Remarks by Angel Gurría, OECD Secretary-General, delivered at the Launch of the 2012 OECD Economic Survey of Switzerland
Berne, 24 January 2012
Federal Counsellor, Ladies and Gentlemen,
It is a great pleasure for me to present our latest Economic Survey of Switzerland. Let me first of all thank you, Federal Counsellor Schneider-Ammann, for your support for our work, as well as all senior officials and experts who provided us with the necessary information and participated in the policy discussions.
Switzerland has weathered the economic crisis well
Reading the Survey I was tempted to agree with your renowned novelist Adolf Muschg, who once said: “In der Schweiz ist uebrigens alles schoener und besser.”
Indeed, the economic stability of Switzerland has stood out in a context of economic and financial instability in many OECD economies and especially the euro area. Switzerland emerged relatively early from the recession in 2009 and the recovery was solid and well balanced.
This achievement reflects appropriate policies. Swiss budgetary rules are one example. They helped ensure that Switzerland reduced government debt in the years of strong growth. Another example is the labour market. In part due to flexible wage bargaining and a well-functioning vocational education system Switzerland’s unemployment rate is among the lowest in the OECD area, especially for youth.
But risks remain in the financial sector
Yet Switzerland is not an island. The country is not immune to instability in global markets because of its close financial and trade ties with the euro area and the wider world. Let me point to two sources of vulnerability: the exchange rate and the banking industry.
The Swiss Franc has once again become a safe haven for investors. With it came an appreciation of the exchange rate, which harms Switzerland’s exports and growth prospects. The Swiss National Bank’s decision to introduce a floor to the Swiss Franc-euro exchange rate was appropriate within its mandate to maintain price stability.
But I am concerned about the broader context. A number of other countries have recently taken unilateral action, including currency interventions and other measures to influence capital inflows. While these measures were all introduced to achieve legitimate domestic policy objectives, there is a risk that, if they became more generalised, such measures could have negative effects on trade and global capital allocation.
Switzerland could also be affected by global financial turbulence through the banking sector. Despite some downsizing, the country’s two largest banks remain exceptionally leveraged and large relative to the size of Switzerland’s economy and by international comparison. Steps are being taken to deal with this challenge. Parliament has approved legislation which makes significant progress in reducing the risks for taxpayers and the economy, should losses occur. The two largest banks are also required to hold more capital than called for by international norms.
Still, reforms should go further. A stricter leverage ratio should be introduced and common equity should account for a much larger share of overall capital. It is important to recognise that higher capital requirements do not imply lower credit volumes. Rather, such requirements provide significant benefits, not only for financial stability, but also for the quality of lending, as they reduce moral hazard from implicit government loan guarantees.
The housing sector also poses challenges. Low interest rates have boosted domestic mortgage lending, a trend that could result in a housing bubble when the economy picks up again. Since interest rates are unlikely to rise anytime soon due to the outlook for inflation and activity, we propose measures in two areas to deal with this risk.
First, the Swiss National Bank should be given powers to introduce macroprudential instruments that could help prevent excessive mortgage lending. Possible instruments include ceilings on loan-to-value ratios or debt service-to-income ratios.
Second, the tax deductibility of interest payments should be phased out. Deductibility should be maintained only for interest paid on mortgages for properties that are let. This is important because interest rate deductibility encourages households to borrow at a time when interest rates are already very low, even if Swiss households’ balance sheets are sound overall.
Looking for new sources of growth
So far I have focused on the risks to the outlook. However, we have to look beyond the crisis and focus on the structural policies that could enhance Switzerland’s performance in the longer term. Our analysis points to three policy areas where further reform is needed: tax policy, productivity and climate change mitigation.
Let me start with taxes. The Swiss tax system relies heavily on the taxation of household income. To achieve a more balanced – and less distorting – tax structure, the personal income tax should be reduced and the base of the value added tax should be broadened. The tax authority could also consider raising the standard rate of the value added tax. Another important initiative would be to remove restrictions of the ability of local governments to raise real estate taxes. This would allow the local authorities to collect more revenue from real estate taxes which could substitute at least in part for local personal income tax collections.
Speaking of taxation, let me point to an aspect that is central to the OECD’s work. Switzerland has made significant progress in improving international co-operation to combat tax evasion. Legislation has been introduced to address several recommendations made in the peer review conducted by the Global Forum on Transparency and Exchange of Information for Tax Purposes, in particular those dealing with the identification requirements. Switzerland is also revising its tax treaties with partner countries to incorporate fully the OECD standard on the exchange of information between tax administrations. But Switzerland can go further, by ensuring that the identification requirements of the given taxpayer or the holder of the information in the revised double tax agreements are in line with the standard.
Going beyond the tax system, there is much scope for other structural reforms to raise productivity and overall economic performance in Switzerland.
Switzerland’s productivity gap relative to the best-performing OECD countries has stopped widening in recent years, but it remains substantial. To a large extent, this gap largely reflects weak performance in some sectors that are not open to international competition. Progress has been made in this domain over the past 15 years, notably by lowering non-tariff barriers to trade and by opening up network industries to competition.
Switzerland should continue to work to close the productivity gap by reducing protection of domestic agricultural production, by lowering the cost of health care provision, and by facilitating full-time female labour force participation.
Finally, while Switzerland has been a forerunner in climate change mitigation, there is a need for more cost-effective policies to meet the targets for reducing greenhouse gas emissions. This would yield Switzerland a double dividend: it would help greening Switzerland’s growth, and it would minimise losses in welfare and activity that may otherwise arise. Three areas of reform stand out.
First, the largest potential for emission reductions at low cost in Switzerland is in the road transport sector. We recommend to introduce a CO2 levy on transport fuels, and to combine it with a variable congestion charge that would be higher in congested areas and periods of peak demand.
Second, there seems to be little incentive for energy-saving renovation of dwellings. Yet, this is an area with large potential for reducing emissions. Further improvement of the rental law may help encourage home-owners to renovate their property, as would raising the level of the CO2 levy on fossil fuels.
Third, the Swiss government is committed to linking its emission trading system with the one of the EU, which is good. In the interim, firms should be required to either pay the CO2 levy on fossil fuels or to participate in the emission trading system to avoid that a large part of emissions are not priced. And emission targets should be set as binding for the industry as a whole, instead of being negotiated, and emission permits should be auctioned. Beyond improving incentives for firms to reduce emissions, these two steps would move the Swiss emission trading system closer to a cap-and-trade system, which will be required anyway when the Swiss system is linked to the EU one.
Ladies and gentlemen,
Coming back to Adolf Muschg’s quote, I would certainly agree that “In der Schweiz ist alles schoener and besser” but also emphasize that there is significant room to make Switzerland “noch schoener und noch besser”.
If our recommended reforms are introduced, they will ensure an even stronger, fairer and cleaner growth for Switzerland’s economy. We know that some of the reforms are difficult to implement, but Switzerland has overcome such challenges in the past and has emerged from them as a forerunner in several domains. And please be assured, the OECD remains at your disposal to help you design and implement these better policies for better lives.
Thank you for your attention.