Switzerland Plans VAT Increase for 10 Years to Revamp Military
(Bloomberg) — Switzerland plans a temporary increase of its value-added tax to boost spending for the military.
To finance a revamp of outdated equipment amid a deteriorating European security landscape, the government is proposing to raise the country’s sales tax by 0.8 percentage point for 10 years from 2028.
“Due to budget cuts in recent decades, the army is not sufficiently equipped to adequately counter the most likely threats,” it said Wednesday in a statement, adding that an estimated 31 billion francs ($40 billion) is required to “substantially” improve the security situation.
The plan requires support from lawmakers and will also face a national vote thanks to the rules of Swiss direct democracy. Currently, the VAT standard rate is 8.1% in Switzerland, among the lowest in Europe.
The additional tax revenue will go to a fund earmarked for military purchases, according to the statement. That fund will be able to take up debt, but must be debt-free again at the end of the 10-year period.
The government said it aims to present a draft law by the end of March, with the matter assigned to parliament in autumn. The timeline then sees a national vote in summer 2027 to allow the tax increase to come into force as of Jan. 1, 2028.
It’s unclear if the measure will get backing in a plebiscite: A separate proposal to lift VAT to 8.8% — to fund a boost of pensions that voters backed in 2024 — is also in the works. Prolonged debates in parliament have already derailed the government’s timeline, which had initially envisioned the increase to take effect this month.
Additionally, parliament’s upper house has demanded an even bigger increase to finance the potential abolition of a tax structure that disadvantages double-income couples — the so-called “wedding penalty” — which is on the ballot on March 8.
Neutral Switzerland isn’t a member of NATO or the European Union and spends the equivalent of just 0.7% of gross domestic product on defense — less than half the European average. After securing funding for procurements, spending the money has been a challenge, with delays and rising costs for key projects having led to the resignation of the defense minister in early 2025. Those challenges have left the nation with outdated equipment.
Faced with Russia’s full-scale invasion of Ukraine and the US security retreat in Europe, there are plans to raise annual defense spending to 1% of GDP by 2032. According to Wednesday’s statement, however, this boost isn’t sufficient for the necessary improvement of capabilities, so the additional tax increase is needed.
“Defense equipment has become significantly more expensive, partly due to inflation and a sharp rise in demand. In addition, high down payments are required,” Defense Minister Martin Pfister said. The current funding “no longer reflects the realities of this market.”
Other models that were considered to finance the military outlays were a financial transaction tax, a wealth tax, a corporate income tax and higher wage deductions, according to Defense Ministry Deputy Secretary General Marc Siegenthaler. “From an economic and financial perspective, the VAT option emerged as the least harmful solution.”
Speaking to reporters in Bern, Pfister was also questioned about a delayed delivery of Patriot ground-based air defense systems from the US. The effort to prioritize support of Ukraine has meant that Switzerland’s order won’t meet an initial 2028 deadline.
“It’s our clear will that we can procure these systems,” Pfister said. “We assume that we will get Patriot, a little later. The US will communicate that decision relatively soon to us.”
(Updates with Patriot order in final two paragraphs)
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