Explainer: extraordinary Swiss spending meets the Debt Brake
Switzerland’s parliament is making heavy weather of settling the 2024 national budget. The reason: juggling the growing billions of extraordinary expenses with the constraints of a debt containment mechanism known as the ‘Debt Brake’.
After weeks of debate, the two chambers of parliament are getting closer to agreeing a budget by the end of the year. SWI swissinfo.ch explains why it’s been so hard this time around and why it won’t get any easier in future years.
The Debt Brake
In 2003, Switzerland introduced binding rules to prevent public debt from spiralling out of control – as it had done in the 1990s.
The Debt Brake seeks to ensure that government spending does not overshoot income over the passage of time.
+ The Swiss Debt Brake as an international model
In boom times, the government must use surplus revenues to pay off debt. This allows for an overspend during fallow economic years. This should balance the federal books after the course of economic cycles, which last several years.
The Debt Brake allows for extraordinary expenses incurred by unforeseen dramatic events, such as pandemics and wars.
Parliament is required to approve such expenses, but the Debt Brake calls for them to be paid off in good time to avoid long-term imbalances in the federal finances.
Eye-watering bills
Switzerland racked up more than CHF20 billion ($23 billion) in coronavirus-related debts that need to be paid off by the end of 2035. Added to this will be the other extraordinary cost of housing Ukrainian refugees and other financial support for Ukraine of around CHF1.25 billion per year.
As a result of Russia’s invasion of Ukraine, parliament decided to increase the Swiss budget spending from CHF5.6 billion to CHF7 billion by 2030. But politicians are still debating the final figure, which could well be higher, and timeline, which might take longer.
Billions more are anticipated to invest in the federal railway network and to plug a gaping hole in the old age pension system in the next few years.
Since the Covid-19 pandemic first struck, extra borrowing has risen close to the ceiling set by the Debt Brake mechanism, leaving little wiggle room for parliament to set a budget that meets future spending requirements.
What does the future hold?
The finance ministry expects government debt to rise from CHF127 billion in 2023 to CHF129 billion next year.
If the economy holds up, and there are no more nasty and expensive surprises around the corner, that debt mountain could start to reduce from 2026.
Compared to most other countries around the world, Switzerland has a comparatively low debt burden.
Switzerland’s gross debt (federal, cantonal and welfare) currently stands at around 37% of the country’s annual economic output (Gross Domestic Product or GDP). This compares to an average 97% ‘debt to GDP ratio’ of the eurozone’s 17 countries.
The future of the Debt Brake?
For years, the Swiss Debt Brake has been criticised by left-leaning political parties for curtailing investment in infrastructure.
Frank Marty, head of the finance and tax department of the Swiss Business Federation, economiesuisse, expects the debt containment mechanism to stay.
But he is concerned that the current trend for extraordinary expenditure could be exploited by some politicians to force through funding for other ‘crisis’ causes, such as reversing global warming.
“Extraordinary expenditure was absent between the financial crisis of 2008 and the Covid pandemic. But now the idea of cheating the debt brake by building up extraordinary expenses has taken hold in Switzerland,” he told SWI swissinfo.ch.
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