SWITZERLAND PUBLIC DEBT

APRIL 26, 2017

GABRIEL VARVA
FBE,3rd year
Table of contents:
Introduction ..................................................................................................................................... 2
Switzerland: the champion saver of Europe ............................................................................... 3
Switzerland Government External Debt ................................................................................. 5
The Debt Brake ................................................................................................................... 6
Maintaining a low public debt ........................................................................................ 7
Conclusions ................................................................................................................. 9
Bibliography ................................................................................................................. 10

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Introduction
As the federal system in Switzerland divides the nation into three levels of governance,
confederation, cantons and municipalities, the federal budget refers solely to the revenues and
expenditures at the national level.

The regional (canton) budgets, as well as the budgets of the more than 2500 municipalities are not
within the competence of the federal government or parliament. Their revenues and expenditures
are therefore not counted as part of the federal budget, but they together amount to more than 60%
of total public spending.

However, the different budget levels are fiscally linked together. There are political instruments
as for instance the "new fiscal harmonization"-law (Neuer Finanzausgleich), which regulate
financial payments from the federal government to the cantons and municipalities as well as from
the fiscally more to the fiscally less potent cantons.

The Swiss federal budget refers to the annual revenue (money received) and expenditures (money
spend) of the Swiss Confederation. As budget expenditures are issued on a yearly basis by the
government, the federal council, and have to be approved by the parliament, they reflect the
country's Fiscal policy.

The budget principles are defined by the Swiss Constitution and have been restated most recently
in the 1999 fiscal guidelines of the confederation. In 2010 the federal budget of Switzerland had a
size of 62.8 billion Swiss francs, which is an equivalent 11.35% of the country's GDP in that year.
In 2014, the federal budget of Switzerland had an estimated size of 66.353 billion Swiss francs,
which is an estimated equivalent 10.63% of the country's GDP in that year. Note that the Swiss
federal budget only comprises 31.7% of Swiss public expenditure, the rest being managed by the
cantons and the municipalities directly.

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Switzerland: the champion saver of Europe

Public debt in non-EU Switzerland corresponds to barely 33% of gross domestic product (GDP),
while the EU average is more than 85%. Yet almost every year the Swiss government comes up
with new ways to cut public spending.

Switzerland is the only European country to have reduced its public debt since the beginning of
the economic and financial crisis in 2007.

Figure 1. Development of federal debt 2002-2015. (gross state debt as a % of GDP)

Source: www.eurostat.com

Having remained outside the European Union, Switzerland belongs to those very few European
countries that have fulfilled, from the start, the Maastricht Treaty’s “convergence criteria”,
designed in 1992 to ensure that a member state’s economy is sufficiently prepared for economic
and monetary union and the adoption of a single currency, the euro. In order to adhere to monetary
union, candidate countries had to strive above all to keep public debt below 60% of GDP.

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 Figure 2. Gross federal debt as % of GDP (2015)

Source: www.eurostat.com

Figure 3. Switzerland National debt from 2010 to 2020 in relation to gross domestic product
(GDP)

Source: www.statista.com

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The Swiss economy, which experienced a downturn only in 2009, rapidly came out of the
international crisis: consumption has held up, exports haven’t collapsed despite weakening
demand from EU markets, and the unemployment rate has remained between 3%-4%.

A real advantage for Switzerland has been the fact that the ratio of public spending to GDP has
traditionally been low compared with other European countries:

Figure 4. Federal spending as % GDP (2015)

Source: www.eurostat.com

Switzerland Government External Debt

External Debt in Switzerland increased to 1721336.40 CHF Million in the fourth quarter of 2016
from 1672899.60 CHF Million in the third quarter of 2016. External Debt in Switzerland averaged
1037907.57 CHF Million from 1999 until 2016, reaching an all time high of 1721336.40 CHF
Million in the fourth quarter of 2016 and a record low of 13293.30 CHF Million in the third quarter
of 2000.

In Switzerland, external debt is a part of the total debt that is owed to creditors outside the country.

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The Debt Brake

Due to the development of budget expenditures in the 1990‘s, the Swiss parliament and
subsequently the people, voted in favor of a new fiscal instrument to reduce government debt in
2001. However, a determining factor in guaranteeing the good health of the public welfare has
been the “debt brake”, a mechanism introduced by the government in 2003 to avoid structural
imbalances in state finances and prevent debt growth, as happened in the 1990s. The debt brake
has enabled the rapid rebalancing of public finances.

