Why the Swiss federal budget is so hard to predict

Switzerland has found more revenue to put the 2027 budget in the black Keystone / Gaetan Bally

Company taxes have come to the rescue of the Swiss federal budget, helping to turn a projected CHF700 million ($865 million) deficit into a CHF800 million surplus.

Last month the finance ministry surprised parliament by revising its forecast for federal revenues upwards by CHF1.9 billion. The increase is more than enough to offset increased spending, including additional defence expenditure. 

The main driver of increased revenues is corporate taxation. The government now expects federal profit-tax receipts to be around CHF1.4 billion higher than the initial forecast. 

Why did the numbers look so different in the space of a few months? Where did the extra CHF1.4 billion in corporate tax receipts suddenly materialise from? And can Switzerland expect to unearth more golden eggs from the same source in future? 

Left-leaning political parties have their own answers. They have again accused the finance ministry of painting a deliberately gloomy picture in early budget forecasts to push through spending cuts.  

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“By systematically underestimating revenues, the Federal Council [government] is trying to justify cuts in public spending and new privileges for the wealthiest and large corporations,” stated Social Democrat parliamentarian Tamara Funiciello, when the more optimistic budget scenario was presented last month. 

Not the first time 

There is a long history of such complaints. In 2018 the government’s ordinary financing balance ended CHF2.6 billion better than originally budgeted. In 2013 an expected CHF400 million deficit turned into a CHF1.3 billion surplus. 

But the finance ministry denies misleading parliament and the public. Ordinary revenue forecasts have been out by 0.3% on average between 2016 and 2025, the ministry said.  

The latest corporate tax windfall, attributable to the 2027 budget, can be traced to a small number of very large, and unnamed, companies. Three-quarters of all corporate tax receipts are concentrated among 0.5% of total companies in Switzerland, according to the government.  

This heavy reliance on a small cohort of multinationals might explain why Swiss corporate tax revenue forecasts are so hard to calculate. A fallow or bumper year from a few of these multinationals makes a big difference to the total business tax haul.  

Most of the big taxpayers are concentrated in cantons Lucerne, which has the lowest cantonal tax rate of 11.66%, Zurich, home to many big banks and other corporations, and Basel City, which plays host to the powerful Swiss pharmaceutical industry. 

The cantons do not say where their corporate tax revenues come from. But there are other clues. The pharmaceutical multinational MSD, which has its Swiss headquarters in Lucerne, paid CHF1.8 billion in Swiss taxes last year, according to its financial statements.   

Canton Geneva has been busy collecting retroactive taxes from companies it failed to bill in previous years. This revenue source has contributed CHF200 million to the latest budget forecast. 

The canton told Swiss public broadcaster SRF earlier this year that oil traders in Geneva, who handle around a third of the global oil trade, have enjoyed bumper profits in the wake of the war in Iran. This phenomenon translates into higher tax revenues. 

Volatile source of income  

But Switzerland cannot rely on this volatile source of income to keep the books balanced every year, warns Michael Grass of the BAK Economics research institute. “Individual record years in corporate tax revenue should not readily be interpreted as durable, structural revenue growth,” he told Swissinfo.  

“In the pharmaceutical industry in particular, international conditions are shifting,” he added.  

These include recent demands from Washington that international firms expand production and research on US soil, efforts by the US to lower the cost of medicaments with its so-called most favoured nation pricing policy and growing competition from China. 

BAK Economics’ caution is mirrored by the Swiss finance ministry. “While corporate income tax revenues have been rising sharply for several years, it is unclear whether and for how long this trend will continue,” it stated in August.  

On the other side of the budget balance sheet is Switzerland’s expenditure, which is also difficult to predict with precision. A series of extraordinary expenses have emerged since the turn of a decade that has already seen a global pandemic and a war erupt in Europe. 

Conflict in the Middle East, which has further squeezed oil and gas supplies, combined with volatile US trade policy is likely to make life more difficult for economic forecasters. 

Edited by Reto Gysi von Wartburg/ts