Middle classes feel the inflationary pinch

Filling up a Swiss shopping bag is getting more and more expensive Keystone

Inflation is back in Switzerland. Increasing energy costs have been blamed for a 15-year high of 3.1 per cent, which is bad news above all for the middle classes.

But who in fact belongs to this social group which makes up a good half of the Swiss population?

“If pushed for a definition, I would say middle class starts when you are no longer entitled to certain social benefits such as grants, health insurance or housing assistance – and ends when the fiscal scale gradually changes from progressive to proportional,” said Yves Flückiger, professor of economics at Geneva University.

A progressive tax is a rate that increases as the amount subject to taxation increases. It imposes a greater burden on the rich than on the poor.

A proportional tax in simple terms imposes an equal burden on the rich and poor.

On these criteria, an unmarried person is considered middle class on an income of SFr70,000-150,000 ($64,000-137,000).

“The category is therefore very disparate socially and politically, and when one’s at the bottom, it doesn’t take much to drop into the lower category,” Flückiger said.

The “lower category” comprises around 30 per cent of the population, while 20 per cent could be considered “rich”.

Fiscal drag

In general, when prices go up, so do salaries. This cancels out the effects of inflation – defined as a sustained increase in the general level of prices for goods and services – but not the decline in the purchasing power of money. As inflation rises, every franc buys a smaller percentage of a good or service.

On the other hand when tax thresholds are either not adjusted for inflation, or fail to keep pace with earnings growth, this can cause an automatic rise in tax revenues.

This process, known as fiscal drag, is an important factor in the middle class’s loss of purchasing power.

“Sure, cantonal laws exist to correct this fiscal drag,” said Flückiger. “But it takes time for them to have an effect. What’s more, the inflation correction for direct federal tax is not complete.”

Even without fiscal drag, the middle classes are already taxed the hardest in proportion to their income.

What’s more, when government statisticians try to calculate inflation, they put a number of goods representative of the economy into a “market basket”. The cost of this basket is then compared over time, resulting in a price index. However, economists do not take into account either taxes or health insurance premiums.

Union demands

Even if the decline of purchasing power is hard to calculate, it is certainly real.

To counter it, earlier in the month the trade union umbrella group Travail Suisse demanded nominal wage increases for next year of between four and five per cent. The unions argue this would boost economic growth by maintaining spending power.

In order for the economy to grow, they say, people need to be able to buy things and to do that they need money. On paper that appears simple – is it too simple?

“Growth does not depend only on consumers consuming but also on companies investing, exports and government spending,” according to Flückiger. “As a result, higher wages hurt competitiveness and exports and slow down investments.”

Thomas Daum, director of the Swiss Employers’ Association, said he couldn’t see the unions’ demands being granted.

A wage hike of up to five per cent, he said, risked damaging the competitiveness of Switzerland, a country which earns one franc in two abroad and where the cost of labour “is already very high”.

swissinfo, based on an article in French by Marc-André Miserez

Key facts

Inflation forecasts:

SNB: 2.7% (2008), 1.7% (2009)
BAK Basel: 2.4%, 1.6%
Swiss economic Institute (KOF): 2.6%, 1.4%
State Secretariat for Economic Affairs (Seco): 2.5%, 1.3%
Credit Suisse: 2.2%, 1.4%