Debt brake (Switzerland)

The debt brake was the title of a constitutional amendment in Switzerland that was passed on June 22, 2001 by the Federal Assembly and on December 2, 2001 by referendum. This is a fiscal rule at the federal level with the (cyclically adjusted) budget result as a control parameter.

This constitutional regulation is intended to oblige the federal government to keep income and expenditure in balance throughout the business cycle. The debt brake has been in force since 2003.

Development of Swiss federal finances up to 2003

Although Switzerland has a relatively low debt ratio (ratio of debt to gross domestic product ) compared to other European countries , the goal of reducing debt was decided. After the two world wars , the federal government's debt level was 9 billion francs , which corresponded to around 50 percent of the gross domestic product at the time. In 1958 , on the recommendation of the Federal Council , the principle of debt relief was included in the Federal Constitution - so the debt should be slowly reduced. Large federal surpluses during the 1960s and 1970s made it possible to reduce the debt ratio sharply, but the late 1970s interrupted this trend with low growth rates and low inflation . The 1980s saw a further decline before the 1990s lifted debt to new levels - in 1999 the debt ratio was 26 percent of GDP , the deleveraging of the previous ten years was completely wiped out in 1992 and 1993 alone.

In the past, there have been numerous attempts in Switzerland to limit national debt, but proposals often failed because of the voting hurdles. Despite the implementation of a debt relief principle, the developments of the 1990s could not be stopped. In 1998 the budget target for 2001 was adopted, which gradually limited the permissible deficit for the coming years in order to achieve a balance in the federal finances in 2001. The debt brake should be seen as a successor to the 2001 budget target.

The development of the Swiss debt

How the debt brake works

The debt brake is codified in Article 126 of the Swiss Federal Constitution and in the Federal Act on the Federal Financial Budget (FHG). Your goal is to keep debt constant over the business cycle. As the economy grows, this results in a falling debt ratio. The object of the debt brake is to control the federal budget by limiting expenditure . The debt brake is thus a spending rule.

Specifically, in the case of the debt brake, the permissible expenditure ( expenditure ceiling ) is limited to the amount of income adjusted for an economic factor.

${\displaystyle A=E\cdot k}$

${\displaystyle A}$denotes the maximum amount of the total expenditure requested, the estimated income and the economic factor . ${\displaystyle E}$ ${\displaystyle k}$

The economic factor is defined as the ratio of the estimated trend-based gross domestic product to the estimated current gross domestic product.

${\displaystyle k={\frac {\text{Trend-BIP}}{\text{aktuelles BIP}}}}$

During a boom, the economic factor is less than one, which creates the pressure to generate surpluses - during a recession, the economic factor is greater than one, and deficits are allowed. However, the budget is balanced over a complete business cycle.

The economic factor

In order to determine the economic factor, the federal finance administration uses real and non-nominal values. The reason for this is that only real economic changes are to be recorded. When considering nominal values, the cyclical fluctuations in the GDP deflator would be included, and there would be the risk of falsifications and estimation errors.

When determining the current gross domestic product, it should be noted that this can only be reliably estimated after about 2 years. Quarterly estimates and other economic factors are used in Switzerland to ensure the highest possible accuracy.

Trend GDP is determined using a modified version of the Hodrick-Prescott filter . The advantages of this method are that one does not determine a theoretical maximum degree of utilization, but an average utilization of the production potential.

Since the HP filter has a boundary value problem, so that the trend towards the beginning and end of the time series approaches the same and predictions for the artificial extension of the time series have often proven to be very imprecise, the Federal Finance Administration has developed the so-called MHP filter that modifies the HP filter in the following ways:

${\displaystyle \sum _{t=1}^{T}{\frac {1}{\lambda (t)}}{(y_{t}-\tau _{t})^{2}}+\sum _{t=2}^{T-1}{[(\tau _{t+1}-\tau _{t})-(\tau _{t}-\tau _{t-1})]^{2}}.}$

With

${\displaystyle \lambda (t)=\lambda }$ For ${\displaystyle t=3,...,T-2}$

${\displaystyle \lambda (t)={\frac {3}{2}}\lambda }$for and ${\displaystyle t=2}$ ${\displaystyle t=T-1}$

${\displaystyle \lambda (t)=3\lambda }$for and ${\displaystyle t=1}$ ${\displaystyle t=T}$

The weights shift towards the end of the time series and the boundary value problem is eliminated. This modification also means that the MHP filter classifies changes more economically than structurally.

The advantage of using the MHP filter is its simplicity and transparency.

The receipts

When estimating income, it is important to take future changes in tax rates into account, as well as changes in income elasticity. This is to be ensured by using the estimates according to budget and financial planning. Extraordinary income is reduced from the ordinary income in accordance with the debt brake; this is to be used to repay debt. Experience shows that income is underestimated at the beginning of a boom and overestimated at the beginning of a recession. This is essentially due to the unanticipated, inverse change in the trend of economic development. However, this effect is desirable as it has an anti-cyclical effect.

