation to Industry and Construction in the All-Union Budget could finance accumulations of state reserves of an Industrial nature. If this is the case, then it is conceivable that accumulations of reserves of some military hardware could be procured under this allocation. The lack of available data prevents estimatingfor geological surveys and for additions to state reservesommilitary nature from the allocation to Industry and Construction in the All-Union Budget.

In the absenceeliable method of estimating the share of cither the all-union enterprises or these other nondefense activities in the allocation to Industry and Construction in the All-Union Budget, the entire allocation is treatedesidual, with the understandingizable part of it is clearlyondefense nature.

he residual under Financing the National Economy and the allocation to Industry and Construction In the All-Union Budget have been estimated jointly in two different ways. One method assumes that the trends in the consolidated State Budget (all-union and republic) for components of Financing the National Economy are identical with those for the same components in the All-Union Budgetn; the other method assumes that the Joint residual moves over time as does the index of total expenditures for Financing the National Economy in the All-Unlon Budget (Variant II in.

* elow. ** Text continued on

Underhe AU-Union 3udget is assumed to havethe same relative share of the total allocations to nonindus-trlal components under Financing the National Economy. Allocations assigned annually0 from the consolidated State Budget to State Agriculture, Transport and Corauunications, and Trade havefairly steady. Variant II extrapolates the combined total of the allocation to Industry and Construction and the residual under Financing the National Economy in the All-Union Budget on the basis of the percentage change in expenditures for Financing the National Economy in the All-Union Budget. Of the two variants, Variant Ithe high boundary of the range because it assumes near constancy in outlays on State Agriculture, Transport and Communications, and Trade, whereasssumes that the expenditures in theseincrease in direct proportion to the expenditures for Financing the National. Economy in the All-Union Budget.*"

Bu Lfat Billion New Rubles

USSH: Sum of the Unexplained Residuals Under the Allocation to Financing the Rational Economy and the Allocations to Industry and Construction in the All-union

of the Pesldual

I

Expenditures for financing the National Eccnoay in the All-Union

Less

State Agriculture cf Transport and Communications e/ Trade f/

Agricultural Procurementsquals

Allocation to Industry and Construction and the Residual under Financing the Rational Ecocoay

Variant II

Expenditures for Financing the National Economy in the All-Union Budget h/

Allocation to Industry and Construction and the Residual under Financing the National Economy i/

1 FOOtBOttM follOV on

8 -

7-9

/

5

/

U.O)

/

/

Continued)

a! eeior the plan; and for the plan1

data.

ee. The extrapolations based on assumed biennial increments ofrubles.

in parentheses are ORR estimates.

ee source The extrapolations basedelatively constant trend atof the consolidated State Budget.

ee. The estimatesre based on annual plan reports.

estimates are based on the annual plan reports of data for State Agriculture, AgriculturalTrade.

ee;jf. The estimates23 are based on annual reportsfulfillment.

estimate0 is the sane as in Variant X, above. The extrapolations based onchange In the expenditures for Financing the National Economy in the All-Union Budget.

A statistical handbook on Social-Cultural measures that was published8able showing total expenditures for Science that were made from the consolidated State Budget and aof these expenditures byr "article" (such as wages, equipment, and repair The sum of these "article"did not exhaust the reported total. Furthermore, for the years& the excess of disclosed expenditures (by article) above the expenditures for Science in the budgets of the republics roughly corresponded with the budgets of the Academy of Sciences and the research Institutes of the Ministry of Health. Therefore, it has been suggested that those expenditures detailed by type of outlay in8 handbook covered outlays for nonmilitary purposeson science by the union-republics, the Academy of Sciences, and the health institutesbut did not cover expenditures for science related to defense. The undistributed part in this sense is here takencience residual that probably Includes expenditures on research and development related to defense (see.

