Economics Department

Economic Survey - Switzerland 2003 (January 2004): Other structural reforms to maintain high living standards

 

What further reforms are needed in the financial sector?

 

The financial sector has suffered a heavy negative shock since 2000 due to stock market losses but has been reacting rapidly with cost cuts, limiting the impact on profitability, while maintaining solvency ratios. In the medium term, it is not likely to grow at the rates of the 1990s if only because global growth of this sector will probably remain subdued for some time. In addition, the sector will have to adapt to increasing international competition and additional administrative costs. These include the implementation of the new Basle Accord which will require enhanced risk evaluation methods, and the application of the draft agreement with the European Union on taxation of savings income, which includes the introduction of a withholding tax on interest income of EU individuals. Switzerland may however find itself under continued pressure to provide more complete access to information to foreign tax authorities, as recently illustrated by a statement of the G7 Finance Ministers and by the OECD Council’s consideration regarding a draft recommendation on improving access to bank information for tax purposes. However, the Swiss Government has shown its determination to resist such pressures and to defend alternatives approaches. Regarding supervision, the merger of the Federal Banking Commission and the supervisory body of private insurance as recommended by the Zimmerli Commission is a positive step, but should be complemented by the incorporation of other types of financial intermediaries and pension funds within this supervisory framework, and by additional personnel for the new authority. Members of the new authority should also be independent and have no other interests in the sector.

 

How could participation of old and female workers be enhanced?

 

Despite the current cyclical peak of unemployment, the rate of structural unemployment is one of the lowest in the OECD thanks to the flexibility of the labour market, which will be further enhanced by the reform of unemployment benefits adopted this year. Participation rates, which are high in international comparison, have been falling in recent years for older workers, while female labour supply is lower when taking into account the very high share of part-time work. To raise participation, the higher social security contribution rates paid by firms for older workers should be reduced, while tax incentives or higher pension accrual rates could be introduced for prolonged activity. This should be combined with greater emphasis on measures improving the employability of older workers. This would increase both labour supply and demand for such workers, while reducing pension outlays. Part-time work of women, when involuntary, could be reduced by measures that make it easier to reconcile work and family life and additional support for early child education.

 

How to finance reforms in education?

 

An increase in enrolment in education at early ages, which is currently low, would have a positive impact both on female labour market participation and on education outcomes later in life. The OECD PISA report has detected insufficient reading abilities for 15 year-old students, especially for those of foreign origin, a wide dispersion of results and a strong correlation with parents’ socio-economic background, which suggests that the capacity of the education system to integrate children should be improved. Reform measures already outlined by Swiss experts to cope with these problems, including bringing forward the age of scholarisation, more testing of students, enhancing the autonomy of schools and focusing attention on the worst students, especially the language skills of immigrants, go in the right direction and should be implemented rapidly. Such reforms should aim at using the available resources better rather than increasing spending per student, which is already by far the highest in the OECD. University education is very expensive in budgetary terms and spending is programmed to rise further, only in part because of the rising number of students. Current and future reforms should therefore aim at raising the efficiency and quality of education at the university level. Raising somewhat the contribution of students to the cost of their education would appear equitable, since private rates of return to education are usually high and exceed real interest rates. Students with liquidity constraints could be helped by grants or loans.

 

Expenditure per student and GDP per capita

2000

1.       In equivalent USD converted using PPPs.

Source:       OECD, Education at a Glance – OECD Indicators 2003, Tables B1.1 and X2.1, OECD, Paris.

How should climate change policy be shaped?

 

Business-as-usual projections suggest that Switzerland will achieve greenhouse gas abatement of 4 per cent against a Kyoto Protocol target of 8 per cent for the period 2008‑12. To date, the costs of policy measures undertaken to reduce emissions have been high and variable across sectors, suggesting that there are considerable efficiency gains to be made. The authorities have always envisaged the possibility of introducing a carbon tax and coupling it with an emission trading programme, in which participation would be voluntary but which would lead to exemption from the carbon tax. The existing law provides that a decision on the introduction of such a system be taken in 2004. There now seems little option but to adopt such policies if the Kyoto target is to be met. In designing the system, the authorities should bear in mind that markets work best with no price discrimination between sectors. Hence, carbon taxes should be equal across sectors and linked to the price of permits. The trading system has been well designed with possible international linkages but has the drawback that unused permits cannot be carried forward, so increasing compliance costs. With such a programme in place, the budget for voluntary initiatives could be safely reduced, as proposed. Finally, support for renewable energy should be tied tightly to either the cost of emission permits or the carbon tax.

 

Would waste management and water pollution control benefit from greater use of economic instruments?

 

In the areas of waste management and water pollution, considerable progress in achieving policy targets has been made over the past decade. While the authorities have examined the cost-effectiveness of measures to achieve targets in these areas, greater use of cost-benefit analysis could help. Water quality has improved quite markedly in a number of water bodies and concentrations of pollutants are low in comparison with many OECD countries. However, diffuse pollution from agriculture remains a problem in many rural areas. Reducing agricultural support and introducing a tax on farms’ nutrient balances would avoid such a problem if the new policy of direct payments to farmers does not have the envisaged effects. Waste management policy has led to a large share of municipal waste being recycled. In promoting recycling, the authorities should determine an upper limit on recycling cost premia, based on the cost of incineration and the avoided production externalities, so that recycling occurs to the point that it is profitable taking into account external costs and benefits. Finally, the authorities should examine the feasibility of introducing competition in the market for incineration.

 

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