The debt brake

Status as at December 2019

Brief summary

The debt brake ensures that expenditure and receipts are balanced over the longer term in the federal budget. The federal budget has consistently achieved structural surpluses since 2006.

The debt brake enjoys strong support among the population: 85% of voters approved the constitutional provision on the debt brake in 2001, and approval remains 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 not only helped Switzerland to withstand the financial and economic crisis relatively well; it has also allowed for a considerable reduction in federal debt.

Nevertheless, the mechanism is occasionally criticised too: among other things, it has led to the federal financial statements always being significantly better than anticipated in the budget. Although the debt brake is undisputed in principle, its design and implementation are thus nevertheless a recurrent topic of discussion. In this context, the Federal Council examined whether the structural surpluses which currently flow automatically into debt reduction should also be used in the future to compensate for losses in the case of tax reforms or to finance higher expenditure. Acting on the basis of various reports, the Federal Council spoke out against adjusting the debt brake at its meeting on 22 May 2019. The Confederation can sufficiently cover its current expenditure, investments and growth in priority task areas with existing tax revenues.

Balanced expenditure and receipts

The cornerstone of the debt brake consists of a simple rule: expenditure may not exceed receipts over an economic cycle. The maximum amount for the (ordinary) expenditure ceiling is linked to the amount of (ordinary) receipts after adjustment using a factor that takes capacity utilisation into account. In the case of above-average capacity utilisation, the expenditure ceiling is lower than receipts – the Confederation then has to generate a surplus. Conversely, the formula tolerates a deficit in times of low capacity utilisation – expenditure may then exceed receipts. The effect of the rule is independent of the amount of the tax burden. It allows for both tax increases and decreases, with tax reductions having to go hand in hand with expenditure cuts.

Curve diagram: the debt brake mechanism
The debt brake regulates expenditure, which may not exceed receipts over an economic cycle.

Parliament retains full budgetary sovereignty within the limits of the expenditure ceiling prescribed by the rule. In exceptional circumstances such as severe recessions, the expenditure ceiling can be raised with a qualified majority in both chambers.

If the actual expenditure at the end of the year exceeds the recalculated expenditure ceiling, the excess is charged to a statistical compensation account. Underspends are in turn credited to this account. Likewise, forecasting errors with respect to receipts and economic growth are taken into consideration in the compensation account in the form of debits or credits. Any deficits have to be eliminated in the following years. No binding rules are provided for in the case of surpluses on the compensation account.

The extended debt brake rule

Under the extended debt brake rule, which entered into force in 2010, deficits in the extraordinary budget must be offset in the medium term via the ordinary budget. The amortisation account, which records extraordinary receipts and expenditure, acts as the "memory" of the extended debt brake rule. If extraordinary expenditure exceeds extraordinary receipts, the shortfall must be offset in the following six fiscal years via surpluses in the ordinary budget. Parliament can extend the amortisation deadline. If the shortfall is foreseeable, the necessary savings can also be made in advance.

Challenges which have been met

The debt brake has passed several tests since its introduction in 2003. For example, the binding guidelines of the debt brake helped to keep the federal budget structurally balanced when it was introduced. Furthermore, the debt brake prevented the high tax receipts from the economically strong years from being used for additional expenditure. Instead, it was possible to build up surpluses and reduce debt. Finally, the debt brake proved its worth also for inclement times during the financial and economic crisis. Thanks to the exemption clause, it was possible to temporarily strengthen the equity capital base of UBS without thereby compromising the proper performance of the Confederation's tasks. In addition, the economically compatible structure of the regulations prevented expenditure from having to be cut in the recession when the crisis struck. Furthermore, it provided scope for moderate stabilisation measures.

The fear that investment could suffer under the debt brake has also proved to be unfounded. It has been seen that investment has not been displaced by current expenditure.

Fiscal policy challenges

The debt brake and the political will to comply with its guidelines have contributed in no small degree to the recovery of the federal finances. The robustness which has been achieved should be maintained and indeed increased further in the future. To do this, budgetary adjustments will occasionally be required.

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.

Review of the debt brake

Budgeted expenditure has consistently 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, the question arose as to whether other uses should also be possible in addition to automatic debt reduction. In 2017, the Federal Council appointed a group of experts to consider this. In its report, the expert group assumes that budget underruns will be lower in the future. It therefore advises against adjusting the debt brake. At its meeting on 22 May 2019, the Federal Council, on the basis of a report by the FFA on the development of budget underruns in 2007-2018, spoke out against adjusting the debt brake. The Confederation can sufficiently cover its current expenditure, investments and growth in priority task areas with existing tax revenues. The budget underruns will thus continue to flow into debt reduction in the future.

In its report, the group of experts had also recommended reviewing a simplification of the supplementary credit procedure. By increasing flexibility in budget implementation, unutilised credits could be reduced and the expenditure ceiling prescribed by the debt brake could be better utilised. At its meeting on 11 April 2018, the Federal Council therefore decided to simplify the supplementary credit procedure. In the case of strictly earmarked budgetary credits without steering possibilities in budget implementation, supplements are to be dispensed with in future. At its meeting on 22 May 2019, the Federal Council also decided to further increase the flexibility of the administrative units in budget implementation. To this end, a materiality limit is to be introduced for overruns in global budgets and individual credits. This should amount to 1% and a maximum of CHF 10 million. Both adaptations are associated with changes to the Financial Budget Act (FBA) and will be integrated into the dispatch on simplifying and optimising budget management (amendment of the Financial Budget Act).