This breakdown by article (or function) vas not repeated in the recently published budget handbook; therefore, the method cannot be repeated for the years I" estimating thosefor science not related to defense for the yearsxpenueo of the Academy of Sciences and the health institutes were estimated and then subtracted from the reported allocation to Science In the All-Union Budget ln order to obtain the Science residual.

The res1dual so obtained looms Largehore of the total Science budget and probably should be viewed as the upper limit of that part of the allocations to Science that are related to defense. The boundary between military and civilian research and development is vague. For example, it would be difficult to prorate between civilian and military purposes research on the developmentuclear reactor that could be used toubmarine or un icebreaker.

E. ro of the Unexplained Residuals and the Explicit Defense

* elow.

A total of budget funds available for defensethe sum of the unexplaimtd residuals and the announced or Explicit Defense budgetis presented in" It must be emphasized that severalof nondefense spending are included within this series. In addition to those categories already discussed, nondefense expenditures included in the budget availability series providedrawings against foreign aidxpenditures on special industrial programs such as those for raising wagespecial expenditures for regional development, such as the virgin lands program;

USSR: Unexplained Residual Under the Allocation to Science in the All-Unionnd Plan3

Billion New Rubles

7 8 9 Plan

O.Si* 9 3 5 7 lM b/ iiC) .

8 ) ) O)

Derivation of the

Allocation to Science

Distributed part of the Science

budget

Equals

Science

1 ) ) ) )

oC, see. The dataave been extrapolated and represent bO percent of the funds for Science in the consolidated State Budget. 50 the funds for Science in the All-Union

Budget ranged betweenndercent of the funds for Science in the consolidated Stateefigure0 wasercent.

ln parentheses are ORR estimates.

ee source JO/* These suna are the difference between tho sum of the reported distributionin the consolidated State Budget by type of outlay and the total of the Science budgets of the he estimates of the activities of the Academy of Sciences and the researchthe Ministry of Health made by ORR suggest that the distributed part of the Science budget equals theto these sectors.

USSR: Explicit Defense Budget and the Unexplained Residuals in the All-Ucion Budget That May Be Available for

Milton Sew IfablM

for

fmm badsx.bpardlijraa realdualinatrlatloaal

Allocation to Ir.au* try utclanca rtuduaifetat

-4

)

)

Flan

e. . rati* J, a. Ll,

d. M* In parantheaea are ORP eatinatea. t, Fran Table I, p. 1J, Tab6 and IS. respectireiy, above. (. . SI, abova.

lo tftlmtf la aade for funis tnat oaj have taea allocated froa tu fteaerre Puada of uu Council of Hlnlatera for defense

tha hitrw Puoda are allocated toational Eooaoay,tbe eatloatea are utderetated to Ua extent tbat part of Uieee

fuada were aaed to flaanse ccrcaaa

scientific re Be arch programsondefense character

that sight be Included in the residuals under Financing the National Economy and under General Expenditures.

Til. Comparison of Budgetary Funds Available for Defense with Expenditures for Defense as Announscd by the UGSH and as Estimated by ORB

A. Over-All Comparison

Given the impiousibility of the announced expenditures forand the unknown range of error attached to ORB estinates of Soviet defense outlays, it is impossible to appraise with any confidence the defense content of the budget availability series by com poring it with the announced or estimated series. Because of the scarcity of budgetary data and the inadequacy of available information on the scope and content of the relevant budget categories, the budget availability series at best con provide only an upper limit of possible Sovietexpenditures. The Explicit Defense budget presumablyower limit.