Exceptions

The expenditure ceiling determined in the budget for next year is binding for the Federal Council and the Federal Assembly , but in exceptional cases, such as severe recessions or natural disasters, the expenditure ceiling can be exceeded if both chambers of the Federal Assembly agree with a qualified majority (majority of Council members) and the exceeding reached at least 0.5 percent of the previous spending ceiling.

Sanction mechanism

Since politicians, according to political-economic theory, have incentives to circumvent existing regulations for their personal benefit and credit-financed expenses are often easier to represent to voters than tax-financed expenses, a good budget rule must have an effective sanction mechanism. In the Swiss case, this is done by the compensation account. Overruns and underruns of the expenditure ceiling are posted to this. These deviations are mainly caused by:

• Estimation errors in income (the expenditure ceiling is determined ex ante in a planning period for an execution period. The actual expenditure ceiling is then determined ex post in the execution period and the expenses incurred are compared with it.)
• Estimation error when determining the business cycle factor
• Exceeding and falling below the spending ceiling

Shortfalls in the compensation account must be taken into account in the spending ceilings for the following years. A binding time limit only exists if the expenditure ceiling exceeds 6 percent of total expenditure, then this excess must be reduced within 3 years.

criticism

When the debt brake was introduced in 2003, there were initially some teething problems. The initial revenue forecast had to be reduced by 8 percent of federal revenue and, contrary to previous assumptions, a structural deficit was discovered. If the debt brake had been implemented word for word, a deficit of 4.6 billion Swiss francs in the budget for 2004 would have had to be eliminated. In order to ensure the stability of the debt brake, a correction path was adopted that allowed spending to be increased over the next few years in order to reduce the deficit.

Using the Hodrick-Prescott filter

While the Hodrick-Prescott filter was still used in 2003 and, thanks to numerous criticisms, the Federal Finance Administration has been using the modified HP filter since 2004, this instrument is also controversial. The smoothing parameter chosen is often based on suggestions made by Hodrick and Prescott for the US economy. However, this value is not theoretically founded, there is a certain element of arbitrariness. Studies have shown, however, that very high smoothing parameters could also trigger a procyclicality of the debt brake. Alternative methods for determining the trend-based production potential have so far been rejected because they are much more complex and show less transparency. ${\displaystyle \lambda =100}$

The role of public investment

The investment rate in Switzerland 1970–2005

Capital expenditures are as in force in Germany since 2009, usually within the debt ceiling just as consumptive spending treated. This fact has been discussed in politics and science since the introduction of the debt brake . If one follows the principle of intergenerational justice , the investments should be financed by credit in order to create a fair balance between several generations. The problem of equal treatment of these expenses can lead to investment foregone if there is increased pressure to save. Proponents of this regulation argue, however, that there is enough leeway for capital expenditure, since the debt brake only regulates the amount of expenditure, not its composition. Special treatment of public investments would also make it necessary to adapt the investment and consumption concepts, whereby interest groups can be expected to act to their advantage.

Zero new debt

An expert report by the Zurich Economic Research Center proved that zero new debt over the business cycle is only possible if the business cycle is known in advance. The reason for this is the fact that, unlike k, long-term receipts are not stationary .

Amount and timing of the compensation account

The fact that there are time regulations for reducing the compensation account amounts only from a certain level implies the possibility that the reduction of these excesses will fall into a recession and the debt brake will thus have a procyclical effect. Adjusting the amount and timing of the compensation account creates the opportunity to deal more closely with economic problems, but also carries the risk of overlooking structural problems. Accordingly, opinions on this in the public discussion are divided.

Ingestion elasticities

The revenue elasticity underlying the debt brake is one. In one study, the actual revenue elasticity was shown to be 1.2. Critics noted, however, that not all of the income underlying the debt brake had been taken into account and that the income was not adjusted for structural changes in the tax system, so that an income elasticity of one was empirically tenable.

Swiss federal finances since the introduction of the debt brake

The debt brake has been applied in Switzerland since 2003. Since then, the debt level has more or less stabilized and the debt ratio has been falling. However, a precise assessment of the effectiveness will only be possible after going through a complete business cycle. A steadily rising debt level as at the beginning of the 1990s can no longer be determined; the debt ratio of 33.1% in 2015 is very good in a comparison of the OECD countries. From the point of view of the Federal Department of Finance, the debt reduction in absolute figures since 2006 has totaled 21.6 billion Swiss francs in absolute figures.

