Switzerland’s “Debt Brake” Is a Role Model for Spending Control and Fiscal Restraint « International Liberty

I agree with Dan Mitchell on many issues. I just found this piece he wrote about Switzerland’s “Debt Brake” in April of 2012. I originally read about the “Debt Brake” in his opinion editorial in the Wall Street Journal. As Dan mentions it is not really a debt brake but a spending restraint and it is only as good as our legislators are willing to let it work. Although it is unlikely that this type of spending restraint will be part of the fiscal cliff negotiations Part I, it make be part of the Part II or Part III negotiations. Ultimately our politicians would have to embrace the fact that our major entitlement programs, Social Security, Medicare, and Medicaid, have become “pay as you go” programs. Here is his chart that shows the problem with spending growing faster than the tax revenues or population.

Obviously spending growth is a fundamental economic problem for the United States and our legislators are willing to copy good ideas from other countries. Representative Brady with his MAP act and Senator Corker with his CAP Act  think a similar debt brake policy in the United States would be a good solution to control the growth of federal spending. Here is what Dan said about the “Debt Brake”.

Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

He goes on to make the point that this policy becomes a de facto spending cap and that it has been a good policy for avoiding the fiscal crisis problems affecting the rest of Europe.

Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.

He concludes with:

To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my oped, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”

Overcoming that obstacle is the real challenge.

Switzerland’s “Debt Brake” Is a Role Model for Spending Control and Fiscal Restraint « International Liberty