Another distortion in the comparison arises from the fact that both the budget availability series and the Explicit Defense seriescurrent prices, whereas the ORR estimates of defense expenditures are expressed5 prices. Although on index of prices paid by the Soviet military establishment does not exist, one can be approximated if it is assumed that the course of prices of military goods produced by Industry was the some as the Indexes of prices in the branches of industry that produce military goods. This price Indexercent58 and levels off thereafter. The whole of this decline Is the resultecrease ofercent in the level of prices In machine building end metslvorking, the source of almost all military hardware. Nevertheless, it is unlikely that the official index accounts adequately for the introduction of new products atprices. An the military hardware mix changed drastically, It Is quite possible that the defense industry seized the opportunities offered, and allowed by Soviet practice, to charge the high temporary prices for new products. Instead ofrice index of military expenditures that covered these new productsmight have even increased somewhat The bentpossible, however, la that the ORRrices) can be considered quite comparable to the budget series (current prices)ut that ORR estimates In current prices probably would risemore rapidly9 than those presented In Tablendl.a*

P.bove. ** Following p.bove.

Although Imprecise, the comparison presented in Table 1some Interesting facets- For each year of the period reviewed.

he range of the ORB estimates of expenditures for defense has been within these two limits. , all three scries went down. 8 the budget availability series and the high side of the ORR range rose. 9 the low side of the ORR range rose also; the upward trend in both series continued In contrast, the Explicit Defense budget series leveled off, increased sharplynd continued upward.

In almost all years the range of ORR estimates for defense lies much closer to the budget availability series than to the Explicit Defense budget series announced by the USSR. The exception, when both variants of the budget availability series climbed steeply.

If the ORR estimates describe the trehd in defense expenditures correctly, there is little reason to prefer the budget availability series to the Explicit Defense budget series as an indicator of annual changes In the level of Soviet military spending. , both series move in the same manner as the ORR range;8 the change in the Explicit Defense budget is the better match for changes in the ORR estimates; hut9 the budget availability series and the ORRrose, whereas the Explicit Defense budget series remained about the same. oth the budget availability series and theDefense series increased much more sharply than did the ORR estimates. However, the high ORR series agrees more closely in trend with both budget series than does the low ORR series and, in thisat least, is more plausible than the low series. Fart of the difference in trend0 between the budget availability series and the ORR estimates may be explained (as discussed above) by the understatement of the rise in expenditures in the ORR series caused by the use of constant rather than current prices. Another part of the deviation could result from the procedure used to estimate Jointly the residual under Financing the National 3conomy and the allocation to Industry and Construction in the All-Union Budget. The numerical basis for this estimate is clearly not as good0 as It is in earlier years.

Tlie pronounced hump in the budget availability series9 points up the difficulty of using iterald of defense trends. Unusual Increases in the General Expenditures residual and in the allocation to Industry and Construction in the Ail-Union Budget were followed0recipitous decline In the General Expenditures residual. In view of the generally accepted estimate of the trend of Soviet defense spending, the dec! ine Ir. the budgetseries0 may indicate sudden shifts in the treatment of nondefense expenditures that remain in the residuals. For example, the large increase In the General Expenditures residual9 perhaps might reflect en increase in funds made available to one of its"accounts with banks." Because these funds, as noted inre believed to Include deposits allocated directly from the budget for the purr-ose of granting long-term credits, an increase in these

bove.

allocations can be suspected, on the basis of the fact that,9 kolkhozes purchased on credit large stocks of equipment from theMachine Tractor Stations (MTS's) and the fact9 vaa the beginningong-torn plan, the initiation of which usually places great demands on bank credit.

Another kind of shift may have occurredI. when announced defense expenditures rose suddenly byercent, thereecline of aboutercent in tho allocation to Financing tbe National Economy in the All-Unlon Budget. Thus part of the increase in Explicit Defense expenditures probablyurfacing of expenditures from Financing the National Economy or from other budget categories. Any accounting changes that made the Explicit Defense budget more or less inclusive of total defense expenditures probably reflect on official effort toertain image of its defense posture for external and Internal consumption.

