Economics Department

Economic Survey - Switzerland 2003 (January 2004): Medium- and long-term fiscal policy challenges

 

When should the Confederation accounts be balanced?

 

The proposed temporary deviation from the debt containment rule has been set in the context of a multi-annual consolidation plan, which is designed to avoid harming the credibility of the Confederation’s fiscal strategy. There is consensus on a strategy to balance the federal accounts, but two constraints exist. First, the increase in tax pressure, which has been greater than in other countries over the past decade, needs to be halted. The consolidation plan, which amounts to ¾ per cent of GDP up to 2006, rightly attaches priority to controlling spending. Second, as the Confederation’s budget accounts for only about 10 per cent of GDP, there are constraints on the expenditure side as well, which prevent a too rapid reduction in federal spending. These constraints restrict the scope of the proposed measures which, moreover, will not allow the debt containment rule to be applied fully in 2005 and 2006. This militates in favour of reforms that do more to tackle the causes of the spending increases than does the consolidation plan, which was established in a short time and did not focus on far reaching reforms. The objective should be to alter outlay trends on a lasting basis to bring them in line with the medium-term revenue trajectory. The severity of such a spending adjustment will depend on what happens to trend growth in the future.

 

Tax revenue development in OECD countries

As a percentage of GDP, 1990-20021

 

 

1.       Difference between the tax revenue as a percentage of GDP in 2002 and 1990 for all countries, except for Australia, Japan  and the  United States (1990-2001).

Source:    OECD, Revenue Statistics.

How to improve the operation of the debt containment rule?

 

The initial difficulties in implementing the debt containment rule must not undermine the Confederation’s fiscal discipline which the rule is designed to guarantee in the medium term. The difficulties reflect problems in estimating the structural balance, which can be affected by temporary fluctuations. The authorities have therefore made technical adjustments to limit the impact of transitory revenue fluctuations linked to financial asset cycles. The amended fiscal rule should now be allowed to operate for some time so that more information on its functioning can be gathered before making further adjustments. However, lessons have been learnt from the initial implementation of the rule. For example, it might be desirable to identify more clearly the non‑cyclical irregular component of the budget balance, instead of making ad hoc adjustments. The debt containment rule should also be embedded in a medium-term fiscal framework, to avoid annual fine-tuning and to reconcile the objectives of public spending control and efficient allocation. The principles underlying the debt containment rule should also be respected in the four-year financial plan.

 

What reforms are needed for the pension schemes?

 

The structure of the pension system, which combines both funded and pay‑as‑you‑go schemes, limits the fiscal impact of population ageing better than in most other countries. However, the funding of first pillar public pensions is not guaranteed beyond 2015. The recent opening of discussions to limit the borrowing requirement – put at 2¼ per cent of GDP between 2015 and 2040 – is timely. The time required to implement a reform should not be underestimated, the more so as reforms have to be phased in gradually so as to provide people with time to adapt. These could include the raising of the retiring age from 65 to 67 and a reform of the pension indexation system, even though this latter measure might be difficult to sustain in the long run. For reasons of equity between generations, it would seem right to focus on both revenues, for instance an increase in VAT, and benefits. Choosing measures which do not hamper growth and which extend working life would be rational and compatible with the lengthening of life expectancy, while the implementation of an effective growth policy would limit the scale of the needed adjustment. Apart from the reform of basic pensions, it is also important to guarantee the financial viability of the invalidity pension system, which has worsened in recent years with the sharp rise in the number of pensions paid. A reform, implemented in 2004, will improve its financial situation by raising revenues, and will also reinforce the Confederation’s surveillance of the granting of invalidity pensions in the cantons, but further measures may be needed to check the rise in expenditure and fund the system until 2020. It is important to avoid invalidity leading to long-term benefit dependency for those who might subsequently be able to re-enter the labour market, and such re‑entry should be facilitated.

 

Should there be a rapid adjustment in pension fund balance sheets?

 

A reform of Switzerland’s funded occupational schemes is under way. It provides in particular for a change in the method of calculating pensions to take account of the increase in life expectancy. Such an adjustment is clearly appropriate. Measures have also been adopted, or are under discussion, to cushion the serious impact of the financial market meltdown on the solvability of pension funds, whose funding levels have fallen by between 20 and 30 percentage points since the late 1990s and is now on average less than 100 per cent of liabilities. It is therefore important to take corrective measures, such as on the one hand lowering the minimum return on assets of compulsory occupational pension schemes while also expanding the instruments enabling pension funds to adjust their balance sheets gradually. It may not be realistic to rely on a sharp financial market recovery to maintain the system’s solidity. But it is important to avoid too rapid an adjustment in pension fund balance sheets as this could weigh on the present fragile economic situation. Better information would improve the surveillance of these schemes and would enable the authorities to monitor changes more closely and so prevent a faster‑than‑necessary adjustment in those pension funds that are in difficulty. In the longer term, it is vital to improve the transparency of pension fund accounts and surveillance to maintain the public’s confidence in the system. Better supervision of the funds would help to prevent the “excess return” over the minimum rate benefiting only pension fund owners and those who reach retirement age during a high‑yield period, and would ensure that it is better shared between the insured. This should be accompanied by flexible management of the minimum rate of return, both upwards and downwards.

 

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The full edition of the OECD Economic Survey for Switzerland is available from:

 

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