Model for Germany

→ Main article : Debt brake (Germany)

The way in which the Swiss debt brake works has served as a model for similar systems in many European countries. In an expert report, the economic research center at ETH Zurich calculated the effects of a debt brake on the German federal budget as a model. In principle, according to the report, the application of a debt brake based on the Swiss model is opposed to the different institutional framework conditions. Above all, the lack of direct democratic, budget-relevant decision-making procedures and the lower independence of the Bundestag vis-à-vis the government should make it more difficult to transfer the Swiss debt brake. In contrast, the Council of Economic Experts proposes an alternative model for Germany - the so-called debt barrier - for assessing macroeconomic developments .

Web links

• Federal Department of Finance: Debt brake

literature

• Bodmer, Frank: The Swiss Debt Brake: How it Works and What Can Go Wrong, in: Swiss Journal for Economics and Statistics, Vol. 142, No. 3, pp. 307-330
• Federal Act on the Federal Financial Budget, of October 7, 2005
• Colombier, Carsten: The Swiss debt brake - more sustainable and more economically fair than the new stability and growth pact ?, in: Schmollers Jahrbuch, Zeitschrift für Wirtschafts- und Sozialwissenschaften, 126th year, no. 4th
• Danninger, Stephan: A New Rule: "The Swiss Debt Brake", IMF Working Paper, January 2002 (PDF file)
• Groneck, Max and Plachta, Robert: Adapting the Swiss Debt Brake to the German Bundesländer
• Economic Research Center of ETH Zurich: A Debt Brake for the German Federal Budget, Zurich, March 2007 (PDF file; 1.02 MB)
• Müller, Christian: Comments on the debt brake, in: Vierteljahreshefte zur Wirtschaftsforschung, Vol. 73, No. 3, pp.491-501 (PDF file; 186 kB)
• Hartwig, Jochen; Kobel Rohr, Rita: Would the Swiss “debt brake” be a suitable instrument for disciplining fiscal policy in the EU ?, in: Vierteljahreshefte zur Wirtschaftsforschung, Vol. 73, No. 3, pp.481-490 (PDF file; 148 kB)
• Expert council for assessing macroeconomic development: effectively limiting national debt, expertise on behalf of the Federal Minister for Economics and Technology, Wiesbaden, March 2007 (PDF file; 2.48 MB)

Individual evidence

1. ↑ Attachment 4 to Message 03.32: Debt brakes in Switzerland - overview of the different models ( Memento of the original from February 9, 2015 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. 
2. ↑ Swiss Federal Council: Message on the debt brake, in: Bundesblatt, 35, pp. 4653–4726 ( PDF )
3. ↑ The federal authorities of the Swiss Confederation: Referendum of June 7, 1998 - First submission: Budget target 2001: Stop indebtedness ( Memento of the original of May 31, 2004 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. 
4. ↑ http://www.admin.ch/ch/d/sr/101/a126.html
5. ↑ Bruchez, Pierre-Alain: A Modification of the HP Filter Aiming at Reducing the End-Point Bias, Eidgenössische Finanzverwaltung, Working Paper, August 18, 2003 ( PDF ( Memento of the original from March 5, 2016 in the Internet Archive ) Info: Der Archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this note. ) 
6. ↑ Bodmer, Frank: The compensation account of the debt brake, in: Note des Ökonomenteams EFV, No. 02, April 2003
7. ↑ Schips, Bernd et al .: Expertise on selected problems of the debt brake, final report, Zurich, June 10, 2003 ( PDF ( Memento of the original from June 13, 2007 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this note. ) 
8. ↑ Müller, Christian: Comments on the debt brake, in: Quarterly Issues for Economic Research, Vol. 73, No. 3, pp. 491–501 ( PDF )
9. ^ Colombier, Carsten; Frick, Andres, reflections on the debt brake ( PDF ( Memento of the original from August 25, 2005 in the Internet Archive ) Info: The archive link has been inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this note. ) 
10. ↑ Bruchez, Pierre-Alain: Will the Swiss Fiscal Rule Lead to Stabilization of the Public Debt ?, Eidgenössische Finanzverwaltung, Working Paper, August 26, 2003 ( PDF ( Memento of the original from June 13, 2007 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this note. ) 
11. ↑ Colombier, Carsten: The relationship between gross domestic product and Swiss federal income, Federal Finance Administration, Working Paper, July 2003 ( PDF ( Memento of the original from June 13, 2007 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this note. ) 
12. ↑ Colombier, Carsten: A revaluation of the debt brake, Eidgenössische Finanzverwaltung, Working Paper, January 2004 ( PDF ( Memento of the original from June 14, 2007 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and Archive link according to instructions and then remove this note. ) 
13. ↑ Marcel Amrein: Debt brake: This cow deserves to be holy In: Neue Zürcher Zeitung from October 19, 2016
14. ↑ Archived copy ( memento of the original from January 30, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. 
15. ↑ EVS: The household at a glance | Invoice 2018 overview. In: efd.admin.ch. EFD, accessed on April 21, 2019 . 
16. ↑ Economic Research Center of the ETH Zurich: A debt brake for the German federal budget, Zurich March 2007. ( PDF )