The debt brake is a simple mechanism for managing federal expenditure. It is designed to prevent chronic deficits and thereby an increase in debt. It enjoys strong support among the population: 85% of voters approved the constitutional provision on the debt brake in 2001, and approval is still very high according to surveys.
With a debt ratio of less than 30%, Switzerland remains in excellent shape by international standards. The debt brake has also allowed for a considerable reduction in federal debt. As a result of the reduction in debt in recent years, significant amounts can be saved on interest expenditure each year, which creates the scope for investments and new important tasks.
The key components
The components of the debt brake are anchored in Article 126 of the Federal Constitution:
- Principle: The Confederation shall maintain its receipts and expenditure in balance over the longer term.
- Expenditure rule: The ceiling for total expenditure that is to be approved in the budget is based on the expected receipts after taking account of the economic situation.
- Exception: In the event of exceptional payment requirements, the ceiling under paragraph 2 may be increased appropriately.
- Sanctions: If the total expenditure in the state financial statements exceeds the ceiling in terms of paragraphs 2 or 3, this additional expenditure must be compensated for in subsequent years.
- Implementation: The details are regulated by law.
Why a debt brake?
The 1990s were difficult times for the finances of the Confederation. In the space of a few years, billions in deficits led to a sharp increase in debt, which was exacerbated by the funding of federal pension funds and enterprises affiliated with the Confederation.
The principle that the "shortfall in the Confederation's statement of financial position must be paid off" was already enshrined in the Constitution at that time. However, the required debt reduction remained a dead letter, a common phenomenon in politics: there is agreement on the principle, but there are always reasons for deviating as soon as it comes to implementation and the specific individual case.
With this fiscal policy experience, there was a growing willingness on the part of the Federal Council and Parliament to impose fiscal policy restrictions on themselves via a concrete and effective expenditure rule in order for the good intention to actually be observed. The debt brake limits expenditure to the level of structural, i.e. cyclically adjusted, receipts. Expenditure may be increased only if its financing is secured by receipts or corresponding sacrifices, and tax reductions must be accompanied by corresponding expenditure cuts.
The effect of the debt brake
The objective of the debt brake is to stabilise debt. Between 2003 and 2019, federal debt was even reduced by around CHF 27.4 billion. This was due to structural surpluses, which came about because of the combination of higher receipts and lower expenditure.
Forecasting errors on the receipts side are likely to decrease in the future thanks to improved estimation methods. However, as budgeted expenditure will generally not be fully utilised in the future either, debt will continue to be gradually reduced in the long term. However, the measures to cushion the impact of the COVID-19 pandemic will temporarily trigger a significant increase in federal debt.
How the debt brake works
In the medium term, i.e. over an economic cycle, the federal budget is balanced with the debt brake: surpluses must be generated during a boom to offset the deficits of the subsequent recession. Expenditure is limited to the level of structural, i.e. cyclically adjusted, receipts. This allows for a steady expenditure trend and prevents a stop-and-go policy.
Flexible but effective nevertheless
In order for a fiscal policy rule to work, it must be stringent and binding; however, it must also allow sufficient leeway to be able to react appropriately to external developments. The debt brake ensures this flexibility by taking the current economic situation into account, as illustrated by the chart above. Furthermore, the debt brake contains an exemption clause: in extraordinary situations (e.g. natural disasters, severe recessions and other uncontrollable developments), it is possible to deviate from the rules and incur extraordinary expenditure. This extraordinary expenditure must be compensated for in subsequent years if it cannot be covered by extraordinary receipts from previous years. In this way, undue use of the exception should be prevented.
The debt brake is applied to the budget and recalculated and controlled with the annual financial statements. The cyclically adjusted surpluses and deficits are captured in the so-called compensation account. If the requirements were not met during budget implementation (e.g. due to excessive supplementary budget credits) and the compensation account shows a deficit as a result, the regulatory framework contains a clear sanction mechanism: the deficit of the compensation account must be fully offset again.
Fiscal policy challenges
The debt brake and the political will to comply with its guidelines have contributed a great deal to the recovery of the federal finances.
In view of the dynamic growth in task areas with strong statutory commitments (e.g. social welfare due to the ageing population), the long-term fiscal policy challenge will be to meet other requirements as well, while still ensuring that the financing of state services remains sustainable for public and private budgets.
Budgeted expenditure has almost always been undershot since the introduction of the debt brake, and this is also due to the economical use of funds. The surpluses thus achieved automatically lead to a reduction in debt under the applicable rules. Against this background, consideration is frequently given to whether another use should be possible in addition to automatic debt reduction.
Last modification 06.10.2020