Debt brake

1 Motivation and aim

The debt brake is designed to avert (chronic) structural imbalances in federal government finances and thereby prevent federal debt from soaring like in the 1990s. At the same time, it ensures a countercyclical fiscal policy by permitting limited cyclical deficits during downturn phases of the economic cycle and requiring surpluses when the economy is booming. The debt brake therefore addresses two classical objectives of fiscal policy: ensuring sustainable public finances and evening out economic cycle and growth fluctuations.

Nominal debt is to be stabilised over the longer term with the debt brake. If this is successful, debt in relation to aggregate value added (debt ratio) declines when the economy grows. However, within the framework of the budget and financial plan, the Federal Council and Parliament can strive for a more ambitious target in the sense of a nominal decline in debt. The debt brake is laid down in Article 126 of the Federal Constitution. The details are set out in Articles 13 to 18 of the Financial Budget Act (SR 611.0). The constitutional article was accepted with a "yes" vote of 85% in the referendum of 2 December 2001.

2 How it works and its components

The expenditure rule

The cornerstone of the debt brake consists of a simple expenditure rule: the annual ceiling for ordinary expenditure is linked to the amount of ordinary receipts. To ensure that cyclical fluctuations in receipts are not transferred to the expenditure ceiling, receipts are adjusted by the cyclical factor, which takes account of the economic situation. It can be understood as a function of the output gap and is defined as the ratio of trend gross domestic product (trend GDP) to current GDP. Since trend GDP is not an observable indicator, it has to be estimated. With effect from the 2021 financial statements, the FFA has been using the production function and output gap calculated by SECO for this purpose (SECO production function and output gap). When the economy is booming, the cyclical factor causes the expenditure ceiling to be lower than receipts and the Confederation generates a financing surplus. Conversely, the formula tolerates a deficit in times of recession. The expenditure rule acts independently of the amount of the tax burden. It thus permits tax hikes as well as tax cuts. However, a tax reduction has to be accompanied by expenditure cuts.

Extraordinary expenditure

The Federal Council and Parliament are bound by the expenditure rule of the debt brake. Nevertheless, additional extraordinary expenditure is possible in exceptional situations that cannot be controlled by the Confederation, such as severe recessions and natural disasters. In such cases, a qualified majority of both chambers of Parliament is required to increase the expenditure ceiling. The possibility of extraordinary expenditure makes it possible to react to exceptional situations.

Compensation account for the ordinary budget

The debt brake requirements for the ordinary budget have to be taken into account when preparing the budget and the subsequent supplementary credits. As soon as the financial statements are available, compliance with the requirements is checked: the maximum permissible expenditure is recalculated based on the receipts actually earned and the revised economic forecasts. If the expenditure actually incurred exceeds the recalculated expenditure ceiling, the excess is debited to the so-called compensation account; any amounts below the expenditure ceiling are credited to the compensation account. Forecasting errors regarding receipts and economic growth also cause the compensation account to be debited or credited, as they result in expenditure ceilings that are too high or too low. Any deficit in the compensation account has to be eliminated in subsequent years. This is not possible in the case of surpluses; they are used to reduce debt.

Amortisation account for the extraordinary budget

The extraordinary budget is subject to the debt brake too. The extended debt brake rule requires deficits in the extraordinary budget to be offset via the ordinary budget in the medium term. An amortisation account serves as a control parameter. It records extraordinary receipts and expenditure. Expenditure surpluses have to be paid off over the course of the subsequent six accounting years by means of surpluses in the ordinary budget. If the shortfall is foreseeable, the necessary savings can be made earlier.

3 Experience

Experience to date of fiscal policy management with the debt brake shows that the desired objectives have been achieved. After it was first applied to the 2003 budget, the Federal Council and Parliament quickly managed to re-establish a structural balance. The Confederation's finances have not shown a structural deficit since 2006. This development is reflected in the significant reduction in debt, with the Confederation's debt ratio falling from 25.3% (2003) to 13.3% (2019). Aside from the debt brake, the dynamic economic growth and increase in receipts were also responsible for the positive development of the federal finances. The high extraordinary expenditure to deal with the COVID-19 pandemic led to an increase in the debt ratio once again in 2021, bringing it to 14.8%. At the same time, the debt brake demonstrated that it provides the necessary flexibility for the Confederation to react appropriately and quickly to crises. Moreover, the Confederation's fiscal policy has become more in line with the economic situation since the introduction of the debt brake. Cyclical deficits support aggregate demand in the economy and thus help to stabilise economic growth. The opposite happens when the economy is booming. Due to the severe economic downturn, the COVID-19 pandemic also revealed the weaknesses of the previous method for calculating the cyclical cycle factor. Consequently, the cyclical factor has been calculated using the SECO production function since 2021.

4 Outlook

The Confederation's high extraordinary expenditure led to a deficit in the amortisation account, which will have to be eliminated again. The Confederation's debt is thus likely to fall again in the future. As a result, the Confederation's ability to withstand crises will be increased again and interest expenditure reduced, which in turn will provide greater fiscal policy leeway. The FDF's long-term outlook shows that the ageing population will place the main burden on public finances over the next 30 years. Major challenges include the financing of retirement provision and long-term care. Climate change is also likely to have a negative impact. The debt brake cannot solve such structural problems. By contrast, a further reduction in the Confederation's debt ratio can provide the best possible basis for future generations.

5 Publications

Further reports are available in the following language versions:

DE

FR

Last modification 30.03.2022

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