New CEPR Policy Insight - The ‘burden’ of Swiss public debt: Lessons from research and options for the future

Over the last two decades, Switzerland has drastically decreased its public debt through a debt brake policy, which in 2018 stood at only 13.2% of GDP - the envy of many advanced economies. However, current government policy could, and should, be adjusted to a more flexible approach that takes advantage of favourable debt conditions likely to persist, and avoid the issues that too little debt can cause. It could also use the substantial fiscal policy space to handle the economic costs of the Covid-19 epidemic.

In this CEPR Policy Insight, ‘The “burden” of Swiss public debt: Lessons from research and options for the future’, Cédric Tille of the Geneva Graduate Institute of International and Development Studies and CEPR Research Fellow, examines if Switzerland has a problem of too little debt, considers alternatives for the government’s current fiscal policy, and recommends policy actions for mitigating damage caused by the COVID-19 epidemic. 

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Among the findings: 

• Switzerland’s debt to GDP ratio is low and has been decreasing for many years, a trend that looked set to continue before the ongoing epidemic.
• Swiss public finances are not under pressure from markets, quite the contrary as investors are willing to pay for the privilege to put their funds with the Swiss government even at long maturities.
• This favourable environment is likely to persist. The decrease in interest rates on sovereign bonds is part of a long trend that is broadly seen in advanced economies.
• The interest rate paid by Switzerland is clearly below the growth rate of GDP, and this pattern is far from unusual in historical perspective. In this context, paying back the debt is a costly policy.
• Given the low level of interest rate the Swiss government could afford a sizeable budget deficit and still keep the debt steady as a low ratio to GDP.
• Authorities could also take advantage of the low funding costs and invest in higher return assets, thereby making good use of the intangible asset that is the trust of investors.

The debt brake rule has been appropriate policy up until now, the Swiss Federation should instead consider a more flexible approach of public finances. This does not imply getting rid of the debt brake, a tool that has provided welcomed discipline on the budgetary prospect, but simply taking a more balanced view and avoiding the current bias towards surpluses in the implementation of policy.

Addtionally, the ongoing COVID-19 epidemic will lead to a sharp economic downturn, and the policy challenge is to ensure that it remains temporary and the economy can quickly recover. This requires an aggressive policy action and the fiscal space should be used to spread the cost. 

Figure 1: Swiss Federal Government's debt

 

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