On the Effectiveness of Debt Brakes: The Swiss Experience

Abstract

This chapter examines the effects of the three types of constitutional or statutory clauses—fiscal decentralization, direct popular rights, and formal fiscal restraints—on public deficit and debt in the twenty-six Swiss cantons, and is organized as follows. Section 9.2 describes cantonal institutions (called “debt brakes”) aimed at preventing public debt from getting out of control. Section 9.3 presents an econometric model to allow a more systematic analysis of their effects. Section 9.4 discusses the empirical results. Section 9.5 considers the new debt brake that has been introduced at federal level. Section 9.6 discusses the problem of overindebtedness at lower governmental levels that might arise in any federal country. It is shown that with well-designed institutions, federal states might be able to follow a sustainable fiscal policy better than unitary states. Alongside fiscal restrictions, fiscal referenda are useful in achieving that.

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