The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Switzerland 2006 published on 6 January 2006.
Can the fiscal policy framework be improved to control public spending better?
The move in federal finances towards balance seems unlikely to be reversed by financial trends at other levels of government. However, this prospective improvement of government accounts should not divert attention from long-term difficulties in controlling public spending, which have led to a sharp rise in the tax burden and indebtedness. While still moderate in international comparison, government debt has increased by more than 25 percentage points of GDP over the past 15 years. Taxation has risen by about 4 percentage points of GDP since 1990, and in addition the mandatory contributions to private insurance schemes have increased by 2 percentage points of GDP. Together, these amount to one of the steepest increases in the OECD. All levels of government have increased their spending more rapidly than GDP, but the sharpest rises concern social programmes, and the pressures in that area will intensify from 2010 onward because of population ageing. In response, the federal council’s consolidation strategy also includes structural reforms of the disability and health insurance schemes that go in the right direction. Nevertheless, reforms could be more ambitious in a number of areas, and further improvements in the fiscal framework are called for.
The debt containment rule does not formally anchor federal spending in the medium term. The medium-term outlook, as outlined in the Confederation’s 2007-09 financial plan, would seem optimistic on several counts, and it does not guarantee the respect of the rule over the coming years. In the first place, the plan is based on favourable growth assumptions. In addition, it does not include fundamental reforms that would guarantee the long-term sustainability of the federal budget. Some expenditure-raising measures, for instance stemming from the new infrastructure fund are excluded. Conversely, to finance disability insurance the plan relies on a 0.8 point VAT hike in 2008, which will entail a referendum and faces substantial opposition. Repeated recourse to consolidation programmes, which would impair the rule’s credibility, cannot be ruled out in the future. Hence, it would be desirable to give more prominence to the debt containment rule and the associated risks in communicating medium-term financial plans, given numerous projects for additional spending or tax cuts and the lack of short-term flexibility of the federal budget. One could also extend the use of financial referenda to the Confederation, allowing citizens to decide on proposals to increase spending in excess of a specific threshold.
The high degree of budgetary interdependence between the various levels of government is a serious problem not only because it impairs transparency but also because it undermines implementation of the rule at Confederation level and thereby complicates consolidation efforts. The separation of the accounts of basic old age and disability insurance from those of the cantons as foreseen by the new fiscal equalisation project is a welcome movement in this direction. Transparency is especially important in the context of direct democracy to give the population a better grasp of the choices to be made and to garner the necessary support for social reforms, which has been lacking so far. Consideration should be given to linking the Confederation’s transfers to its revenues, rather than to the spending of the insurance schemes. While such a reform would have redistributive effects which may increase the difficulties of finding sufficient political support, it would on the other hand reduce the crowding-out of the most productive outlays (education, research, investment) that has to some extent been observed in recent years. It would also underscore the urgent need for social security reform. In addition, a more comprehensive approach to budgetary issues should be formulated. Because of the federal structure of government and the fact that certain social outlays are administered by compulsory contributions to private insurance schemes, it is difficult to gain a coherent view of overall budget trends and prospects. At the national level, discussions focus mainly on the federal finances, which account for only one-third of the total budget. Also, because the accounts of the Confederation, the cantons, the communes and public and private social insurance schemes are interdependent, decisions taken at one level of government may affect spending of other levels of government, forcing ad-hoc cuts elsewhere to meet the deficit targets. Regular formulation of consolidated medium- and long-term plans for all administrations, including compulsory private social insurance schemes, would make it easier to spot and rank problems and to convey policy priorities to the population. This would entail stepping up efforts to enhance the timely availability of standardised statistics and other information on budget policies. Even if cantonal budget policies are framed independently, it would be useful to evaluate them through a peer review system that would spur consolidation efforts.
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