Putting the Brakes on U.S. Debt

As the world continues to struggle with the economic recovery and increasingly overwhelming debt levels, many are looking to Switzerland’s rather novel method of controlling its government debt, the Swiss “debt brake.” Germany has recently adopted a partial debt brake rule, and there are some discussions taking place about a debt brake rule to cover the entire set of euro zone countries.

The Swiss made it through the Great Recession relatively unscathed compared to most countries. In fact, the Swiss economy is facing a different kind of crisis: their currency is becoming too strong and the country’s exports are having trouble competing. Nevertheless, the Swiss “debt brake” is cited as one of the reasons for the country’s largely successful navigation of recent economic turbulence. With Germany and others looking to the Swiss debt brake as a model for their own fiscal rules – and as the U.S. debates its own fiscal future – we thought it would be helpful to provide some background. In this blog we will attempt to go into some detail on the history and function of the Swiss debt brake, and talk a little about how it works.

The Swiss government is generally known for its fiscal frugality. Toward the end of the 1990s, however, the country’s debt level grew to an uncomfortable 51 percent of GDP (still far below many other developed countries at the time). Subsequently, the debt brake was enshrined in the country’s constitution in 2001 after receiving 84 percent of the popular vote.

Effectively, the rule aims to maintain a structural budget balance every year. The rule allows deficits to be run in a recession, but requires surpluses in better economic times so that over the cycle the budget is in balance.

The debt brake rule specifies a ceiling on central government expenditures, looking forward a year, equal to predicted revenues adjusted by a factor reflecting the cyclical position of the economy. It is then possible to run deficits in a recession, but over the medium-term deficits and surpluses are expected to roughly cancel each other out. Differences between budget targets and estimates and actual outcomes are recorded in a notional account. If the negative balance in the account exceeds six percent of expenditure, Swiss authorities are required by law to take measures sufficient to reduce the balance below this level within three years. An escape clause exists, by which Parliament may allow deviations to the rule in exceptional circumstances. Because of its flexibility in allowing for surpluses and deficits, the debt brake rule evades one of the shortcomings of a typical balanced budget rule, which is that they are inherently pro-cyclical and often do not allow governments to respond to economic downturns.

The Swiss economy weathered the economic crisis much better than most countries, and many credit the debt brake for helping the country maintain a relatively stable debt level. In the Peterson-Pew Commission on Budget Reform’s 2010 report, Getting Back in the Black, the commission suggested that Switzerland offers lessons for the U.S. and other countries to learn from on controlling debt. As getting our own fiscal house back in order seems increasingly difficult and unlikely, perhaps its time to look abroad for some guidance.