The five most important questions about reducing COVID-19 debt

18.03.2022

The Federal Council has approved the dispatch on the reduction of the Corona-related debt. The additional debt accumulated as a result of the high extraordinary expenditure to cushion the corona pandemic is to be reduced again with future financing surpluses. Five questions on the topic.

Why does the Confederation have to reduce debt by as much as CHF 30 billion?

The debt brake requires expenditure and receipts to be kept in balance; therefore, it does not permit any new debt over the longer term. The high extraordinary expenditure to combat the COVID-19 pandemic led to a deficit in the extraordinary budget that has to be made up again. The Federal Council currently assumes that the shortfall in the so-called amortisation account is likely to be between CHF 25 billion and CHF 30 billion at the end of 2022. The amortisation account provides the statistics for extraordinary expenditure and receipts. Extraordinary expenditure is possible only in exceptional cases. These include, for example, severe recessions, natural disasters and a pandemic.

How is this debt to be reduced?

Firstly, the additional profit distributions by the Swiss National Bank (SNB), currently amounting to CHF 1.3 billion annually, will be used to reduce the shortfall. Secondly, a temporary legislative amendment is necessary. This makes provision for using financing surpluses for debt reduction and extending the statutory repayment period.

The debt is to be reduced without savings programmes or tax increases. The reduction is to be designed in a way that minimises any adverse effects for the economic recovery. The annual financing surpluses are expected to amount to about CHF 1 billion per year due to budget underruns. By combining those with the additional profit distributions by the SNB, the COVID-19 debt can be reduced by CHF 2.3 billion p.a., which means that the shortfall can be made up within 11 to 13 years. The repayment period therefore has to be extended to 2035.

Why can we not simply let the debt be? Other countries are much more indebted than Switzerland.

The current situation is a good illustration of the fact that the next crisis can come at any time. The pandemic is subsiding and the next crisis is already on its way. However, as some of our neighbouring countries are starting with high levels of debt, they have less room for manoeuvre. If they continue to increase their debt, they will be severely exposed when interest rates start to rise again – as seems likely. This is a perfect example of how important it is to be in a good position in terms of fiscal policy. For this reason, the Federal Council wishes to reduce the COVID-19 debt entirely to ensure that we are equipped for future challenges and crises.

Why does the Federal Council want to reduce all of the debt?

There are a number of reasons:

  • The debt brake has proved its worth. Not only was the Confederation able to reduce its debt in the pre-crisis years, it even substantially increased expenditure. Therefore, the Federal Council intends to intervene as little as possible in the current mechanism.
  • The pandemic has shown how quickly debt can rise and how important it is to have a sound financial budget in order to be able to take comprehensive measures quickly.
  • Solid public finances are a key locational advantage, and they increase Switzerland's competitiveness. This is also important in view of the OECD tax reform.
  • Aside from the pandemic and the Ukraine crisis, many other challenges lie ahead. In particular, the ageing population and climate change are likely to put a strain on public finances in the longer term.
  • Complete debt reduction can be implemented without drastic measures for the federal budget; our expenditure will also continue to grow.

Will the debt brake be undermined with these changes?

The Federal Council is standing by the tried and tested principle of the debt brake. It is one of Switzerland's great achievements. It is not without reason that the decisive "expenditure rule" is even anchored at the constitutional level. Even 20 years after it was introduced following an overwhelming majority vote by the people, the debt brake still enjoys strong support among the people and Parliament. The planned changes are at the legislative level and relate solely to the reduction of COVID-19 debt.

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Last modification 29.06.2022

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