What is Switzerland’s debt brake and how does it affect residents?

While the issue of national debt is a hot-button topic in Germany at the moment, in Switzerland it is not stirring controversy or any heated debates. 

In fact, the fiscally-responsible Swiss government is averse to debts, so it has kept its finances (that is, spending) on an even keel ever since the principle of debt brake has been introduced in 2003.

What exactly is it?

According to the government, it is a mechanism designed to “prevent chronic deficits and keep federal debt from soaring.”

Just as it is for private spending, the government must be careful not to exceed the set 'expenditure ceiling.’

As any other piece of legislation that’s in force in Switzerland, this law was also approved by Swiss voters: 85 percent accepted the constitutional provision on the debt brake in 2001.

That law went into effect in 2003, and since then “it has served as an anchor for the federal government's fiscal policy."

“With a debt ratio of around 30 percent of gross domestic product, Switzerland remains in excellent shape by international standards,” the government pointed out. “The debt brake has not only significantly helped Switzerland to overcome multiple crises relatively well; it has also allowed for a considerable reduction in federal debt."

It added that “the debt situation in Switzerland is much better than in other countries.”

Has the ‘debt break’ principle always worked well?

In ‘normal’ times, yes.

However, the Covid pandemic was the biggest challenge to the debt brake so far.

The government made 30 billion francs available within a very short time to cushion the economic impact of the health crisis on the economy — the money which will have to be repaid eventually, since the government doesn’t want to create even more deficit.

While Covid strained federal coffers in an unprecedented manner, this provision is included in the debt brake legislation.

“Additional extraordinary expenditure is possible in exceptional and uncontrollable situations, such as severe recessions and natural disasters,” authorities said.

In such circumstances, “a qualified majority of both chambers of Parliament is required to increase the expenditure ceiling.”

Overall, the debt brake, as well as the careful way the government has managed to keep it in check, “has played a significant role in Switzerland’s financial regulation and contributes significantly to the country’s fiscal discipline,” according to a political, social, and economic think tank,  Avenir Suisse. 

How does this soundly managed debt brake benefit Switzerland’s residents?

First, let’s look why a high debt is bad for the country’s economy and, therefore, for its population as well.

Simply put, a debt (whether private or public) has to be repaid, and the higher the debt and the slower the process of repayment, the higher the interest rates.
 
And high interest costs could curb government spending on a variety of much-needed public programmes and projects and, consequently, stunt economic growth as well.

In most extreme situations, a rising government debt can even trigger a financial crisis.
 
On the other hand, a low national debt, as is the case in Switzerland, has the opposite effect: the government has money to fund the education system, social programmes, research and development, and various infrastructure that benefits everyone in the country.

In other words, it has contributed to Switzerland's (and its population's) prosperity.