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 the sustainability of public finances and smoothing economic cycle and growth fluctuations.

Nominal debt is to be stabilised over an economic cycle 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 popular vote of 2 December 2001.

2 How it works and its components

The expenditure rule

The cornerstone of the debt brake consists of a simple rule: expenditure may not exceed receipts over an economic cycle. The annual expenditure ceiling is linked to the amount of receipts, which are adjusted using a factor that takes the economic environment into account (cyclical factor). When the economy is booming, the expenditure ceiling is lower than receipts and the Confederation generates a surplus. Conversely, the formula tolerates a deficit in times of recession. Balanced finances are achieved over the entire economic cycle. The rule acts independently of the amount of the tax burden. It permits tax hikes as well as tax cuts. According to the rule, a tax reduction has to be accompanied by expenditure cuts.

Extraordinary expenditure

The Federal Council and parliament are bound by the basic rule of the debt brake. However, parliament retains budgetary sovereignty within the limits of the expenditure ceiling prescribed by the rule. In extraordinary circumstances, e.g. severe recessions or natural disasters, the rule's expenditure ceiling can be raised by a qualified majority of both chambers of parliament.

Compensation account for checking success

The debt brake requirements have to be taken into account when preparing the budget and the subsequent supplementary credits. As soon as the closing accounts are available, compliance with the requirements is checked: the maximum permissible expenditure is recalculated based on the receipts actually achieved and the revised economic outlook. If the expenditure actually incurred exceeds the recalculated expenditure ceiling, the excess is charged 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. Such errors lead to an expenditure ceiling that is either too high or too low. Compensation account deficits have 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 in advance.

3 Experience

Experience to date of fiscal policy management with the debt brake (see debt brake report) 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. Amounting to 18.5% in 2013, the federal debt ratio has more or less fallen back to the same level as in 1994. Aside from the debt brake, the dynamic economic growth and increase in receipts are also responsible for the positive development of the federal finances. 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 lead to a stabilisation of economic growth. The opposite happens when the economy is booming.

4 Outlook

The statutory rules with respect to the debt brake will tend to result in a nominal debt reduction also in the future. As a result, Switzerland's ability to withstand crises will be increased and interest expenditure reduced, which in turn will provide greater fiscal policy leeway. A further reduction in federal debt would thus be beneficial. The long-term fiscal policy challenges as a result of the ageing of the population concern primarily the social security funds and the corresponding expenditure of the Confederation. The debt brake cannot solve such structural problems. By contrast, a further reduction in the Confederation's debt ratio can provide future generations with the best possible starting point for tackling the problems of the future.

5 Publications

Last modification 27.11.2020

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