Figure 5. Federal budget (surplus or deficit) 1990 - 2015 (CHF)

Source: Federal Department of Finance

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The so-called debt brake was enacted in 2003 and reinforced the constitutional principle that
expenditures have to be mainly financed by revenues and not through an increase in public debt.
The mechanism of the debt brake works in a way that introduces a ceiling on spending that is being
calculated on a yearly basis. There are adjustment punishments for exceeded budgets, which in
turn will force public debt down in following years. Importantly all sorts of government
expenditures are equally covered by the debt brake. The only exception to this rule are
extraordinary spending’s that have to be approved by both chambers of parliament. This exception
is supposed to allow the government to react to emergency situations such as for example disaster
relieve or the 2008 UBS bailout.

Despite slow economic growth (even negative in 2009), the budgetary debt of Switzerland has
declined from 130.3 billion CHF in 2005 to 110.5 billion CHF in 2010. That is a reduction of
15.2% of nominal debt.

Maintaining a low public debt

The financial balancing is shared among all political forces, given that the agreed aim is not only
to reduce expenses destined for paying off interest on debt but also to strengthen Switzerland’s
resistance to new crises. But for some parties – and some economists – the policy of saving is
now excessive: in the past decade, the government has reported surpluses even in years when
the economy has slowed down.

In spite of these advantages, every year the government presents new plans to cut public
spending. According to the political left, state finances should be spent mainly on reinforcing
the welfare state, supporting the economy and creating jobs in economic downturns. For those
in the center and on the right, the economy doesn’t need state support but rather further tax
relief.

Despite the positive trend of the federal finances, fiscal policy has been one of the most fiercely
debated issues in parliament for years. This year, within the framework of the new reforms on
company taxation, the majority of those in the center and on the right approved a series of relief

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measures worth billions of francs for companies. These reforms represent an attack on the state
coffers, say those on the left, who intend to launch a referendum.

At the same time, Finance Minister Ueli Maurer from the conservative right Swiss People’s Party
has already announced three savings schemes for next year. These will affect in particular social
security, education and foreign aid. Untouched, on the other hand, will be national defense,
agriculture and road transport. These plans, too, are subject to heavy fighting between the parties.

Figure 6. Federal spending 2015

Source: Federal Department of Finance

Like the other countries in Europe, Switzerland has to tackle – and soon – two factors which
threaten to weigh heavily on public spending: an ageing population and the explosion in health
costs. Over the next 30 years, some CHF150 billion ($155 billion) will be needed to cover the
costs connected to the changing demographics, says a new report from the finance ministry on the
long-term prospects of the country’s public finances. Without savings measures or increasing tax
revenue, public debt will increase to 59% of GDP by 2045.

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Conclusions
All in all, public debt consists of all liabilities that require payment or payments of interest and/or
principal by the debtor to the creditor at a date or dates in the future; includes debt liabilities in the
form of Special Drawing Rights (SDRs), currency and deposits, debt securities, loans, insurance,
pensions and standardized guarantee schemes, and other accounts payable; all liabilities in the
GFSM 2001 system are debt, except for equity and investment fund shares and financial
derivatives and employee stock options.

Balanced-budget rules and limitations of expenditure, taxes, and deficits, have in most cases
proved to be effective in cutting down public expenditure, revenue, and debt. However, at least in
some cases this leads to a deterioration of the quality of the publicly provided services, especially
with respect to schooling.

Budgetary procedures matter, and the interaction between budgetary procedures and the electoral
system also matters: Not all budgetary procedures have the same effect in all electoral systems.
They might be less effective than constitutional or statutory balanced budget or tax and expenditure
limitation rules, but in a situation where it is impossible to introduce such rules they might show a
feasible second-best way to reach fiscal sustainability.

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Bibliography:

http://www.swissinfo.ch/eng/public-debt_switzerland--the-champion-saver-of-europe/42221592
https://www.cato.org/publications/commentary/how-swiss-debt-brake-tamed-government
http://www.tradingeconomics.com/switzerland/external-debt
https://www.efd.admin.ch/efd/en/home.html
https://www.statista.com/statistics/277105/national-debt-in-switzerland-in-relation-to-gross-
domestic-product-gdp/

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