After passing tax cuts without cutting spending to offset short-term losses in revenue, a gigantic omnibus spending package priced at $1.3 trillion in March, and continued increases in autopilot spending on mandatory programs, the U.S. is in a dire fiscal situation. Federal deficits are projected to reach $1 trillion by the end of 2019 and surpass $1.5 trillion within the decade, whilst public debt as a percent of GDP is on track to reach 100% shortly thereafter. In an act of political schizophrenia, following the release of the CBO’s gloomy budgetary outlook, policymakers attempted to push through a balanced budget amendment. On a mostly party line vote, the amendment failed to receive 2/3 necessary to pass in the House. Such an amendment will never appeal to Keynesian policymakers who favor deficit spending when the economy stumbles. However, there are alternatives to strict balanced budget amendments which may prove to be more politically palatable, while still fiscally prudent. One solution which has proven to be a success in countries that have imposed it, is a Swiss style debt brake rule. Fifteen years ago, Switzerland, much like the U.S. today, found itself on an unsustainable fiscal path—the government ran a budget deficit in 11 out of 13 years from 1991 to 2003 and debt as a percent of GDP was quickly approaching 50% of GDP. Similar to the current fiscal situation in the U.S., the government ran deficits during both recessions and boom periods with little political incentive to rein in spending. After public referenda in 2001, the Swiss government implemented a new fiscal expenditure rule in 2003 aimed at a structurally balanced annual budget through a cyclically adjusted expenditure ceiling. The rule specifies a one year ahead ceiling on government expenditure equal to trend line revenue projections. The expenditure ceiling is adjusted to the ratio of trend real GDP to expected real GDP. Under these fiscal rules, the government can run a deficit during a recession and a surplus during a boom, but over the cycles these surpluses and deficits have to cancel out so that expenditures remain independent of cyclical variations. The Swiss debt brake rule appeals to Keynesian economists and policymakers who favor deficit spending during economic downturns. Equally important, this feature appeals to proponents of sound fiscal policy—10 out of the last 14 years have seen budget surpluses, while deficits have remained rare and small, averaging -0.85% during this period. At the same time, the ratio of debt to GDP has fallen from almost 50% to less than 30% as of 2017. Switzerland now finds itself in an unusual situation whereby it frequently debates what to do with all of this additional surplus revenue—a situation that seems a million miles from fiscal conditions in the U.S.
Other countries have since learned lessons from the Swiss experience and both Germany and Sweden have adopted debt brake fiscal rules of their own. Germany adopted a set of debt break fiscal rules in 2009 and has seen its debt to GDP ratio decline from 81% to 64% with growing budget surpluses since 2014. Sweden, with its large welfare state, adopted a softer fiscal brake rule that actually predates the Swiss rule. In 2000 Sweden implemented a multiannual expenditure ceiling which ultimately targets a government surplus of 1% of GDP on average over the business cycle. Unlike the Swiss and German fiscal rules, there is no formal enforcement or sanction procedures, yet, remarkably, the rules have been fully respected due to the reputational costs for government of deviating from its targets. The Swedish debt to GDP ratio has fallen from 52% in 2001 to 40% in 2017, while small deficits were run in 7 out of 18 years, 4 of those during the Great Recession.
Unlike the United States, Switzerland, having implemented stringent fiscal rules, is well prepared for both moderate and severe economic or fiscal crises. Even with a rapidly ageing population and the consequent growth in social security expenditure, Switzerland is projected to continue running budget surpluses in the coming years.
Budgetary reform and fiscal rules must have a bipartisan appeal that allows for flexibility in times of crises, but ultimately restores fiscal sustainability to the federal budget. Policymakers looking for ways to rein in government profligacy should look to international success stories such as the Swiss debt brake.