Putting the Brakes on Government Spending: The Swiss Debt Brake

Large budget deficits and high public-sector spending and debt have been pervasive features of modern economies, including in the United States and Switzerland.

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Have the Swiss found a way to reliably and permanently limit debt and control outlays? What is the situation in the United States?

Switzerland

In 2002, after a decade of high budget deficits, Switzerland introduced a method of limiting expenditures: the debt brake (Schuldenbremse). The debt brake sets a limit on expenditures, both during a recession and during an economic boom.

During the 1990s, large budget deficits in all three levels of government led to a large increase in public debt. The increasing debt was highly unpopular among the public, and the Federal Council and parliament worked out a mechanism, the debt brake, to limit government spending.

A debt brake is an expenditure-based rule that limits spending—except on social security—in accordance with revenues and a business-cycle adjustment factor. The Swiss debt brake is a countercyclical expenditure rule that allows deficit spending during economically weak periods and limits spending more tightly during economically strong periods. The goal is to achieve a stable revenue-to-spending ratio. The rules, adopted in 2003, have led to a budget that tends toward surpluses or balance. (For detailed information, see this excellent article by Daniel J. Mitchell (YL 2003).

The debt brake required a change in the Swiss constitution, which voters approved easily with a majority of nearly 85 percent. After some delays, the Swiss debt brake has been working more or less as intended, slowing down the growth of public debt which currently stands at 36 percent of GDP. If public spending deviates from the set limit, the difference is credited or debited to an adjustment account and has to be balanced out in one of the following years. Critical for continued success of the debt brake is that revenue estimates must be close to structural revenue. Furthermore, since a spending limit is not a silver bullet, and its effectiveness requires commitment to fiscal responsibility, the debt brake must continue to enjoy a certain respect by politicians.

The United States

The U.S. is in a dire situation: The total public debt is at more than $20 trillion (105 percent of GDP), with fast-growing deficits and even larger unfunded liabilities. The U.S. has an official debt ceiling, which is currently suspended. The suspension expires on March 15, 2017. On March 16, the debt ceiling will automatically reset to include all of the debt issued while it was suspended. That will likely trigger the Treasury Department’s “extraordinary measures,” debt-limit loopholes it can use to technically stay under the limit for several months. After that, President Donald Trump will have to face the same problem that President Barack Obama faced through much of his presidency—the need to suspend or raise the debt ceiling, or else face an unprecedented default on U.S. financial obligations.

The Importance of the Debt Ceiling. The debt ceiling is the statutory limit on the amount of national debt that the U.S. Treasury may issue to meet federal payment obligations. Congress last raised the debt ceiling in November 2015 as part of the Bipartisan Budget Act (BBA), known as the Obama–Boehner budget deal. The BBA reinstates the debt limit on March 15, 2017.

U.S. government debt exceeds the amount that the U.S. economy produces in goods and services as measured by annual GDP. Debt is growing rapidly, primarily driven by spending on health care and old-age entitlement programs, including Medicare, Medicaid, Social Security and the Affordable Care Act (“Obamacare”).

A spending limit can enshrine fiscal commitment and facilitate enforcement. But only when lawmakers have a staunch commitment to changing budgetary policy can a spending limit, or its enforcement, be sustained. As with most any laws or reforms, political will is indispensable for success.

Other Methods for Establishing Effective Expenditure Limits in the U.S.

The Penny Plan. House Budget Committee MemberMark Sanford (R–SC) and Senate Budget Committee Chairman Mike Enzi (R–WY) introduced the “Penny Plan,” which would implement an aggregate spending cap beginning in 2017 and would cut one penny from every dollar the federal government spends.

The Penny Plan would impose a spending cap of $3.6 trillion for total noninterest outlays, less 1 percent for 2017. For each following year through 2021, outlays would be capped at the previous year’s level (not including net interest payments), less 1 percent. Starting in FY 2022, total spending would be capped at 18 percent of GDP, which is in line with the historical average.

The Maximizing America’s Prosperity (MAP) Act.  Introduced by Representative Kevin Brady (R–TX), the MAP Act is focused on the key drivers of spending and debt in the U.S. (unsustainable health care and retirement programs), and would cap federal non-interest spending as a percentage of full-employment GDP (or potential GDP for cyclical adjustment). Lawmakers would be able to spend more during periods when the economy is weak, and deficits incurred to smooth out business cycles would be offset with surplus revenues when the economy is near full employment.

The Business Cycle Balanced Budget Amendment. The Business Cycle Balanced Budget Amendment, introduced by Representative Justin Amash (R–MI) would cap federal non-interest spending based on the average annual revenue collected over the three prior years, adjusted for inflation and population. Congress would need to pass implementing legislation to carry out the necessary spending changes determined by the spending cap. The expected motivator for politicians to stick with the lower spending is public humiliation for breaching the spending caps.

The Merrifield/Poulson (MP) Rule. The MP rule, named after researchers John Merrifield and Barry Poulson, would limit all federal spending with automatic enforcement sequestration, except for interest, Social Security, and Medicare Part A.

A second-layer debt and deficit brake would include all spending, except interest, and is expected to exert indirect pressure on entitlement spending by squeezing other parts of the budget more tightly. The spending limit would be adjusted upwards with population growth and inflation, similar to Colorado’s Taxpayers Bill of Rights (TABOR), which is recognized as one of the most effective budget limits in the U.S.The second-layer debt brake follows the Swiss model for achieving countercyclical budget balance.

A debt brake is not an automatic cure-all for fiscal woes—but for countries that have implemented it, it has worked better than having no debt brake at all.

Additional  Reading

How the Swiss “Debt Brake” Tamed Government by Daniel J. Mitchell (YL 2003)

2017 Debt Limit Should Trigger Spending Limit—with Enforcement by Romina Boccia (YL 2016)

State and Local Spending: Do Tax and Expenditure Limits Work?

Analysis of the Bipartisan Budget Act of 2015

Causes of the U.S. Government’s Unsustainable Spending

Trump’s 2017 Debit Limit Price, If Any, Remains Unclear

John D. Merrifield and Barry W. Poulson, Can the Debt Growth Be Stopped? Rules-Based Policy Options for Addressing the Federal Fiscal Crisis (Lanham, MD: Lexington Books, 2016).

A Growing Consensus for Spending Caps and the MAP Act, 2015 by Daniel J. Mitchell

Even the OECD Now Admits Spending Caps Are the only Effective Way of Restraining Government, 2015 by Daniel J. Mitchell