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A two-course Swiss menu: Corona and the debt brake
Author(s):
Sturm, Jan-Egbert Publication Date:
2020-12-14 Permanent Link:
https://doi.org/10.3929/ethz-b-000465777
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In Copyright - Non-Commercial Use Permitted
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ETH Library
A two-course Swiss menu:
Corona and the Debt Brake
Prof. Dr. Jan-Egbert Sturm
Director KOF Swiss Economic Institute
14 December 2020
Prof. Dr. Jan-Egbert Sturm
Director KOF Swiss Economic Institute 14 December 2020
The Swiss Debt Brake
Public debt in Switzerland
Sources: EFV, BFS
0 5 10 15 20 25 30 35 40 45 50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Federal debt (% GDP w/o sports) Cantonal debt (% GDP w/o sports)
Municipal debt (% GDP w/o sports) Social insurance debt (% GDP w/o sports)
% GDP w/o sports
Background: Introduction of the Debt Brake
• The expansion of federal debt in 1990s
− Spending bias coupled with a pro-cyclical fiscal policy:
economic upturns not used for fiscal consolidation
− Raising federal revenues usually requires a constitutional amendment. Spending increases require only a simple majority vote in parliament
− W eak fiscal rule since 1959
• 1997: start of planning the introduction of the debt brake
− Structurally largely balanced budget as necessary condition for its introduction
− Budget target for 2001 was formulated in 1997
(temporary constitutional provision in 1998 referendum: 70.7% Yes)
• 2003: first application of the debt brake
− 2001 referendum: 84.7 % Yes
Design of the Swiss Federal Debt Brake
• Goals
1. Ensure medium- and long-term debt stabilization by avert (chronic) structural imbalances 2. Grant short-term countercyclical budget leeway
• Application
− The Swiss debt brake applies since 2003 to the ordinary budget.
Since 2010, extended to extraordinary income and expenditures but managed seperately
• Constitutional provision for the debt brake principles
− Strict implementation through the Financial Budget Act (FHG)
Features
1. Application only to the expenditure side
− The budget must be balanced given tax revenues subject to a business cycle correction
− Constitutional upper limits on main tax rates make it (almost) impossible to act on the revenue side
− No short-run economic impulses are intended to come from the expenditure side
− Tax revenues are supposed to act as automatic stabilizers 2. Management of surpluses and deficits
− Asymmetric management: Deficits and surpluses are treated differently
− Constitutional framework permits symmetrical management, but current law is more restrictive
− Parliament gave priority to debt reduction over spending increases or tax relief
− Deficits and surpluses are managed in the (notional) compensation account
− Surpluses cannot be used to increase the expenditure ceiling or to reduce taxes
− They thus lead to a reduction in debt
− A surplus in the compensation account is continued and there is no obligation to reduce it
− Balance in the compensation account increases also in case of systematic forecasting errors of
revenues, of the cyclical adjustment factor, and thus the maximum expenditure ceiling
The Federal Debt Brake Mechanism
• Rule: expenditure may not exceed receipts over an economic cycle. (Constitution)
− 𝐺 𝑡 ≤ 𝑘 𝑡 𝑇 𝑡 with 𝑘 𝑡 = 𝑌
𝑡∗𝑌
𝑡− A modified HP filter is used to calculate 𝑌 𝑡 ∗
− Tax revenues act as automatic stabilizers
• If actual expenditure differs from ceiling, this is charged to a (notional) compensation account
− Rule applied to budget forecasts and outcomes
− Second calculation determines what must be credited or debited in the compensation
account
− Deficits have to be eliminated in the following years - No rules are provided for surpluses
− The rule offers an escape clause for unexpected
situations and uncontrollable developments
Gross debt
Development Swiss central government debt, 1990-2019
Source: Federal Administration
0 25 50 75 100 125 150
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Level compensation account
Bln. CHF
0 5 10 15 20 25 30
Gross debt-to-GDP ratio (r.scale)
% GDP
Increasing balance in the compensation account
• Since 2006, the revenue growth was under- and the expenditure growth overestimated
• During the time period 2004-2019:
− Forecast errors for revenues explained 52% of the inflows
− whereof 44% were due to ‘Withholding Taxes’
− Forecast errors for expenditures 40%
• Are budget underruns a first-class problem?
− Systematic forecasting bias undermines the trust in the finance ministry’s forecasting abilities.
