The Swiss welfare state is ‘not about to be dismantled’

Switzerland needs to revise its “debt brake” mechanism, say guests on our Let’s Talk panel. That might help balance the country’s budget without having to rely on savings cuts, say economists Marius Brülhart and Nils Soguel.

The Swiss federal government wants to do some serious belt-tightening in order to maintain a balanced budget. The plan is to save CHF3 billion-4.5 billion ($3.65 billion-5.5 billion) a year from 2027. Climate policy, childcare, scientific research and foreign aid – the cuts will affect just about everything except the armed forces.

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Marius Brülhart, an economics professor at the University of Lausanne, admits there is a need to act. “It is important to have healthy public finances and a balanced budget,” he says. He cautions, however, that there is no easy answer how this should be done. “Should we have budget cuts like the government wants? Should we increase revenue by increasing taxes, or take on more debt? These are political decisions.”

Brülhart favours relaxing the rules on the debt brake, a mechanism adopted by Switzerland in 2003 backed by 85% of voters. This rule provides that total expenses may not exceed the total amount of revenue over the course of an economic cycle.

“Our debt brake is the strictest in the world. And in the legislation that implements it, we have made it even stricter,” Brülhart points out. He regards it as not just a brake, but a “step back from debt”, as it reduces the nation’s debt ratio.

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Nils Soguel, a professor of public finance at the Graduate School of Public Administration of the University of Lausanne, has a more positive view of the debt brake. In his opinion, it is a key factor behind Switzerland’s success.

Thanks to this mechanism, the federal government stands out with its low debt when compared to other countries. It was about 15% in 2023, according to data from the International Monetary FundExternal link (IMF). That’s much lower than most other countries.

“The debt brake is like chocolate and watches, a good export from Switzerland,” insists Soguel. It may limit budget policy, but it still leaves room for manoeuvre in economic ups and downs or crises.

He also thinks, though, that the mechanism has a built-in bias which needs to be corrected. “It was worked out at the end of the 1990s, which were terrible years for public finances. At that time, no-one imagined that the federal government would find itself dealing not with deficits, but systematic surpluses,” he explains.

‘A matter of political bargaining’

Both economists believe that the government’s programme to curb spending is not likely to curb national growth. “State spending is useful and creates jobs, but raising or lowering expenditures by 1% in any particular area should have no more than a marginal impact,” thinks Soguel.

Brülhart agrees: “It’s a matter of political bargaining and distribution of costs and advantages, but one could hardly say that growth in Switzerland will be all that much affected if we do this or that.”

He notes that studies have found that if there is a major budgetary problem, it is better to correct it by means of cuts in expenditures than by raising taxes. “These results don’t really apply to the situation here, though, because they are based on budgetary crises that were much more severe than what the federal government is dealing with,” Brülhart points out.

Stereotypical reactions

The federal government’s savings programmeExternal link is currently being argued over by politicians, with the ongoing traditional differences between left and right. Those on the right think Switzerland has a problem with its finances, while those on the left think the federal finances are already in good shape.

“The reactions are pretty much stereotypical, but the politicians will have to find a consensus solution. They will have to determine priorities. If there is not enough revenue, some things will have to be given up,” says Soguel.

He points out that the government would not find it easy to withdraw from any existing responsibilities, as centre-right parliamentarians demand. He says the budget cuts proposed in the so-called “Gaillard” reportExternal link adopted by the government, don’t involve completely giving up any responsibility.

“With time, some needs disappear, but the structures remain. It is hard to drop a particular structure from an organisational chart, because there are always interests at stake,” Soguel says. As an example, he mentions the Swiss National Stud FarmExternal link in Avenches, which was founded in 1898 to ensure a supply of horses needed by the armed forces and industry. “Today, motors have replaced animal power, but the stud farm has a new job now, maintaining the traditional Freiberger breed of draught horses,” he points out.

Maria Silletta, who represented the Swiss Abroad in our debate, is worried about budget cuts affecting the diaspora. She points to cuts in the budget of the Organisation of Swiss Abroad (OSA) and the withdrawal of the federal contribution to the services of the national broadcaster aimed at consumers outside the country (such as SWI swissinfo.ch).

“These cuts may be minor matters in the overall budget of the federal government, but they follow the thinking of the experts’ report which advocates cancelling small grants, as they achieve little and cost a great deal to distribute,” explains Soguel.

He does point out that the efforts of Switzerland on behalf of the Swiss Abroad, the worldwide network of embassies, and development aid all contribute to maintaining the country’s positive image abroad. “This is a common resource available to all Swiss. Sometimes people lose sight of these things,” the economist admits.

‘Trump’s policy is not austerity’

Budget cuts are not only an issue here in Switzerland, but in other parts of the world too. “It’s the trend. Many populist movements are riding a wave of success,” notes Brülhart.

He warns, however, against over-use of the word “austerity”. He says: “As regards the Trump administration, for example, there is no real austerity there, because he wants to lower taxes, which is going to add to an already considerable deficit in the US.” As regards Switzerland, he does not think the government’s proposed cuts are deep enough to be called austerity.

While the US is withdrawing from Europe, European nations are having to increase their defence spending and take funding away from other areas. “That doesn’t mean our welfare state is going to be dismantled. There is no reason for such a fear,” says Soguel.

He believes European countries have benefited from a “peace dividend” following the fall of the Berlin Wall. “It was used to increase social welfare spending. Today, we find ourselves in a much more conflictual environment, and the balance of public expenditure is going to have to tip back towards defence spending, which is what parliament has now decided.”

Brülhart has no worries, either, about the welfare state being dismantled. “Defence spending could be boosted by making cuts to social welfare. That’s one scenario. But I find it hard to imagine that that scenario would appeal much to the Swiss people.”

Edited and checked by Samuel Jaberg/adapted from French by Terence MacNamee/sb