How the Swiss "Debt Brake" Tamed Government

April 30, 2012

Americans looking for a way to tame government profligacy should look to Switzerland.  In 2001, 85 percent of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue.  The reform, called a "debt brake" in Switzerland, has been very successful, says Daniel J. Mitchell, a senior fellow at the Cato Institute.

  • Before the law went into effect in 2003, government spending was expanding by an average of 4.3 percent per year.
  • Since then it's increased by only 2.6 percent annually.

The Swiss debt brake does not require a balanced budget in the traditional sense.  Tax receipts tend to increase rapidly when the economy is doing well and fall off when the economy stumbles.  To smooth out the ups and downs, Switzerland's debt brake limits spending growth to average revenue increases over a multiyear period. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes.

  • Maximum rates for most national taxes in Switzerland are constitutionally set.
  • The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

Switzerland's spending cap has helped the country avoid the fiscal crisis affecting so many other European nations.

  • Annual central government spending today is less than 20 percent of gross domestic product (GDP), and total spending by all levels of government is about 34 percent of GDP.
  • That's a decline from 36 percent when the debt brake took effect.

This may not sound impressive, but it's remarkable considering how the burden of government has jumped in most other developed nations.  In the United States, total government spending has jumped to 41 percent of GDP from 36 percent during the same time period, according to the Organization for Economic Cooperation and Development.

The spending cap has been an effective debt brake.

  • Between 2005 and 2010, when debt levels in the average euro zone nation jumped to 85 percent of GDP from 70 percent, Switzerland's overall government debt declined to 40 percent of GDP from 53 percent.
  • Debt is now down to 36.5 percent of GDP.

Source: Daniel J. Mitchell, "How the Swiss 'Debt Brake' Tamed Government," Wall Street Journal, April 25, 2012.

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