Exploring Swiss island of liquidity in Europe’s sea of sovereign debt

By Felix Egli and Wu Fan, VISCHER
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In this column, we look at the reasons for Switzerland being an island of healthy public finance in a stormy sea of sovereign debt. In its statement of accounts for 2011, the Swiss government summarised that the key figures of Swiss public finance – including the confederation, states, municipalities and social security carriers – are among the lowest by international comparison.

Felix Egli, Senior Partner, VISCHER, Zurich
Felix Egli
Senior Partner
VISCHER
Zurich

Switzerland’s fiscal quota – measuring fiscal revenues (including tax and social security contributions) against GDP – was at a low 29.3%, while the nation’s public spending ratio – measuring government expenditures against GDP – was just 34.8%. Ordinary public profit and loss (P/L) balance was at a surplus for the sixth year in a row (0.4% of GDP in 2011), Switzerland’s national debt ratio – measuring national debt against GDP – was a low 36.5% applying the EU’s Maastricht definition, and 48.7% applying the International Monetary Fund (IMF) definition, respectively. The depth of the sea of sovereign debt around that island is best illustrated by the schedule set out in the graph.

So, how has Switzerland managed to avoid the sovereign debt crisis from which most Western countries are suffering so badly? Debt brake laws are the main reason.

Debt brake laws in Switzerland

Sovereign debt reduction has been a constitutional goal since 1958. The goal was missed by considerable margins in the 1990s, but in 2001, the Swiss constitution was supplemented by binding restrictions (effective since 2003). Also on the state level debt brake laws are in place (although not always as stringent). But here we focus on the federal debt brake law which is the most important one.

How it works

In a nutshell, the federal constitution and relevant implementation law require the federal budget to be balanced. But when it comes to details it’s far more sophisticated. The Swiss recognised that tax revenue soars in good times, while in tough times it falls, and therefore tough times might require deficit spending to prevent the evisceration of social security programmes, and to stimulate the economy. Therefore, when requiring a balanced budget, the federal debt brake requires that the spending budget for a year does not exceed the budgeted trendline revenue for that year except for extraordinary spending needs, approved by a qualified majority of both houses of parliament.

Wu Fan, Counsel, VISCHER, Zurich
Wu Fan
Counsel
VISCHER
Zurich

But what is the budgeted trendline revenue? It is defined as the budgeted revenue multiplied with a factor called “economic cycle factor”, which is the quotient between the levelled long-term trend GDP (numerator) and the budgeted GDP for the relevant year (denominator). An economic cycle factor greater or lower than 1 means that the government expects the budget year’s GDP to undercut or exceed the levelled long-term trend GDP. In the first case, the application of the economic cycle factor allows the maximum government spending to exceed the budgeted revenue to finance economic growth incentives (so-called cyclical budget deficit) and in the second case – that is in good times, when the economy is expected to do better than the levelled long-term trend GDP – it reduces the otherwise permissible maximum government spending.

A question of balance

After each budget year, the government must recalculate the budgeted maximum government spending by replacing the parameter “budgeted revenue” with the relevant actual revenue. If the resulting final maximum government spending amount has been exceeded or undercut by the relevant year’s actual government spending, the excess or shortfall amount will be debited or credited to the so-called compensation account. In the event that the balance of the compensation account is negative, government and parliament are obliged to balance it out over several years by cuts in the maximum government spending amounts that would otherwise be permissible in those future years. If the compensation account’s negative balance exceeds 6% of the previous year’s government spending, it needs to be balanced out within three consecutive years. Conversely, no compensation with positive balances is allowed.

瑞士公共财政国际横向比较(根据占GDP的百分比)

Swiss Public Finance by International Comparison (% of GDP)

赤字限额

Fiscal quota

公共支出

比例

Public spending ratio

一般公共

收支结余

Ordinary public P/L balance

负债率

(《马约》规定)

Debt ratio (Maastricht definition)

负债率

(IMF规定)

Debt ratio

(IMF definition)

瑞士Switzerland

29.3

34.8

0.4

36.5

48.7

欧元区Euro zone

n.a.

49.3

-4.0

88.3

95.6

德国Germany

36.0

45.5

-1.2

83.2

86.9

法国France

42.9

56.2

-5.7

85.8

98.6

意大利Italy

43.0

50.1

-3.6

120.0

127.7

荷兰Netherlands

n.a.

50.5

-4.2

64.8

72.5

瑞典Sweden

45.8

51.8

0.1

36.8

46.2

英国UK

35.0

49.8

-9.4

87.6

90.0

美国US

24.6

41.9

-10.0

n.a.

97.6

加拿大Canada

30.9

43.2

-5.0

n.a.

87.8

资料来源:瑞士政府Source: Swiss government

In 2010, the federal debt brake law was supplemented by a rule requiring the government to separately account for parliament-approved extraordinary government spending in excess of the budgeted trendline revenue. Ever since all actual extraordinary government spending and extraordinary revenues of a budget year must be debited and credited, respectively, to an amortisation account. Any negative balance on the amortisation account needs to be balanced out within six consecutive years by cuts in the maximum government spending amounts that would otherwise be permissible in those future years. If, however, both the compensation account and the amortisation account are negative, the obligation to balance out the amortisation account will be suspended until the compensation account is balanced out.

As a result of the federal debt brake law, government spending in Switzerland was at 34.8% of GDP in 2011, as opposed to 36% GDP when it was first applied in 2003, and during the same period the national debt ratio dropped from 53% to 36.5%.

The health of Swiss public finance is the reason for the moderate Swiss tax rates (which we will feature in our next column) and moderate sovereign debt and government spending do not exercise any pressure to raise them.

Felix Egli is a senior partner and Wu Fan is counsel at the Swiss law firm VISCHER in Zurich

VISCHER

Schützengasse 1

Postfach 1230

8021 Zürich

电话 Tel: +41 58 211 34 00

传真 Fax: +41 58 211 34 10

Felix Egli

电话Tel: +41 58 211 34 90

电子邮件E-mail: fegli@vischer.com

吴帆 Wu Fan

电话Tel: +41 58 211 36 45

电子邮件E-mail: fwu@vischer.com

www.vischer.com

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