The Swiss are renowned for crafting the finest watches in the world, such as the Patek Philippe. The Swiss are now credited with inventing the most effective fiscal rules in the world, the Swiss debt brake.
The debt brake was enacted as a constitutional fiscal rule through referendum in 2001, with support from 85 percent of Swiss citizens. Like many countries, the Swiss have encountered recessions accompanied by unsustainable growth in debt. The debt brake was enacted to impose more effective constraints on federal spending and restore sustainable levels of debt. Over the past two decades, the Swiss cut debt as a share of national income roughly in half.
In the United States, federal debt now exceeds national income, and the Congressional Budget Office projects that by midcentury, U.S. debt will be more than double our national income. We have much to learn from the Swiss experience with their debt brake.
Like a Swiss watch, the debt brake has several parts that are synchronized to constrain fiscal policies. The most important part is a rule that constrains the growth in federal spending to the rate of growth in potential output. This means that in the long term the federal government cannot grow more rapidly than the private sector.
Another rule is designed to stabilize spending over the business cycle. The federal government can incur deficits in periods of recession but must offset those deficits with surplus revenue in periods of economic growth. The rules cap deficit spending. If the deficits exceed 6 percent of expenditures, the excess must be eliminated within the next three annual budgets by lowering the expenditure ceiling. A compensation account is used to track deficits and surpluses over time.
The Swiss rely on automatic stabilizers to offset business cycle fluctuations. Unemployment benefit spending is exempt from the expenditure cap rule. This allows unemployment benefit spending to increase rapidly in periods of recession and high unemployment, and to decrease in periods of expansion. A separate budget accounts for unemployment insurance spending with its own rules.
Some entitlement expenditures are also exempt from the expenditures cap. Old age pension insurance and disability insurance are accounted for in separate budgets with their own rules. If the debt level in these insurance programs increases above a threshold, contribution rates are raised.
The debt brake provides for emergency expenditures above the expenditure cap. The Swiss responded to the financial crisis in 2009 and the coronavirus pandemic in 2020 with emergency expenditures. Emergency expenditures are accounted for in a separate budget. Emergency expenditures must be approved by a qualified majority in Parliament, a higher standard than that for ordinary budget expenditures. Emergency spending may be financed by borrowing, but the Swiss have not ratcheted up debt from one business cycle to the next as the United States has.
The debt brake has fostered fundamental reforms in the budget process in Switzerland. Before the debt brake was enacted, the Swiss relied on a bottom-up approach to budgeting. Each ministry proposed its own budget, and these were then aggregated into a total budget. Bottom-up budgeting is biased toward deficit spending, as each ministry lobbies for its own programs. The debt brake requires top-down budgeting. The finance minister is now required to draft a budget that conforms to debt brake rules, and that budget is then broken down into separate budgets for each ministry. An inter-ministerial conference resolves any conflicts over budgets for each ministry. The finance minister plays a key role in assuring that the budget for each ministry is consistent with debt brake rules.
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The Swiss debt brake has proven to be the most effective of the new generation of fiscal rules enacted in developed countries. The reason is that it replaces discretionary fiscal policies with rules-based policies. Swiss legislators are held accountable for meeting the fiscal targets set by the rules. This was demonstrated this year when the initial draft of the budget exceeded the expenditures cap and Parliament was forced to revise the budget to bring expenditures within the cap. Later, a bill was introduced providing funding for the Ukraine war. When economists determined that the bill would push spending above the expenditure cap, the bill was withdrawn.
Even a carefully crafted Swiss watch requires fine tuning over time, and the same is true for the Swiss debt brake. When the debt brake was enacted, the Swiss were in recession, so legislators provided for a transition period to adjust to the rules. Over time, the Swiss have gained more confidence in living with their fiscal rules. They are now addressing some long-term structural problems, such as an aging population, within the framework of their rules.
The Swiss have been successful in exporting their fiscal rules, just as they have their watches. There is no patent on the debt brake. European countries, and the European Union, have enacted Swiss style fiscal rules. In general, the northern tier of European counties has had more success in enacting the new fiscal rules than the Southern European countries.
The major obstacle to enacting new fiscal rules in the United States is Congress. Many proposals for new constitutional fiscal rules have been introduced in Congress over the years, but none of these has received the two thirds vote required to submit the proposed rules for ratification. Fortunately, Article V provides the states with an alternative route to amending the Constitution. Private groups are now working with state legislators to enact a fiscal responsibility amendment in the Constitution through an Article V convention.
Barry W. Poulson ([email protected]) is a policy advisor with The Heartland Institute.
