Ebook On the Effectiveness of Debt Brakes: The Swiss Experience
Current policy debates on public finances across OECD countries focus on the question how a sustainable fiscal policy can be obtained. The most pertinent discussion takes place in the European Union (EU) where the Stability and Growth Pact (SGP) as a follow-up to the fiscal convergence criteria of the Maastricht Treaty requires EU member states to keep budget deficits below 3 percent of GDP and public debt below 60 percent of GDP. Deviations from this general rule are only allowed for specific circumstances like severe economic downturns or extraordinary events like natural disasters.
The governments of member states are held responsible for sticking to the SGP which poses additional problems in those countries which are organised as federal states. In Austria, Germany, and Spain, regional authorities have a certain fiscal autonomy such that deficits at that sub-federal level may be at the expense of the federal level. In Germany, this situation has led to a national stability pact which lacks however effectiveness.
The discussion in the EU is not unique. In the United States, the GRAMM-RUDMAN-HOLLINGS (GRH) act passed in 1985 in order to reduce federal public debt. Several U.S. states have formal fiscal restraints with characteristics that strongly vary across the states. In Switzerland a discussion about a ‘debt brake’ for the federal budget was induced by the strong increase of the federal debt during the nineties. The corresponding amendment to the Swiss constitution was accepted on December 2, 2001, with an overwhelming majority (and a turn-out of 37 percent). In addition, there exist similar rules in several cantons, partly since decades, which are really effective. They are, moreover, stricter than the new procedure at the federal level, the effectiveness of which has to be proven in the future.
Contrary to nearly all other OECD countries, the Swiss and the U.S. fiscal systems have two particular features: fiscal federalism with a strong extent of fiscal competition and tax autonomy of the sub-federal jurisdictions (cantons/states and local communities), and direct popular rights in political decision-making which include fiscal referenda at the sub-federal levels. However, large differences with respect to the institutional design between the Swiss cantons persist that even exceed those between U.S. states, thus making Switzerland a unique laboratory for the effects of fiscal institutions to be studied.
In federal states like Switzerland, Germany, and Austria, there is the additional problem that there is no single actor who even rudimentary can restrict the total public deficit. This problem became obvious in Germany in the spring of 2002: Despite the fact that the federal government had at least in comparison with its predecessors reduced the issuance of new debt, the Federal Republic of Germany nearly got a ‘blue letter’ from the European Union because the expected deficit of 2002 was 2.7 percent compared to GDP and, therefore, far away from its former stabilisation objective, and quite close to the Maastricht limit of 3 per-cent of GDP (which it has actually passed in the meantime). The reason for this was a considerable increase in the deficits of the Bundesländer and the local communities.
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