The Swiss government has scaled back—but not abandoned—its plan to raise value-added tax (VAT) to finance higher defence spending.
In January the Federal Council proposed a temporary 0.8-percentage-point increase in the standard VAT rate to help fund Switzerland’s growing security needs. Following a public consultation, it has reduced the proposed rise to 0.5 percentage points. The levy would apply for 12 years rather than the originally proposed ten.
The government says the smaller increase strikes a better balance between strengthening national defence and limiting the burden on households and businesses. Nevertheless, it argues that the worsening security environment, pressure on the federal budget and the armed forces’ rearmament programme leave little alternative.
Martin Pfister, the defence minister, described the tax rise as a contribution to the country’s security, arguing that restoring the army’s defensive capabilities could not be achieved without additional revenue.
The government expects the measure to raise around CHF 24bn over its lifetime. The proceeds would be earmarked exclusively for defence. They would help finance efforts to strengthen the army against hybrid threats and long-range attacks, offset rising procurement costs and contribute towards a possible second long-range ground-based air-defence system, as well as additional expenditure on the Patriot missile programme.
The planned increase in the army’s ordinary budget, already approved by parliament, will not be financed through the VAT rise. Instead, it will come from the federal budget, with the government citing improved fiscal forecasts as providing greater flexibility. The same approach will apply to additional funding for civilian federal agencies with security responsibilities.
The Federal Council, Switzerland’s executive, also intends to proceed with plans for a debt-financed defence fund. The fund would allow advance payments for major procurement projects, smooth spending peaks and accelerate the purchase of equipment.
The revised proposal would temporarily raise the standard VAT rate from 8.1% to 8.6%. At the same time, the reduced hotel rate would increase from 3.8% to 4.1%. Both rates are already scheduled to rise further from 2028 to finance the 13th monthly payment under the old-age and survivors’ insurance (AHV) system. If both measures take effect, the standard VAT rate would reach 9%, the highest in Swiss history.
The hotel rate could eventually rise to 4.3%, although its future remains uncertain after the National Council voted against extending this preferential rate. The Council of States has yet to decide. The reduced VAT rate of 2.6% on essential goods, including food and medicines, would remain unchanged.
The proposal must now be debated by parliament, with discussions expected to begin after the summer recess. Because VAT rates are set in the constitution, any increase requires approval in a nationwide referendum and a majorities in a majority of the cantons, known as a double majority. The separate VAT increase to finance the 13th AHV payment could be put to voters as early as November.
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