Here’s why the huge Swiss budget surplus is causing headaches

In most countries, it would be an occasion for rejoicing, but Switzerland’s latest budget surplus has once again raised hackles. Here is what you need to know.

Here's why the huge Swiss budget surplus is causing headaches
Swiss Finance Minister Ueli Maurer. File photo: AFP

Just how big is the surplus?

Ten times larger than forecasts. On Wednesday, the Swiss government announced a tidy budget surplus of 2.9 billion Swiss francs (€2.38 billion) for 2018 despite having forecast a far smaller figure of ‘just’ 300 million francs.

The result, which is still preliminary, comes on the back of a similar ‘surprise’ surplus of 2.8 billion francs in 2017. It is also the best result since 2010 and means Switzerland’s gross debt is now below 100 billion francs for the first time since 1997.

Why is the surplus so much larger than expected?

In a statement (here in German) on Wednesday, the government said the surplus was the result of revenue growth and highly-disciplined spending.

It pointed to strong income from direct federal taxes, which came in at 22.4 billion francs against a forecast of 21.5 billion francs, and to income from withholding tax in particular.

This income from withholding tax, which derives chiefly from dividends and interest on securities and bank accounts, came in at 7.7 billion francs, or 1.6 billion francs more than expected.

Meanwhile, in a separate document, the Swiss Federal Department of Finance (FDF) noted that total federal expenses in 2018 were 0.6 percent below budget at 70.6 billion francs. Since 2007, expenses have come in an average 1.6 percent below budget.

So what is the problem?

The latest large disparity between forecasts and the actual surplus has raised eyebrows about the budget process.

“The difference is really big. The government has been underestimating the dynamic on the revenue side. A close look needs to be taken at this,” Erich Ettlin, a senator with the Christian Democrats (CVP) told Swiss daily Tages Anzieger.

Meanwhile, the Socialists have once again criticized the government for using pessimistic budget projections as an excuse for cost-cutting measures – at the expense of the Swiss population.

Socialist MP Mattea Meyer said this could be traced back to Switzerland’s debt brake mechanism which aims to avert soaring debt levels by permitting limited cyclical deficits during downturn phases of the economic cycle and requiring surpluses when the economy is booming.

What does the finance ministry say?

in a pre-emptive move, the FDF on Wednesday published a document titled ‘Did the government get its sums wrong?’

In the document, the FDF noted that errors in income projections were unavoidable but that income tended to even out over time.

The ministry drew particular attention to revenues from withholding tax, which are notoriously difficult to predict.

To give an example: in Switzerland, withholding tax on capital income is 35 percent. Therefore, if you, as an individual investor, receive 1,000 francs in dividends from, say, UBS bank, you will actually only see 650 francs and UBS will pay the other 350 francs to the Swiss government in the form of withholding tax. 

However, when you declare your personal income including the dividend, you then receive the 350 francs.

The problem in terms of forecasting is that many Swiss investors have chosen to defer claiming this tax back from the government because the current negative-interest climate means it is more attractive for them to have this money parked with the government than sitting in their own bank accounts.

Investors can defer repayment of withholding tax for up to three years but this money can, in theory, be reclaimed at any time, creating a deferred liability for the government.

What happens next?

On Wednesday, the government said: “The outlook for 2020-2022 has improved given the good revenue development, so from the current perspective no savings measures will be required in 2020.”

The NZZ newspaper pointed out that this would allow Switzerland to continue to chip away at gross debt while giving it elbow room in terms of the possible introduction of a new funding mechanism for pensions or the possible scrapping of Switzerland’s ‘tax penalty’ for married couples.

Read also: Tax penalty for married couples – Switzerland may vote again

Currently in Switzerland when two people get married their incomes are combined and taxed jointly, meaning they lose out compared to cohabiting couples who are taxed separately and therefore each have a tax-free allowance.

Scrapping the scheme would cost Switzerland an estimated 1 billion francs a year.

Meanwhile, the finance ministry is warning against too much optimism in the face of the strong budget surplus.

It has sounded warnings about uncertainty over income from withholding tax in future while noting that Switzerland may still have to lower taxes to boost its attractiveness if the EU fails to grant the country stock market equivalence – one of the key bargaining chips in the current stand-off between Bern and Brussels over a future deal on bilateral arrangements between Switzerland and the EU.

Read also: What you need to know about the draft Swiss-EU deal

This stock market equivalence means EU-based trading platforms can buy and sell Swiss stocks. If Brussels withdraws it, the Swiss exchange could see trade volumes seriously reduced. Switzerland's international image as a financial hub would also be damaged.

Tax breaks for foreign firms could help tip the balance back in Switzerland's favour if Brussels chooses not to grant Switzerland stock market equivalence.