To soften the economic devastation of the coronavirus, Switzerland announced special support for employees, freelancers, parents and companies – as well as industry-specific support for those in tourism, culture and sport.
While the stimulus support has been widely lauded for minimising the economic impact of the pandemic, the total cost of the package is estimated at 70 billion francs. In addition to other losses, the total is estimated at 80 billion francs – or roughly one annual federal budget.
As a result, the government’s debt ratio is set to rise from 26 to 34 percent, according to estimates from Credit Suisse.
With two avenues open to governments to recoup budget deficits – either raising taxes or cutting services – which will the Swiss government take in the coming years?
Interest rates will remain low
Despite the economic uncertainty, Switzerland has pledged to keep interest rates low in order to continue to boost the economy.
Switzerland’s debt brake mechanism – which operates to prevent government debt from rising – allows for temporary expenditure like the coronavirus rescue package.
As noted by Credit Suisse, the total debt of the country – even with the new expenditure – remains relatively low.
Switzerland still meets the Eurozone debt criteria under the Maastricht framework and its AAA rating is not in danger.
Switzerland is currently the third least indebted country in Europe (after Estonia, Luxembourg and Bulgaria) and has racked up surpluses each year since 2006, other than 2014.
Will taxes rise?
Swiss economy minister Guy Parmelin said to Swiss' news network RTS that tax increases should be avoided this year and the next in order to stimulate the economy.
Parmelin said the government needed to be wary about seeking to raise funds as “an increase in taxes would make the situation even more difficult for companies and for people who are already on the brink”.
Swiss economics minister Guy Parmelin. Photo: Fabrice COFFRINI / AFP
Speaking with Swiss news outlet 20 Minutes, economist Martin Eichler said Switzerland was unlikely to have any short term difficulties in funding the economy – but the debt repayment was likely to take upwards of 15 years.
“Although debt has risen sharply, Switzerland remains a long way off from being unable to fund the state,” he said.
“It would be reasonable for Switzerland to reduce the corona debt over a period of 15 to 20 years.”
Eichler said that while the government would need to raise additional money, he “didn’t think a tax increase was likely”.
The decision to raise taxes is made at a cantonal level.
Instead, Eichler said the government would be more likely to shelve upcoming tax cuts for the coming years.
While taxes for individuals and companies have been repeatedly slashed over the past 15 years, fewer and fewer of these could be expected in the near future.