As part of a celebration of Albert Gallatin's upcoming 250th birthday the Swiss Embassy held a panel discussing the Swiss federal government's "debt brake" and what could be learned from its use. The panel included Swiss Federal Finance Administration Director-General Fritz Zurbruegg, IMF Fiscal Affairs Director (and Announcement Effect Club member) Carlo Cottarelli, House Budget Committee Chairman John Spratt, and former OMB director, former House Budget Committee Chairman, and current CRFB board member Jim Nussle.
Zurbruegg explained how the Swiss debt brake works. After years of rising deficits and debt in the 1990s, Switzerland's citizens adopted the debt brake as a constitutional amendment in 2001 (with 85% approval!) The rule was to be implemented starting in 2003. It stated that each year, the budget must be in balance, adjusted for economic conditions. They do this adjustment by multiplying expenditures by a cyclical factor (the ratio of trend real GDP to expected real GDP), thus either allowing for deficits during recessions or forcing lawmakers to have surpluses during booms. Essentially, the rule calls for structural balance in each year and absolute balance over the course of a business cycle. So if lawmakers want to have expansionary fiscal policy during recessions, they need to pay for it by saving up during good economic times. The rule did initially allow for "extraordinary spending" if a qualified parliamentary majority approved, but recent changes have made this spending count as normal expenditures.
In practice, there is obviously limited experience to pull from, but it has worked out well so far, according to Zurbruegg. Upon finding out that the Swiss budget had structural imbalances in 2003, lawmakers undertook a three year plan to put the budget back in balance (and in surplus). Using the surplus from the good years, they were able to weather the economic downturn without resorting to using any emergency spending. Zurbruegg though did express some concern that lawmakers were so focused on abiding by the debt brake that they risked ignoring their longer term fiscal challenges.
Carlo Cottarelli then gave the criteria for a good design for a fiscal goal/rule. He said that it should have the following: broad coverage (not excluding any category of the budget); transparency, like in the form of an independent fiscal agency; constitutional power if possible, so lawmakers can't just change it whenever convenient; flexibility for economic conditions; and finally, a mechanism for enforcement. Certainly, the debt brake measures up well to these criteria.
Overall, our own lawmakers could learn a lot from the Swiss example. They designed a budget rule that neatly walks the tightrope between too rigid and too soft. In doing so, they made a rule that wasn't so hard to follow that lawmakers tried to ignore it, and one that wasn't too easy to find a way around. It will be interesting to see how the debt brake works out for Switzerland in the future.