Swiss watches are known for their quality, including the Patek Philippe. Swiss debt brake is now credited as the most effective fiscal rule in the world.
In 2001, the debt brake was adopted as a constitutional rule on fiscal policy by referendum with 85 percent support of Swiss citizens. The Swiss, like many other countries, have experienced recessions that were accompanied by an unsustainable increase in debt. To impose effective limits on federal spending, and to restore sustainable debt levels, the debt brake was implemented. In the last two decades, Switzerland has cut its debt as a percentage of national income by about half.
The federal debt in the United States now exceeds the national income. According to the Congressional Budget Office, by the mid-century period, the U.S. national debt will have more than doubled. The Swiss debt break is a good example of how we can learn from their experience.
The debt brake is a Swiss-style watch with several components that work together to constrain fiscal policy. The rule that limits the growth of federal spending to the potential growth of output is the most important. The federal government can’t grow faster than the private sector on a long-term basis.
A second rule is to maintain spending stability throughout the business cycle. In periods of recession, the federal government may incur deficits but must offset these deficits with surplus revenues in periods of economic expansion. The rules limit deficit spending. The excess spending must be reduced within three budgets if the deficits are greater than 6 percent. The compensation account tracks deficits and excesses over time.
Swiss businesses rely on automatic stabilizers to counteract business cycle fluctuations. The expenditure cap does not apply to unemployment benefit spending. The rule allows for unemployment benefit spending in recessions and periods of high unemployment to rise rapidly, while in expansions it can decrease. Unemployment insurance is accounted for separately in the budget, with its own rules.
Certain entitlement expenses are also excluded from the cap on expenditures. The old age pension insurance as well as the disability insurance is accounted for separately in a budget with its own rules. Contribution rates will be raised if the debt in these insurance programs exceeds a certain threshold.
The debt brake allows for expenditures that exceed the cap. Emergency expenditures were used by the Swiss to respond to the financial crises of 2009 and 2020’s coronavirus epidemic. The Swiss account for emergency expenditures in a separate Budget. The approval of emergency expenditures by Parliament must be attained with a qualified majority, which is a higher standard for budgetary expenditures. The Swiss may borrow to finance emergency spending, but they haven’t ratcheted debt up from one business cycle into the next like the United States.
The debt brake in Switzerland has led to fundamental reforms of the budget process. Before the implementation of the debt brake, Swiss budgeting was done from the bottom up. Each ministry submitted its budget. These were then combined into a total. Bottom-up budgeting tends to favor deficit spending because each ministry advocates for its programs. Top-down budgeting is required for the debt brake. Now, the finance minister must draft a budget following debt brake rules. This budget is then divided into separate budgets by the ministry. A conference of ministers is held to resolve any disagreements over the budgets for different ministries. The finance minister is responsible for ensuring that each ministry’s budget adheres to debt-reduction rules.
The Swiss Debt Brake has been proven to be one of the most effective fiscal rules in the developed world. This is because it replaces discretionary policies with policies based on rules. Swiss legislators must meet the fiscal targets that are set out by rules. This was shown this year when the first draft of the budget was over the spending cap. Parliament was forced into revising the budget to keep expenditures within the limit. A bill to fund the Ukraine war was then introduced. The bill was withdrawn when economists concluded that it would cause spending to exceed the budget cap.
The Swiss debt brake is no different. Even the most carefully crafted Swiss watches require fine-tuning with time. The Swiss were in a recession when the debt brake was implemented, so the legislators allowed for a period of transition to allow the Swiss to get used to the new rules. With time, the Swiss became more confident in their fiscal rules. Within the framework of these rules, they are now addressing long-term structural issues, such as an aging population.
Just as with their watches, the Swiss have successfully exported their fiscal rules. The debt brake is not patented. The European Union and European countries have adopted fiscal rules based on Swiss models. The northern European countries have generally had greater success in implementing the new fiscal regulations than the southern European countries.
Congress is the main obstacle to new fiscal rules being implemented in the United States. Over the years, many proposals for new fiscal rules in the Constitution have been presented to Congress. However, none of them has ever received the required two-thirds vote. Fortunately, Article V gives the states an alternative way to amend the Constitution. Now, private groups are working with state lawmakers to pass a constitutional amendment on fiscal responsibility through an Article 5 convention.
Barry W. Poulson ([email protected]) is a policy advisor with The Heartland Institute.