This might be detrimental in other contexts.
− From a division of power perspective, the budget authority of the parliament is undermined if forecast
errors have a systematic bias in favor of fiscal surpluses.
Budget underspending, 1994-2019
Source: Federal Administration
-2500 -2000 -1500 -1000 -500 0 500 1000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Budget underspending Budget underspending (w/o interest payments and shares to third parties)
Mln. CHF
Expenditures: Difference budget and budget estimate
Ø 2004-2019 Ø 2007-2019 Ø 2004-2019 Ø 2007-2019
Ordinary expenditures 1’055 1’095 1.7% 1.7%
(621) (664) (1.0%) (1.0%)
Transfers' to third parties -194 -199 -2.5% -2.6%
(303) (333) (3.9%) (4.2%)
Interest expenditures 292 306 11.4% 12.7%
(337) (324) (13.3%) (13.6%)
Other ordinary expenditures 956 988 1.9% 1.9%
(373) (399) (0.7%) (0.8%)
thereof own expenditures 440 4.2%
(197) (1.8%)
% of the budget estimate
million CHF
Revenues: Difference budget and budget estimate
Ø 2004-2011 Ø 2012-2019 Ø 2004-2011 Ø 2012-2019
Ordinary revenues 2’504 267 4.4% 0.3%
(1’934) (1’469) (3.3%) (2.2%)
Withholding tax 1’338 973 43.4% 17.0%
(993) (797) (33.2%) (13.2%)
Other revenues 1’166 -706 2.2% -1.2%
(1’234) (1’212) (2.3%) (2.0%)
million CHF % of the budget estimate
Four reasons why budgets are not fully spend
1. Lower costs or lower demand
− Such estimation errors should be symmetrical and balanced in the medium to long term
− However, the last decade was marked by the financial crisis and franc shocks
− Interest rate, inflation and economic developments were (systematically) misjudged
Four reasons why budgets are not fully spend
1. Lower costs or lower demand 2. Shifts between fiscal years
− Article 36 FHG allows the Federal Council, in the case of delays, to transfer already granted credits to the following year
− However, this regulation presents a certain bureaucratic hurdle and may therefore not be fully exploited
− The new management model for the federal administration (NFB) allows administrative units to
create reserves that can be reused as credit overruns (introduced in 2017)
Four reasons why budgets are not fully spend
1. Lower costs or lower demand 2. Shifts between fiscal years 3. The precautionary motive
− Budgetary hurdles, or even social and cultural practices, can make it more costly for administrative units to undercut budgets
− Over-budgeting is used to cover unforeseen events or to avoid filing for supplementary credits
− Administrative units tend to (over-) cautiously budget (but also to use funds economically)
− In these situations, the effective expenditure is more likely to correspond to the social optimum than the tentatively carefully negotiated budget ceilings
− Reducing budget underspending then implies designing the “costs” of exceeding and falling short of the budget more symmetrically
− The introduction of global budgets under the NFB goes in this direction
Four reasons why budgets are not fully spend
1. Lower costs or lower demand 2. Shifts between fiscal years 3. The precautionary motive
4. The problem of the fiscal commons
− The political economy assumes that the administration is budget-maximizing
− Influence and prestige are positively related to the size of the budget
− All administrative units are competing for access to the common source of revenues
− The decisive factor is the institutional design of the budgetary process or the control mechanisms designed to prevent inefficient use of public funds
− For practical reasons, control mechanisms are more pronounced when budgets are spend than during the budgeting process. This should result in budget underspending.
− Global budgets and intertemporal transferability of budgets are likely to increase this problem
− Penalties for budget underspending, such as a budget cut in the following year or a strengthening
of the role of fiscal management in the budget process, could reduce such budget underspending
(but could increase the “December fever”).