Content of tbe Explicit Defense Budget

That the announced Explicit Defense budget does not include all defense expenditures has been intimated by Sovietnd corroborated by ORR estimates of the costs of Soviet defense programs. Total defense expenditures may be divided among seven major categories:

Pay and allowances for personnel

Expcndltureo on tho operation and maintenance

of forces

3- Procurement of organizational equipment and housekeeping supplies

Construction of facilities

5- Procuretaent of major military equipment

xpenditures for research and development,nuclear energy programs, that arc not covered by the price of the final product

7> Expenditures on "internal security forces"he forces of the republic "ministries for theof public order" (formerly known as the Ministry of Internal Affairs).

This concept of defense expenditures excludes investment in fixed and working capital for defense production and subsidies possibly required for production or weapons. It also excludes research expendituresto defense that arc financed from nonbudget sources.

Soviet texts appear to include expenditures on personnel,and maintenance, and facilities ln the Explicit Defense budget but are vague on the Inclusion or exclusion of procurement33/ The Explicit Defense budget la believed to include items (l) through (U) and on undetermined portpi.

57 the general trends In Explicit Defense expenditures, ORR defense estimates, and the budget availability series were somewhat similar, as shown ln 8owever. Explicit Defense expenditures leveled off, while both the ORR defense estimates and the budget availability series shoved substantial increases. It may be that the increased number of categories ofthat are financed outside the Explicit Defense budget and the growing importance of military research and development in these years had the effect of maxing the Explicit Defense budget less inclusive of total defense outlays.

This trend evidently was planned to continues planned expenditures under the Explicit Defense category were setillion rubles. But in, Khrushchev announced an increase3 billion rubles in Explicit Defense spending. I were given6 billionillion rubles less than tho revised plan butillion rubles above the original plan. In contrast, the estimated actual defense expenditures increasedillion rubles (the low side of the ORR range)illion rubles (the high side of the ORR range). If it is assumed that all of this estimated increase in defense spending was included In the increaiioillion rubles in the Explicit Defense budget,illionillion rubles of the Increment may haveransfer to the Explicit Defense budget from other budgetary categories

The planI for Financing the National Economy at the all-union level, as shown lnriginally7 billion rubles, up billion from the actual expenditures By the endl, however,illion rubles actually had beenlllion-ruble underspending of the originol plan. This sua of It.8rubles can be divided roughly intoillionillion rubles representing categories that may have been transferred to the Explicit Defenseillion rubles representingof the total expenditures plan of the consolidated State Budget,illionillion rubles remainingun transferred to the Republic Budgets.

On the assumption that the content of tbe Explicit Defenseis that described above, the budgetary residuals would supply funds for research and development and some parts of major military procure-mcnt. It in also possible, however, that some outlays for facilities, particularly those for advanced weapons systems, would be financedof the Explicit Defense budget. Little can be said about the

Following p.bove.

USSR: Planned and Actual AU-Unlon and Republic Budgetary Expenditures

Billion New Rubles

Budget

tbe National

b/

n

Service

Defense

Funds of the

of Ministers

Budgets

the National

Funds of the

of Ministers

Data in parentheses are OUR estimates.

defense content of individual residuals other than that the internal security forces probably arc financed from the General Expendituresand that most military research and development is likely to be financed from the Science budget under the allocation for Social-Cultural Measures in the All-Union Budget.

There are two reasons for doubting that all of the procurement outlays not financed from the Explicit Defense budget would be financed from any one residual: first, of the four residual categories discussednly the allocation to all-union Industry ands large enough to embrace the total residual for such procurement, and, second, there probably ere in each of these residuals substantial nonde-fense expenditures that cannot be estimated with present Information.

* See II, p.bove. ** That is, the total including the allocations to the threeand construction elements financed under the Industry andcategory of the all-union Financing the Nationaledium machine building, construction of electric power stations, and the gas industry.

A core 1ixcly, although conjectural, hypothesis is that total military procurements are divided among the Explicit Defense category, the General Expenditures residual, and the allocation to Industry and Construction in the All-union Budget. Tbe Science residual logically would not include procurements of major armaments, and the residual under Financing the National Economy would be too small toarge procurement category even if suspected nondefense components are not Included. Again, It is necessary to add that some military armaments could he procured through the Republic Budgets under the accumulation of state material reserves.

