Why do nearly half of Swiss households have debts?

New data shows that over 40 percent of the population lives in a household with at least one debt. Large families, the unemployed, and foreigners are the most affected.

Why do nearly half of Swiss households have debts?
Nearly half of Swiss households are in debt. Photo by Fabrice Coffrini / AFP

Given that Switzerland is officially the most expensive country in the world it's perhaps no surprise so many households are in debt.

Payment arrears are the most common type of debt. Nearly one in five people falls into this category, according to a survey on income and living conditions published by the Federal Statistical Office this week. 

The figures cover the year 2017, but they are the most recent available.

Almost 10 percent of the population (9.9 percent) are in debt due to unpaid or late payments of taxes and 7.3 percent of the population are in arrears due to unpaid insurance premiums. These are the two most common forms of household debt in Switzerland.

These debts are the reason 9.9 percent and 7.3 percent of the population, respectively.

But arrears can also relate to rent, mortgage interest, loan payments, alimony, water, electricity, gas, heating, telecommunications, or other bills.

READ MORE: What does Switzerland spend all its money on?

A quarter of families are more indebted than households without children, which make up only 11 percent of the population.
And more than a third of people living in single-parent families had faced at least one late payment in the past 12 months.

After the arrears, vehicle leases constitute the most frequent debts — 14.6 percent of Switzerland’s residents have skipped on these car payments.

Next comes money owed to family or friends (10.3 percent) and consumer loans (9 percent).

In total, 42.5 percent of the population lives in a household with at least one type of debt, 18.4 percent with at least two, and 8 percent with at least three.

The latter category is more prevalent in the French-speaking cantons and in Ticino than in German-speaking Switzerland. Families with at least three children (17 percent), the unemployed (15 percent), and immigrants (13 percent) are the most affected.

It is also these three categories which are most often the subject of legal proceedings.

Overall, 7.6 percent of households have at least one person affected by a lawsuit or an act of default of property. More than one in four unemployed people are in this situation, as are 23.8 percent of foreigners and 18.3 percent of large families.

The study also shows that young people tend to be more likely than their elders to buy things they cannot afford. Again, that statistic pertains more to the French than German speakers.

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Why the Swiss are so spooked by using debt to prop up economy

Germany, which is known for strict budgets, has tapped debt markets to prop up its virus-hit economy, while neighbouring Switzerland has consistently curbed borrowing despite calls to change course.

Why the Swiss are so spooked by using debt to prop up economy
Montreaux, Switzerland. Photo: DPA

With Swiss firms struggling through another lockdown, the federal government last week finally loosened its purse strings a bit, doubling emergency aid to 10 billion Swiss francs ($11.2 billion, 9.3 billion euros) as part of a programme to boost the economy.

But when he presented the package for companies worst hit by the latest Covid restrictions, Finance Minister Ueli Maurer again lamented that Switzerland had to borrow to boost the economy.

Some 10 billion francs in debt will have to be paid off within six years according to a constitutional debt brake rule, Maurer warned.

READ MORE: What will Switzerland's coronavirus debt mean for your tax bill?

He promised to present various options to do so as soon as the economic outlook cleared a bit.

Despite mounting criticism that the wealthy Alpine nation isn't doing enough to support companies, Maurer has repeated time and again that the Swiss government has “no money”.

The government is already borrowing “150 million francs a day, or six million per hour, or 100,000 a minute,” he notes.

In 2020, Switzerland's federal government spent 15 billion francs ($16.7 billion, 13.8 billion euros) to support the economy, and preliminary data shows it ended the year with a deficit of 15.8 billion ($17.6 billion, 14.5 billion euros).

Debt phobia

Some have called for Switzerland to put balanced budget dogma aside during the crisis, to protect against potential long-term economic damage.

“Switzerland could be much more generous,” said Michael Graff, an economics professor at ETH Zurich, a public research university.

He believes the country could borrow what it needed to boost business activity without a problem.

A study published by Graff in January argued the nation's post-crisis finances would remain healthy even if borrowing rose, primarily because the country entered the pandemic with one of the world's lowest debt ratios.

National debt stood at 25.8 percent of gross domestic product (GDP) at the end of 2019.

That was less than half the European Union's widely breached target of 60 percent.

According to Graff, if the Swiss debt ratio rose by 10 percentage points, or even 20, and “if things take a turn much worse than expected” the country would still be at a level that is “extremely low, compared to other nations, once the crisis is overcome”.

If Switzerland is in some ways a very liberal nation, Graff pointed to a “public debt phobia” which he said was a cultural trait.

After debt soared at the end of the 1990s owing to a crushing real-estate crisis, Switzerland became a champion of fiscal rectitude, introducing a debt brake into its constitution in 2003.

‘Irrational’ fear

“This fear of going into debt is something irrational,” argued Cedric Tille, an economics professor at Geneva's Graduate Institute of International and Development Studies.

This is especially so, he said, because Switzerland currently benefits from negative interest rates, which means investors are willing to lose money to own Swiss 10-year bonds.

Former Swiss central bank vice president Jean-Pierre Danthine believes the country's debt brake rule should be suspended when the economy is facing a crisis.

With negative rates, Switzerland can borrow “all it needs for its economy”, he said in a recent interview with Leman Bleu television.

The country did not suffer as badly as some European neighbours during the first wave of the pandemic moreover, and its economy has fared better.

It was able to ease restrictions faster and count on strong pharmaceutical exports.

The Swiss government rapidly implemented economic support measures and allocated 70 billion francs ($78 billion, 64 billion euros) to finance partial unemployment benefits for workers and short-term business loans.

After falling by 8.6 percent in the first half of the year, Swiss GDP rebounded with a 7.2-percent gain in the third quarter.

But after infections surged again, cafes, restaurants, theatres, cinemas, museums and sports clubs were closed in mid-December and all non-essential shops followed a month later.

Shops are slated to reopen on March 1, but some fear the shutdown will lead to a wave of bankruptcies at small- and medium-sized businesses.

“For the second wave, they should have distributed aid much earlier to cover lost revenue,” remarked Rafael Lalive, an economics professor at the University of Lausanne.