Sustainable Fiscal Policy in a Federal State: The Swiss Example

Abstract

Using a small theoretical model it is first shown that it is reasonable to limit public deficit and debt in relation to GDP in the long-run. Then we describe fiscal institutions called `debt brakes' which are designed to prevent public deficit and debt from going off course. We present some models which have been applied in some Swiss cantons, especially in the canton St. Gallen, and the respective institution recently introduced at the federal level. Altogether, the models in the different cantons are quite successful. At the federal level we still have to wait before we can evaluate the results. Finally, we describe how the problem of a possible bail out of cantons and local communities is solved in Switzerland. Taking all results together, we come to the conclusion that by choosing appropriate institutions federal countries are rather more able to perform a sustainable fiscal policy than unitary states. In this process, budgetary restrictions and/or fiscal referenda play prominent roles at all levels. On the other hand, a special stability pact between the different governmental levels does not seem to be necessary.