SOURCE

CIA. CIA/RR,0 Soviet Budget, U.

. (edr.) Finansy 1SSSR (Finance end Credit

in the. U.. (edr.) redit SSSR (Finance and Credit in the - CIA. CIA/RR, The Soviet Budgetov 6a,.

G.F. (edr.) Qosudaratveonyy fayudahetyudzhety

soyuznykh respubllk (The State Budget of the USSR and Eudgcts of the u.

A.N. (edr.) Skononicheskaya entaiklopcdlyq, prccyshlcnnost'

1Econonic Encyclopedia, Industryonstruction. u.

Bureau of the Census, Foreign Demographic Analysis

Division. Soviet Fiscal Project Research Paper noheof Revenues and Expenditures in the Soviet Budget,

, U.

USSR, Tsentral'noye Statisticheskoye Upravleniye. Narodnoye khozyaystvoThe National Economy of the USSR

,. U. USSR, Tsentral'noye Statlsticheskoye Upravleniye. Narodnoye oayaystvo1 Rodu (The National Economy of the USSR

,. U. (hereafter referred to as

USSR, TaSU. Nor. khoe.l) USSR, Tsentral'noye Statlsticheskoye Upravleniye. Narodnoye

khozyaystvogodu (The National Economy of the USSR

,. u. (hereafter referred to as

ussr, TaSU. War, khoi.g) Pravda,. 4. U.

Pravda,. 5- U.ec 6l, p. 5. U.1. 6. U.7. rj.0. 1. U.

CIA. CIA/RRl,. 4j. U.

10- t al. Finansy SSSR (Finance in the USSR),

- U.t al. redit (Finance and Credit),

U.t al. redit sssr (Finance and Credit in

the-

-

p ii i*

M.A. Balans narodnogo khoayayotva SSSR (The Balance of the

National Economy of theefimov,. U. Plotnikov,bove). U.

Tsentral'noye Statistichcskoyc Upravleniye. Narodnoye

khozyaystvo0 godu (The Rational Economy of tho USSR,I,- U.

Dundukov, og.. l8 U. CIA. CIA/RB U.

. "Reorganizatsiya MTS, novyy poryadok zagotovok

1 zadachi finansovykh organov" (Reorganization of the MTS's, the New Procedure for Procurements, and Tasks of the Financialinansy SSSR, no U-

H. (edr.) otsialisticheskoyo stroitcl'stvo

(Finance and Socialist- " Dundukov, U.

18. Lavrov,,. U.

19- Dundukov, op.. U.

TsSU. War, khoz.bove). Ye. Razvitiyc byudzhetnogo ucheta (The Development of

Budget. 3. U.

7 Dec 6l,- U.

USSR, TsSU. Nar. khoz.2bove). U.

nd 6. OT"

23- Dundukov, op.. Ibid.

27- USSR, TsSU. Nar. khoz.bove). U.

28. USSR, Ministerstvo Finansov. Haskhody na sotslal'no-kul'turnyye meropriyatiya po gosudarstvennomu byudzhotu SSSR (Outlays for Social-Cultural Measures by the State Budget of the. U. (hereafter referred to as Raskhody na sotsial'no kulturnyye)

29- Uundukov, op.. U.

Raskhody na,. U2. U.

Dundukov, op. u.

USSR, TsSU. Nar. khoz.bove). U. Pravda,. 6. if.

lefimov,. u. Plotnikov, og.bove). U-

t al. redit SSSR (Finance and Credit in

the. t al, Finansy SSSR (Finance in the USSR),

. llakhverdyan, op.,. . CIA. CIA/RR, The Relationship Between Announced Soviet

Military Manpower Budgetary Allocation for Defense and Total

Military,- si '

Original document.

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