Switzerland is currently implementing modest austerity measures, aiming to reduce federal budget deficits by approximately 3 billion francs by 2027, which is only 0.4% of its GDP. Unlike more substantial cuts seen in other countries, Switzerland’s strategy primarily focuses on slowing expenditure growth. Historical comparisons show that successful austerity programs, primarily based on spending reductions, can stimulate economic growth, as evidenced by past Swiss measures and international examples from Denmark and Sweden.
Switzerland’s Austerity Measures: A Comparative Analysis
In recent times, it may seem as though Switzerland is embarking on a path of self-imposed austerity. Scientists have raised alarms regarding the potential repercussions of the federal government’s cost-cutting proposals, while various interest groups have voiced their concerns about the adverse effects of spending cuts in their sectors.
Currently, the federal government has initiated a consultation regarding its relief package, and it’s anticipated that criticisms will rise in the weeks and months ahead.
Insights from International Comparisons
However, an examination of international practices reveals that Switzerland’s austerity approach is relatively modest. There’s a wealth of knowledge to glean from the experiences of other nations. What are the main takeaways?
Firstly, austerity measures are often more substantial in other countries. When comparing austerity programs based on economic output, the Swiss government aims to cut its federal budget deficits by approximately 3 billion francs starting in 2027, which represents a mere 0.4 percent of the nation’s GDP.
It’s important to note that this isn’t a true reduction in spending; rather, federal expenditures are projected to grow at a slower rate of about 2 percent annually, instead of the previously planned 3 percent. Finance Minister Karin Keller-Sutter prefers to label this initiative as a relief package rather than an austerity measure.
How does this relief package stack up against international benchmarks? Economists have extensively analyzed austerity programs and their impacts, with a comprehensive overview provided by researchers at the International Monetary Fund (IMF) examining data from 17 industrialized nations between 1978 and 2020.
The findings indicate that austerity measures are not uncommon; on average, governments in the analyzed OECD countries have had to implement budget consolidation strategies every three years over the last four decades. Conversely, austerity initiatives in Switzerland are rare, with the last significant measures occurring in 2003/04 when the federal budget had to be balanced due to the introduction of the debt brake. This shows that Switzerland has consistently maintained a robust financial policy.
Internationally, the current austerity proposals from the Swiss federal government appear to be quite moderate. The IMF report indicates that, on average, countries implemented austerity measures amounting to about 1 percent of GDP annually during their reform programs. Notably, in countries like Portugal and Spain, governments had to introduce austerity measures repeatedly during the Euro crisis, with Portugal’s measures totaling 17 percent of GDP from 2010 to 2014 and Spain’s reaching 12 percent.
In contrast, Switzerland’s planned relief package, which accounts for only 0.4 percent of GDP, is relatively minor and represents a one-time adjustment in 2027, with minimal further cuts expected thereafter.
The Strategic Approach of Switzerland’s Austerity Package
The effectiveness of austerity programs is heavily influenced by their structure, as demonstrated by the late Harvard economist Alberto Alesina’s extensive research. Governments typically have two primary methods for addressing budget deficits: reducing expenditures or increasing taxes. Alesina’s findings suggest that budgets are most effectively consolidated through permanent cuts in government spending, which can even foster economic growth by restoring confidence among citizens and businesses.
In contrast, raising taxes often leads to negative outcomes, as it can breed distrust in financial governance and hinder economic activity. Alesina’s research indicates that when austerity measures are perceived as burdensome, it discourages investment from both citizens and businesses.
Among the 17 OECD nations studied, governments typically relied equally on spending cuts and tax hikes in their austerity measures. However, Switzerland’s approach is more favorable, with the current relief package projected to derive 90 percent of its savings from spending cuts.
This strategy suggests a promising outlook for the country’s economic development, potentially enhancing growth rather than hindering it. Experts from the Gaillard Commission have indicated that the targeted savings could feasibly be achieved entirely through spending reductions.
Lastly, successful austerity programs can indeed promote growth, as evidenced by various international examples. Denmark implemented a significant budget consolidation program in the 1980s while experiencing robust economic growth, making it a classic case of “expansive budget consolidation.” Sweden similarly reduced public debt through welfare reforms in the mid-1990s, achieving economic growth alongside lower social inequality.
Switzerland has also seen positive results from past relief packages. The austerity measures introduced in 2003 and 2004, which were similar in scale to the current plans, coincided with an economic upswing. The Swiss government then focused on spending cuts to balance the federal budget, underscoring a crucial lesson: successful austerity programs are fundamentally based on expenditure reductions.