On 28 June 2023, Switzerland’s Federal Council approved a budget for 2024 with a deficit of CHF 6.7 billion.
Switzerland’s constitution includes a section designed to constrain spending to prevent the government from living beyond its means. The debt brake, as it is known, allows a limited degree of annual overspending that is expected to be covered by future surpluses.
However, there is a wrinkle. The debt brake refers to ordinary expenditure, which means any spending that can be defined as extraordinary is exempt. In the 2024 budget, an extraordinary amount of spending found its way into the extraordinary bucket, allowing the government to present a budget with an ordinary deficit of CHF 0.5 billion. This level of deficit satisfies the requirements of the debt brake.
The challenge faced by the federal government is that spending is rising at a faster rate (+4.1%) than revenue (+2.1%). Revenue is up in 2024 due to a hike in VAT and rising taxable profits. However it is lower than originally forecast because the expected share of central bank profits of CHF 1.3 billion has not materialised – one side of the SNB’s huge balance sheet, built in the era of QE, is sinking in value, generating losses.
Spending on the other hand is being driven up primarily by pension reform, which hurts upfront, an injection of funds into Swiss Rail, support for the electricity sector, spending on Ukrainian refugees, higher military spending and higher interest payments on government debt – both debt and interest rates are rising.
Karin Keller-Sutter, Switzerland’s minister of finance, recognises the problem. She told RTS that we have a real spending problem and the Federal Council is looking for ways to cut it.
So the budget blow out in 2024 is either CHF 0.5 billion or CHF 6.7 billion, and either satisfies the debt brake rules or doesn’t depending on how one chooses to define certain spending. Either way the amount that will be added to Switzerland’s government debt will be CHF 6.7 billion, (extraordinarily?) adding a bit more to the nation’s interest bill.
With consolidated government debt1 representing around 30% of GDP, Switzerland’s debt burden is more manageable than that of some nations. If all financed at current rates the related interest bill would consume around 0.5% of GDP. In the US, federal government debt of more than US$ 32 trillion represents around 125% of GDP. If that were all financed at current interest rates the interest bill alone would consume around 4% of GDP.
1There are many ways to calculate government debt. This figure includes federal debt, cantonal debt, social security debt and municipal debt all calculated following particular methodologies. So it reflects particular methodologies and does not necessarily include everything.