Stable financial circumstances are a significant locational advantage of Switzerland. At the federal level, they are closely related to the debt brake introduced in 2003 connected. With the pandemic, the set of rules has also passed another major test. Extensive support measures to cushion the far-reaching economic impact were possible thanks to the switch to the extraordinary budget and the low level of debt. Based on these experiences, is there a need to change the rules? Yes, but only in the fine print. A realignment, as called for in a recently submitted proposal in Parliament, jeopardizes the financial stability of the federal government. When dealing with crisis debts, however, Parliament should recall the original concept of the debt brake. The topic of this blog sometimes requires technical vocabulary. A box at the end of the text therefore explains the elements and how the debt brake works.
Ideas for easing the debt brake are not new. Before the corona crisis, those for whom the corset of the debt brake had always been too tight tried to anchor the numerous surpluses for their own purposes. The experiences of the corona crisis have apparently not taken the appeal away from such efforts. One submitted in the fall Postulate aims to adjust the actual goal of the debt brake. The rules are to be realigned to stabilize the debt ratio instead of balancing income and expenditure. This means that gross debt should be allowed to increase with GDP growth in the future.
If you do not save in the time, you have nothing in need
The proposal touches on a sore point: does it make sense to use the existing set of rules to bring the federal government a falling debt ratio? Does Switzerland need an expenditure rule to maintain financial stability that even results in a reduction in debt in good times? As is well known, the debt brake between 2003 and 2019 led to a reduction in (gross) debt by CHF 27 billion to CHF 97 billion. To this extent, the reduction is not directly related to the debt brake, but to the tendency to conservative budgeting to do. However, the mechanism goes beyond the conditions for the sustainability of government debt. In the textbook one can read: Affordability is given under the condition that debt does not increase faster than economic growth in the long term.
The call for a fix could be well received, given that the mechanism would be changed only slightly. The supporters of the postulate have the idea of using a growth factor in addition to the existing economic factor to calculate the spending ceiling. Effectively, however, it is by no means a minor facelift. As the Federal Council writes in its statement on the proposal, the proposed reorientation would in future allow expenditure to always exceed income in line with economic growth.
This would make the debt brake theirs main trump card deprived of the compulsion to exercise moderation in good times, and would largely make an anti-cyclical spending policy impossible. Only with the latter can the tendency towards deficits and indebtedness (“deficit bias”) be counteracted. In political practice, government spending tends to increase when times are bad, but generally not cut back when times are good. A look at the experiences with the European Stability and Growth Pact shows how toothless a fiscal rule is if this is allowed to happen.
Wrong decision to reduce corona debt
Apart from the fact that the proposal changes the character of the debt brake, it ignores the experiences of the corona crisis. The question is not whether future emergencies will lead to large deficits, but how large these will eventually be. Those who aim to stabilize the debt ratio in normal times are willing to accept an increase in the debt ratio with every extraordinary crisis. In the long term, there was a risk of a staircase effect because too little would be saved in good times. As a result, the original aim of the proposal would be missed and the scope for combating the crisis would gradually disappear.
The current regulation is much better in this regard. In normal times, it obliges budget discipline, thereby increasing the state’s resistance to crises and enabling flexible handling of crisis-related debts. Room for maneuver that Parliament did not fully use in the wake of the corona crisis. The shortfall in the amortization account of around CHF 25 billion accumulated as a result of the extraordinary expenditure during the pandemic is to be corrected on the one hand by future surpluses and on the other hand with parts of the profit distribution from the SNB. There was also discussion about offsetting half of the amortization account with the compensation account, which has a positive balance of CHF 30 billion due to the surpluses of the 2010s.
It is understandable that Parliament opted for the stricter option, complete debt reduction without offsetting against past surpluses. The extension of the amortization period (until 2035) that was decided at the same time is stipulated in the law, but offsetting is not. Strictly speaking, however, the parliamentary decision is based on an error. The six-year period can only be extended if further economic turmoil occurs within the same period. The law does not provide for an extension.
Allow offsetting of crisis debts and surpluses in the future
In addition, offsetting is by no means illegitimate. The Purpose of the debt brake does not consist in reducing debt, but in stabilizing it. When the debt brake was introduced, it was assumed that the mechanism would be accompanied by a reduction. However, the primary goal was to stabilize the existing federal debt. With a view to future crises, Parliament should therefore return to its decision and, while maintaining a certain reserve amount, allow the two accounts to be offset in future. If half of the shortfall in the amortization account had been offset against the compensation account, the balance in the compensation account would still have been CHF 10 billion.
This is not a reinterpretation of the debt brake: what the federal government takes from taxpayers in good times, it reimburses through offsetting. The much-cited statement that the debt brake allows you to save for hard times is thus effectively lived up to. Because the fiscal policy consensus that income and expenditure should be balanced also includes the realization that surpluses and deficits in household accounts of several tens of billions of francs contradict the original concept of the debt brake. They have to be cleaned up accordingly. If it is insisted that crisis debts must be fully offset by future surpluses, debt reduction degenerates into dogma.
Switzerland should take care of its fiscal stability. A realignment of the federal government’s debt brake to stabilize the debt ratio would be tantamount to a softening of the rules and would jeopardize this goal. Given that the existing framework involves deleveraging in good times, going forward it would be appropriate to offset debt accumulated through extraordinary spending against past surpluses. This would help the credibility of the debt brake. Because a significant reduction in debt does not meet the criterion of “fairness between generations” any more than significant debt growth.
Lukas Schmid is a fellow at the think tank Avenir Suisse. This post first appeared on the Blog the think tank.