The Corona Crisis
– a Swiss Perspective
COVID 19 pandemic: registered deaths worldwide - cumulative & daily (7-day average)
Source: Reuters
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000
01.01 01.02 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 01.11 01.12 Persons
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Persons
COVID 19 pandemic: registered deaths in Switzerland - cumulative & daily (7-day average)
Sourcce: Reuters
01.01 01.02 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 01.11 01.12 0
1,000 2,000 3,000 4,000 5,000
6,000 Persons
0 15 30 45 60 75 Per million persons 90
Persons Euroraum
Health-Wealth Trade-Off? Experiences from the first wave
Sources: Reuters, national statistical offices, Datastream. Circle size ~ Population size
-200 0 200 400 600 800 1,000
-35% -30% -25% -20% -15% -10% -5% 0% 5% 10%
co n fi rm ed d ea th s p er m ill io n p eo p le ( 31 /7 )
real GDP growth from previous year, 2020 Q2
Africa
Asia-Pacific
Europe
North and South America
Switzerland Australia Nigeria
South Africa
China
India Indonesia
Japan Austria
Belgium
France
Germany Italy
Netherlands
Portugal
Russia Spain
Sweden United Kingdom
Canada United States
Argentina
Colombia Mexico
Peru
Switzerland Denmark
Oxford Stringency Index
Source: Oxford
0 10 20 30 40 50 60 70 80 90
1 2 3 4 5 6 7 8 9 10 11 12
CH NL DE
KOF Stringency Index – cantonal differences
Source: KOF
0 10 20 30 40 50 60 70 80
1 2 3 4 5 6 7 8 9 10 11 12
ag ai ar be bl bs fr ge gl gr ju lu ne nw
ow sg sh so sz tg ti ur vd vs zg zh ch
Variation of the reproduction rate in the cantons
Sources: NCS-TF, KOF
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6
Mar Apr Jun Jul Aug Sep Okt Nov
RMAD CV
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
RMSD
Variation measures Reproduction rate
Re (r.scale)
KOF Stringency-Plus Index
and Cantonal Differences in Reproduction Rates
Sources: NCS-TF, KOF
0 5 10 15 20 25 30
10 11
Below average Above average 0.5
0.8 1.0 1.3 1.5 1.8
2.0 Reproduction rate Re Number of Cantons
Comparison of Swiss GDP developments - financial versus corona crisis
Sources: Seco, KOF
140 145 150 155 160 165 170 175 180 185 190
2019 2020 2021 2022
Corona crisis
2.Lockdown (left scale)
-1.9-7.3 6.8
-10 -8 -6 -4 -2 0 2 4 6 8
% 10 Billion (2017) CHF
140 145 150 155 160 165 170 175 180 185 190
2008 2009 2010 2011
Financial crisis
Level (left scale) Quarterly comparison (right scale)
-2.8 -1.60.6 1.1
-10 -8 -6 -4 -2 0 2 4 6 8
% 10
Billion (2017) CHF
A sector perspective for Switzerland
Source: KOF
-30 -25 -20 -15 -10 -5 0 5
A - Agriculture and forestry B- Mining C - Manufacturing industry D/E - Energy and water supply F - Construction G - Trade, repair trade H/J Transport and storage, information and communication
I - Hospitality industry K - Credit and insurance industry L/N/M - Real estate, bus.services, freelance, scientific & techn. servicesL
O - Public administration P - Education and teaching Q - Health and social services R/S/T - art, entertainment, private HH, other services
%-Difference compared to 2019
2020 versus 2019 2021 versus 2019
Swiss GDP per capita since 1949
Sources: BFS, KOF
20 30 40 50 60 70 80 90
49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
thousand CHF
General government balance and fiscal stimulus against a counterfactual scenario
Source: KOF
-25 -20 -15 -10 -5 0 5 10 15 20 25 30
Counterfactual Baseline 2.Lockdown Baseline 2.Lockdown
General government balance Fiscal impulse relative to the counterfactual 3.9%
4.4%
2020
2.4%
3.1%
2021
1.0%
1.6%
2022
Bln. CHF
Quotes of the Finance Minister (Bundesrat Ueli Maurer)
• “Noch einmal ein 30 Milliarden Hilfspaket könne sich die Schweiz nicht leisten.”
24.10.2020
− “"Switzerland cannot afford another 30 billion aid package.”
• “Wir könnten dann mindestens einmal die Olympischen Spiele auf dem
Schuldenberg haben. Der wird so hoch das es dort sicher schneesicher ist.”
11.12.2020
− “We should then be able to have the Olympic Games on our debt mountain at least once.
It will be so high that snow is guaranteed there.”
Public debt in Switzerland
Sources: EFV, BFS, KOF
0 5 10 15 20 25 30 35 40 45 50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Federal debt (% GDP w/o sports) Cantonal debt (% GDP w/o sports)
Municipal debt (% GDP w/o sports) Social insurance debt (% GDP w/o sports)
% GDP w/o sports
General Government Debt in selected countries/regions
Source: IMF
